Water (Special Measures) Bill [ Lords ] (Fourth sitting)

Jerome Mayhew Excerpts

Committee stage
Tuesday 14th January 2025 Public Bill Committees

[Emma Hardy]

I hope that the hon. Gentleman has not misunderstood. There is certainly no desire from me to keep pedalling. Instead, what we want to do is look at the entire financial situation of companies—he knows that we have had that conversation outside this room. We need to look at some of the longer-term reform options for how companies are structured financially, which is why we have the deputy governor of the Bank of England leading our review, and using his knowledge and expertise to look at how companies are structured.

I do not think that the new clause is the appropriate place to pre-empt the outcome of the commission before it has had an opportunity to report, or even to listen to the hon. Member for Epping Forest through the call for evidence that is yet to be announced. I want to stress that I support sentiment of the hon. Member for Witney, but I express caution around the risks of putting through changes of this magnitude without giving full and proper consideration. We believe that the commission is the appropriate way to do that.

[Jerome Mayhew (Broadland and Fakenham) (Con)]

Okay, perhaps the Minister is right—perhaps the detail of what percentage of debt or what multiple of revenue is appropriate should be established by the commission and the wider review—but surely the principle can be established now. From any investigation in this area, we can say that the principle will be that debt will need to be capped or managed, or have some oversight, because we have seen what happens—particularly with Thames Water—when there is no cap or oversight. Does the Minister not agree that the new clause just sets out the principle, and the amount would be set out by an SI?

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[Tim Farron]

I thank the hon. Member for her very reasonable intervention. In the extremely unlikely event that the Committee rejects my new clause today, we will of course submit our ideas to Sir Jon Cunliffe and take part in the review, which we welcome. Nevertheless, my point is that the division of responsibility and division of attention, particularly in the Environment Agency as a regulator dealing with flooding and so on, means that it does not have the resource; I know that we will talk about that later. Also, the fact that the regulatory set-up is so fragmented means that the water companies simply run rings around the various regulators.

One final point arising from new clause 20 is that we must outline a potential way forward. We are not convinced at this stage that renationalisation would be affordable or wise. I am not saying that I am opposed to it in principle; it just does not seem wise at this stage to do something that will cost the taxpayer a vast amount and put money in the hands of people who have fleeced us once already. Unless people can come up with a different model, that does not feel like the right way of doing it.

At the same time, the current model of ownership has clearly failed. We suggest a not-for-profit, a community benefit company model or looking at mutuals, but there may be a way of migrating the system towards that model of ownership via what happens at the end of the administration.

[Jerome Mayhew]

The hon. Member says that privatisation has demonstrably failed. I challenge him on that. There are elements of privatisation that have failed: the refinancing, the imposition of debt and the removal of money through dividends in the noughties and, I am sorry to say, between 2010 and 2015. That is a failure, but I hope that the hon. Member accepts that privatisation as a whole has delivered more than £160 billion of capex investment into the industry, which simply would not have happened if it had been up against schools, hospitals and the other calls on the public purse.

I know that I am straying too far, but subsection (1)(b) of the new clause refers to

“whether a public benefit company could better perform the role of current undertakers.”

As I am sure the hon. Member will know, we have an example of that: Welsh Water. Is he able to point to a single metric by which Welsh Water has outperformed its private sector comparators?

[Tim Farron]

I am not wedded to one model or another. Having said all that, water is blindingly obviously a natural monopoly and should not have been privatised in the first place. Can I give one metric? Yes. Of the 16 water companies, Welsh Water is among the minority that are financially sound. Performance is not necessarily and always a function of ownership absolutely: it is a combination of ownership, culture and regulation.

We are simply saying that we should look at migrating the system to this model. Let us bear in mind that for all the additional money we can say we leverage in through private investment, a vast amount of money leaks out of the system to shareholders, often through holding companies overseas and in bonuses, which could otherwise have been spent internally.

