Water and Sewage Regulation (Industry and Regulators Committee Report)

Lord Hollick Excerpts

Monday 16th October 2023 Lords Chamber

Moved by

[Lord Hollick]

That this House takes note of the Report from the Industry and Regulators Committee The affluent and the effluent: cleaning up failures in water and sewage regulation (1st Report, HL Paper 166).

[Lord Hollick (Lab)]

My Lords, I am pleased to introduce this debate on the affluent and the effluent. I thank our staff for their valuable contributions to the committee’s work, and the many contributors who gave evidence to the inquiry.

In May last year, we launched our inquiry into water and sewage regulation following a public outcry at the discharge of sewage into our waters. We published our report this March, which received a response from the Government that was curt and dismissive and implied that the committee had gone beyond its remit in questioning matters of public water policy. It was a clear attempt by the Government to dodge parliamentary scrutiny of their record.

In April, the Government published their Plan for Water. In May, England’s water companies issued an apology for sewage discharges and announced a recovery plan. We then launched a follow-up inquiry in June focusing on the role of Defra, which concluded with a letter to the Secretary of State last month; a response to that letter is expected on 27 October, this month. In our report, we found that, after privatisation, pressures on the water and sewerage network increased due to climate change and population growth; but the levels of investment fail to match that, leading to a serious deterioration in water quality and a network struggling to cope. Storm overflows are supposed to provide a safety valve during periods of heavy rainfall, but they are now used as a matter of routine.

According to Environment Agency figures, there were more than 300,000 monitored sewage spills in 2022 and 75% of all rivers are polluted. The Environment Agency itself has struggled to monitor or enforce against water companies due to budget cuts. There has been a growing pressure on our water supply itself, meaning that England will require an initial 4 billion litres of water a day by 2050, an increase of 41%. Taps will run dry with increasing frequency unless new water supplies can be established and more measures are introduced to reduce demand. The last reservoir built was in 1991. The Government’s plans for storm overflows estimates that £56 billion of investment will be needed by 2050 to clear up this mess. To this end, water companies have proposed investing £11 billion before 2030. Further billions of pounds will be needed to maintain the existing infrastructure.

Water companies recently published their business plans for the next five-year price review, proposing to invest £96 billion between 2025 and 2030—a 90% increase on the current period and a very welcome acknowledgement of the need for action. It is clear that investment over the last decade in our water system fell far short of what was needed—a casualty of weak regulation and incompetent government leadership. The opportunity to invest when interest rates were historically low and before prices surged with inflation was squandered. Now, a much higher level of investment is needed to remedy this neglect, and that burden will fall heavily on household bills.

Ofwat has the powers to regulate the price water companies can charge, the level of their capital investments and the size of returns they can make to their investors, but it has failed to ensure that companies invest sufficiently in water infrastructure, thus creating a backlog. Ofwat has been cautious about raising customer bills to finance long-term investment without the determined political backing of the Government. Decisions about the level of what people pay is, in the end, the responsibility of the elected Government, who must give regulators clear guidance on how to strike the right balance between investment and affordability.

The Government’s 2022 strategic policy statement for Ofwat gives no sense of priority—in effect, ducking this key decision. Will the Government provide further guidance on pricing ahead of the next price review? Underinvestment means that customer bills have been flat or falling for 15 years, but it is now inevitable that they will have to increase from 2025, when Ofwat’s next price review comes into effect. Company business plans published recently are proposing an average increase of 28.6% by 2030, even before inflation is taken into account. Including inflation, Thames Water has proposed a sharp 61% increase on today’s bills by 2030.

In the face of these rises, the Government must ensure that consistent support nationwide is offered to households struggling with their bills during a cost of living crisis. The Government initially committed to consult on a single nationwide social tariff to end the current postcode lottery, but then dropped the proposal. Water companies are now trying to help by more than doubling the number of households eligible to receive support, but the Government should have stepped in to ensure consistency. They urgently need to set out their approach.