New clause 7 is an attempt to come up with a constructive alternative. We would abolish Ofwat, take the water regulatory powers off the Environment Agency, create a single regulator in the form of the clean water authority and seek to migrate ownership within the water industry towards a mutual and community benefit model. As I say, we will not push new clause 7 to a vote, but we will seek a vote on new clause 20.

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[Tim Farron]

New clause 12 is a short, and I hope consensual, measure relating to chalk streams, which we have already discussed, and new clause 27 deals more widely with the powers of national parks.

Some 85% of all the chalk streams on planet Earth are in the south of England. The impact that that has on the biodiversity of this part of the world—and more broadly—is hugely significant, creating pure, clean water from underground chalk aquifers and springs, which is ideal for wildlife to breed and thrive. They make a vital contribution to global biodiversity, providing natural habitats for many plants and animals. They will exist in many Members’ constituencies—not in mine, but, as a resident of planet Earth, I still reckon they are very important. I therefore think that they are worthy of specific attention and regulation in this Bill, so I commend new clause 12 to the Committee.

New clause 27 makes specific reference to powers regarding—and the importance of—national parks. It is my great privilege to represent a constituency with two of them: the dales and the lakes. We recognise the importance of natural national landscapes, which, of course, include areas of outstanding natural beauty, as they were known until relatively recently. We recognise many of the worthy inclusions and mentions in the Glover review for reform within our national parks—I remember meeting Julian Glover as he began that review. I agreed with much that he recommended, and was disappointed that the previous Government did so little with his recommendations.

[Jerome Mayhew]

To save everyone’s time, I will not make a speech on this, but I am concerned about new clause 12 because it confers an absolute duty regarding chalk streams. I represent a constituency with several chalk streams, including the Stiffkey, which goes through Walsingham. The new clause says:

“Where a relevant undertaker operates, or has any effect on chalk streams, that undertaker must—”

so it is a direction—

“secure and maintain high ecological status of such chalk streams”.

We all want that outcome, but the problem is that water undertakers are not the only ones with negative impacts on chalk streams, yet the new clause gives them the requirement, which is absolute in its terms. We know that farming, and increasingly road detritus, also affects chalk streams, so how does the hon. Member square that circle?

[Tim Farron]

The hon. Member makes a very good point, and we will later come to a new clause that we tabled about planning, because undoubtedly development and industrial activity also have an impact. However, this goes back to my original comment about the importance of singularity in regulation; while we recognise that the water companies may not be entirely responsible, we think that the regulator should have a responsibility across the piece.

However, the hon. Member makes a good point. We are not planning to push new clause 12 to a vote, but we are keen for the Minister to look at what we have said—and indeed what the hon. Member and his colleagues have said previously in Committee—about the importance of chalk streams, and for them to be included on the face of the Bill.

New clause 27 relates particularly to national parks. Every single lake, river and stream in England’s national parks—every single one—is polluted in one way or another. There has been no regard by water companies for national park status in this process. It is not that the lakes, rivers and waterways outside national parks do not matter—they absolutely do, and a vast part of my constituency is not in either of the national parks—but nevertheless, the lack of a higher bar for those in our national parks demands the question: what is the point in the national parks? We need to make sure that that stipulation is included. New clause 27 would therefore force water companies to specifically reduce pollution in those precious places.

To talk about my own community, United Utilities’ negligent treatment of Lake Windermere has been a standout example. Over the two years between 2021 and 2023, 165 hours of illegal sewage was pumped into Windermere, England’s largest lake and the centre of our hospitality and tourism economy, with 7 million visitors every year to that part of the Lake district alone, out of the 20 million who visit the lakes overall.

For the record, I should say that I still swim in Windermere and I do not think I am a complete lunatic, so it is not an open sewer by any means. Nevertheless, for many people, the reality is that so many of the 14—I think—assets that United Utilities owns on or around the tributaries of Windermere, or its connecting lakes, are not fit for purpose. I am thinking about the pumping station at Sawrey, for example, or the water treatment works at Ambleside. It is unconscionable that we have these assets, many of which are ageing and under-invested in, and the water company, United Utilities, failing to take action. Windermere is known globally and is part of Britain’s national brand. If its reputation becomes unfairly sullied, it will hit my constituents’ revenues.