Water companies have been assiduous in maximising their returns from their monopolies. It has been estimated that their dividends extracted since privatisations have exceeded £50 billion, while the debt of water companies has increased to over £60 billion, partly as a result of private equity owners loading the companies up with debt to help to pay themselves larger returns. All this has been in plain sight of a dozing regulator and an unconcerned Defra. This debt mountain has left companies vulnerable to higher interest rates. Ofwat now has stronger powers to control dividends and has set out a more determined approach, but this cannot recoup what has already been lost. The regulator now faces the challenge of requiring companies to boost significantly their level of investment just when they are facing rising costs, financial strains and uncertainty over government and regulatory actions, all of which is making water companies much less attractive to investors.

It is not clear to us that the water companies are capable of delivering investment at the level that is required. This is why we have called on the Government to increase the use of competition in delivering major water infrastructure. With this approach, specialist infrastructure companies, rather than the water companies themselves, can build the infrastructure that we urgently need. This approach has reduced the costs of the Thames Tideway tunnel project from an expected £80 per customer per year to around £25. Specialist infrastructure companies without the financial baggage of water companies can be an efficient and cost-effective solution for large projects. We recommend that the Government legislate to make it easier for more infrastructure to be built in this way. We await their response.

We noted in our recent report that some progress has been made. We called for the Government to provide a national water strategy, to look at the water system holistically, which they have done through the Plan for Water. The Government have also designated a National Policy Statement for Water Resources Infrastructure, as we recommended, to help water infrastructure to proceed more smoothly through planning. Funding has also been made available to monitor storm overflows. Ofwat has tightened its controls on the sector’s finances and, together with the Environment Agency, is investigating the water companies’ role in sewage discharges. All essential funding was previously cut by the Government.

However, major challenges remain. Can the Minister explain what action will be taken to reduce water demand? Why has mandatory water metering not been introduced? Concerns remain about the capacity of water companies and their supply chains to carry out projects at the necessary scale proposed. To ensure that infrastructure plans are independently assessed and their progress professionally reviewed, we recommend that consideration be given to granting the National Infrastructure Commission a statutory role to carry out these duties.

We remain concerned at the Government’s deep-rooted complacency. They have failed to set out how customers will be supported to pay rising bills. They have failed to provide Ofwat with any guidance on how to balance investment and bills. They have shown an almost casual confidence in the task of funding a huge investment programme in very challenging times. Nowhere is this complacency clearer than in relation to wet wipes. In 2021, a consultation found that 96% of respondents supported a ban on wet wipes containing plastic. The Government’s response was to bring forward yet another consultation—which was published only this weekend, after two years. Can the Government tell us when the ban is expected to take effect? This is an easy win. Its delay is unnecessary and deeply damaging to the environment.

Too often in the water sector, government, regulators and water companies have shown themselves to be poor stewards of an essential public service by preferring the easy, short-term option to prioritising the long-term well-being of the system, the quality of water and the environment. We need the Government to take responsibility to ensure a clean, plentiful water system free of sewage. The public deserves better. I beg to move.

--- Later in debate ---

[Lord Hollick (Lab)]

I thank all the speakers in today’s debate. The Minister can be in no doubt about the anger about what has happened in the water industry and the fury of consumers. He talked about companies not being prepared to reveal what their price increases will be. Well, they have just announced them, and they are going to be between 28% before inflation and, in the case of Thames Water, 61%. I am afraid they will fall on household bills. Nobody is hiding the cost of this neglect of investment. Since privatisation, £200 billion has been invested in the water industry, which is about £5 billion per year. I am not adjusting for inflation, but we have now gone up to £96 billion over the next five years, so we can see the sharp rise to cover the lost ground. I pointed out in my remarks that, at the time, inflation and interest rates were low and therefore the cost of repairing the roof while the sun shone was there for all to see, but I am afraid that the Government squandered that opportunity, and we all will pay the bill for that.

Motion agreed.