[Jerome Mayhew]

I am afraid I have to make the same point about new clause 27. Proposed new section 4A(1)(a) contains an absolute duty on the undertaker, which “must”—so this is a direction—secure and maintain high ecological status, and that has to be achieved within three years. I question the practicality of that.

I am also keen to highlight the fact that proposed new section 4A(7) includes the broads, which I am lucky enough to represent. The broads are affected by all sorts of factors: we have a high degree of recreational use, with boating as well as angling, and it is a farming environment, with grazing in the marshes, particularly down in the Halvergate marshes. Yes, Anglian Water has affected water quality negatively—as well as in some positive ways, to give it credit—but it would be a travesty to place an absolute duty on Anglian Water when it has only partial control of the answer, and over a three- year timeframe. Does the hon. Gentleman agree that that is unrealistic?

[Tim Farron]

I do not think it is unrealistic—we need to be ambitious—but I absolutely accept that there are multiple sources of pollution.

I promise to be brief in talking about my patch, which is not of interest to everybody. It is key to point out that pollution in Windermere generally comes from three sources. It is true that agricultural run-off is an issue but, sadly, the policies of this Government and the previous one, over a period of time, have effectively destocked the fells, meaning run-off has a massively reducing impact on Windermere and the broader catchment.

The bigger two problems are the 14 assets that United Utilities has either on or around the lake or its tributaries. There is also the best part of 2,000 septic tanks around the lake or its tributaries. Unlike septic tanks and, indeed, package treatment works in many rural communities, these are not scattered all over in the middle of nowhere; they are in a ring around the lake, most of them within yards of a mainline sewer. It is, then, entirely possible for the water companies, while gaining significant income benefit as a consequence, to mainline a massive proportion of the sources of sewage spillage into the lake, via the septic tanks and the package treatment works being brought into the system.

The new clause is of course slightly selfish, but it is really important that we seek to maintain national parks right across the country at the highest possible bar, and therefore make sure they set an example for others to follow. We will seek to press new clause 27 to a vote.

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Like new clause 12, new clause 27 requires sites to maintain “high ecological status”. I have already spoken about the high standard that “good ecological status” represents, but I will touch on it further. Surface waters with good ecological status support a diverse group of aquatic invertebrates, fish, mammals and birds, and therefore I want to reassure the Committee that “good ecological status” is in fact a very high standard to achieve.

[Jerome Mayhew]

I would like the Minister’s comments on the issue that we have, and I am focusing primarily on the Norfolk broads, of which I represent a good chunk. There is the requirement to make a mandatory obligation on the water undertaker to ensure “high ecological status”, which is above “good ecological status”—that is the point the Minister is making. Does she agree that, while they are a primary input into the quality of the water in the Norfolk broads, they are not the only influencer? While the intention to create and encourage high ecological status in the broads is a very good one, and it is one that I share, does the Minister agree that the drafting of this new clause is not appropriate?

[Emma Hardy]

The hon. Gentleman is right to highlight that the pollution caused in the Norfolk broads and in many other areas does not come from water companies alone. As has been discussed, it comes from the environment, road run-off and various other places. “High ecological status”, as we have stated, could involve not being able to fish in those waters at all, which I know is a recreational activity in his area. It may also restrict planning for housing developments with any minor effects on the water quality of water bodies in national parks. The Government therefore cannot accept either new clause, although I recognise the intention behind them. I hope that the hon. Gentleman feels able not to press both.

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I am really keen to highlight another thing. Again, I feel a little sorry to bring this on the Minister, but I am going to do it. If we look at the asset depreciation rates of these water companies, they are the biggest I have ever seen in 25 years in finance. Let us say that someone has a waste water network asset—people might immediately think of Bazalgette’s great big pipe, which he built 150 years ago. They might think, “Well, that is pretty good for purpose,” and perhaps they do not need to depreciate it over more than 150 years. But let us think about places in my patch, such as Aston and Standlake, where pipes were put in 30, 50 or 70 years ago and are leaking hand over fist. We have half a million hours of sewage dumping, but do you know what the depreciation rate on that asset is, Dr Huq? It is not 20 years, 30 years, 40 years or 50 years. It is 150 years.

[Jerome Mayhew]

This is a genuinely interesting point. I know it is late, but I would be grateful if the hon. Member could expand in further detail. While he is referencing regulated capital value and the difference between what is on the sheet and what is reality, could he explain in a bit more detail, for the benefit of the Committee, what that means in reality? If there were to be a rebase of regulated capital value, what would be the practical impact of that?

[Charlie Maynard]

I question what value regulated capital value, given how completely out of whack it is with reality, is bringing to the table. I do not have all the answers, but I question whether this has any utility to the conversation. What is happening here is that a business is generating £1.2 billion of cash flows, and it has this enormous balance sheet and this enormous regulated capital value. Because of those essentially false premises—I believe that we do not actually have assets of that value—regulated capital value is essentially a figment. We are grappling with things that have no basis, and we would do well to reconcile and to look at the facts—at what these assets are actually worth—and then to build out from there.

[Jerome Mayhew]

One possible reason why regulated capital value is important is that the assessment of whether bills are reasonable or not relates—in part, at least—to what is considered to be a reasonable return on capital. Does the hon. Member agree that if one’s regulated capital value has depreciated to zero, there might be an adverse knock-on impact on what is considered a reasonable bill, to take account of the debt and the capital investment? Does he think that that might be something to do with it?

[Charlie Maynard]

The whole thing is reverse engineered—I am completely in agreement on that—and that is not necessary or useful in terms of where we are getting to, and that is causing a lot of the trouble. I would like to find a way out of that, and I would really recommend that the water commission digs into this to find a way out. I am on the Business and Trade Committee and I will be asking the Financial Reporting Council, which oversees the accounting body, to ask these accounting firms whether they actually think those numbers—those incredibly slow depreciation periods of 150 years—are valid and, if so, why.

[Jerome Mayhew]

I am grateful to the hon. Member for allowing me another intervention, this time on proposed new subsection (2DZB)(a), which refers to

“a prohibition on water or sewerage undertakers having offshore holding companies”.

He referenced some of the international investors who have holdings in Thames Water, and perhaps in the majority of the other water companies. Access to international markets is very important for raising investment into our water utilities. Does he accept that using offshore holding companies might be a mechanism that allows for easier transfer of funds, easier investment and easier access to international finance, and may therefore have a benign rationale? We always assume that offshore holding companies are somehow suspicious, or that their motivation is tax avoidance, and I believe that the hon. Member referenced that earlier. That might be the case—in which case, they should not be encouraged—but with his 25 years’ experience in finance, which he referenced, does he think that there is an argument for saying that offshore holding companies make it easier to access international investment?

[Charlie Maynard]

I have the name of one here: Thames Water Utilities Cayman Finance Holdings Ltd. Why Cayman? If I say “Cayman”, people say “tax haven”. That is why it is there. We should be doing our best to stop that. Last I looked, London was still a financial capital, and equity and debt could still be raised in this country, and I sincerely hope that remains the case. So I do not see a good reason to have holding companies offshore. Hon. Members might be happy to hear that that was all I wanted to say on new clause 19.

New clause 23 is also being considered in this tranche, and I will highlight proposed new subsection (2DZB)(b), which refers to

“a process for agreeing capital expenditure necessary for service improvements, bill increases, and changes to operating costs while the undertaker is subject to the Special Administration Regime”.

We have to spend a huge amount of money on our water utility companies, because they have not been spending enough over the last decade or two. When a special administrator is appointed in such instances, the goal is to ensure that the special administrator takes that future spend into account in considering how much debt needs to be cut. We do not want to come out of special administration with debt that is still high, which will prevent the investments from being made that will be required over the next. That is the goal of the new clause.