Water Industry (Specified Infrastructure Projects) (English Undertakers) (Amendment) Regulations 2020

Lord Goldsmith of Richmond Park Excerpts

Monday 8th June 2020 Lords Chamber

Moved by

[Lord Goldsmith of Richmond Park]

That the draft Regulations laid before the House on 28 April be approved.

[The Minister of State, Department for the Environment, Food and Rural Affairs, Foreign and Commonwealth Office and Department for International Development (Lord Goldsmith of Richmond Park) (Con) [V]]

My Lords, the instrument before you is a simple amendment to the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013 to remove their sunsetting provision. This would allow the 2013 regulations to continue in force and be available as part of the regulatory framework of the water industry. Without this SI, the 2013 regulations would expire on 27 June 2020. As such, before I talk a little further about the Government’s reasons for bringing forward this amending SI, I will outline the purpose of the 2013 regulations.

As noble Lords will know, water and sewerage services in England are provided by companies also known as undertakers. The 2013 regulations were designed to help contain and minimise the risks associated with large or complex water or sewerage infrastructure projects, therefore helping to protect undertakers, their customers and UK taxpayers. Containing and minimising risks is likely to reduce the overall cost of borrowing for a given water undertaker and so ensure better value for money for that undertaker’s customers. It also makes sure that delivery of such infrastructure projects will not adversely impact on the existing water or sewerage services provided by undertakers.

The 2013 regulations enable the Secretary of State or Ofwat to specify by notice an infrastructure project where either is satisfied that two conditions have been met: first, that the infrastructure project is of a size or complexity that threatens an undertaker’s ability to provide services to its customers; and secondly, that specifying the project would likely result in better value for money than if the project was not so specified, taking into account charges to customers and any government financial assistance.

Once specified, an undertaker is required to put the infrastructure project out to tender and a separate Ofwat-regulated infrastructure provider is then designated to finance and deliver the project. Such infrastructure projects raise many complex issues, particularly around determining the cost of their financing, coupled with a construction risk that is far greater than that normally associated with an undertaker’s typical capital investment. Requiring an undertaker to tender competitively for an infrastructure provider for a large or complex project provides an objective means of testing whether the financing costs of such a project are appropriate and reasonable. Without that tendering process, competitively determining the cost of capital for this type of infrastructure project would not be possible. The ability to create Ofwat-regulated infrastructure providers also helps to ringfence their associated higher risks and should result in more effective risk management for these projects. Creating designated infrastructure providers in this way ensures that a large or complex infrastructure project will not affect the ability of an undertaker to provide its day-to-day services for customers and avoids any resultant extra costs that would ultimately be borne by those customers.

The amending SI was laid in Parliament following a post-implementation review of the 2013 regulations carried out in 2018. Eight key stakeholders were consulted, five of which—Ofwat, Thames Water, Bazalgette Tunnel Ltd, Bazalgette Tunnel Ltd investors and the Consumer Council for Water—submitted responses. The review found that the 2013 regulations had successfully fulfilled their policy objectives. Accordingly, the review recommended that the 2013 regulations’ sunsetting provision be removed.

In March 2020 we undertook a further, targeted consultation on our proposal to remove the sunsetting provision. Views were sought from Ofwat, Water UK, Thames Water, Bazalgette Tunnel Ltd, the Environment Agency, the Drinking Water Inspectorate and the Consumer Council for Water. Water companies were consulted via Water UK, and Bazalgette Tunnel Ltd was given the option to consult its investors. Four written responses were received from Ofwat, the Environment Agency, Thames Water and Affinity Water. All indicated that they were in favour of the amendment.

Currently the only project regulated under the 2013 regulations is the Thames tideway tunnel. However, Ofwat has identified four large or complex water infrastructure projects currently in development that may benefit from being specified in accordance with the 2013 regulations over the next 10 years. These are the south-east strategic reservoir at Abingdon, a joint project proposed by Thames Water and Affinity Water; the London effluent reuse scheme, a project proposed by Thames Water; south Lincolnshire reservoir, a joint project proposed by Anglian Water and Affinity Water; and the River Severn to River Thames transfer, a joint project proposed by Thames Water, Severn Trent Water and United Utilities. A decision would be made on a case-by-case basis at an appropriate time when schemes are brought forward as to whether the infrastructure projects could come within scope of the 2013 regulations.

The Government are committed to improving water supply resilience, as set out in our strategic policy statement to Ofwat and our 25-year environment plan. This ambition is made more challenging because of a growing population, increased water demand from agriculture and industry, and climate change. We also want to ensure that there is sufficient water left for the natural environment. Without any action, many areas of England will face water shortages by 2050.

The starting point for action is to reduce water use by reducing leakage from the water distribution networks and reducing our personal consumption. However, even if leaks and personal consumption are reduced, we will continue to need new water resource infrastructure. In our Water Conservation Report, published in December 2018, we set out our progress to promote water conservation from 2015 onwards. We endorsed the industry’s existing commitment to a 50% reduction in leakage by 2050 and announced a consultation to enable us to set an ambitious target for personal water consumption. We consulted on measures to reduce personal water consumption, including supporting measures on amending building regulations, water efficiency labelling and smart metering. Most of these measures can be taken forward without the need for new primary legislation. We will publish a government position in late 2020. As I have said, alongside reducing leakage and reducing personal water consumption, new water resources infrastructure, including reservoirs and water transfers, is needed to provide a secure supply of water for future generations. In the current price review period, Ofwat has made £469 million available to nine water companies, to investigate and develop integrated strategic regional water resource solutions in order to be construction-ready by 2025. This work will be supported by the Environment Agency’s national framework for water resources, which was published in March 2020.

In summary, the instrument before noble Lords enables the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013 to continue in force so that they can continue to be used in the future delivery of large or complex water or sewerage infrastructure projects. Such projects play an essential role in strengthening the future resilience of water resources in England. Retaining the 2013 regulations will help to reduce the associated financial risks of such projects and ensure that water undertakers can continue to deliver their existing water or sewerage services to customers and provide greater value for money. I beg to move.

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[Lord Goldsmith of Richmond Park [V]]

I thank noble Lords for their points. They made a lot of them; I will try my hardest to answer all the key questions. I apologise in advance if I am not able to do so.

The noble Lord, Lord Adonis, made a number of points. He asked for an update on the Thames tideway tunnel. It is on track. It is currently in construction and will be operational in 2023, and the project as a whole is due for completion in 2024. He also asked about a number of other issues, which were echoed by other noble Lords, including the impact of Covid-19 on the tunnel. I am afraid that the only answer I can provide at the moment is that we are still assessing any possible impact; I cannot go further at this point.

The noble Lord asked about the reservoir at Abingdon. The Government recognise the need for more water resources in the south-east, but at this stage we are not able and it would not be appropriate for us to support a specific recommendation. We are waiting for further evidence on the most appropriate and best solution to be drawn together by Thames Water, Affinity Water and the wider water resources in the south-east group. We will come to that shortly.

The noble Lord also asked why reference was not made to the National Infrastructure Commission’s 2018 report, Preparing for a Drier Future. I apologise if I did not mention it. The report outlined clearly the need for new water supply infrastructure. It estimates that a combination of changing rainfall patterns, brought about by climate change, and an increased population—while leaving enough water to protect and sustain the environment—will require an additional 4,000 megalitres a day for longer-term drought resilience. It says that, without action, many parts of England will face water shortages by 2050, especially in the drier south and east. We as a Government are committed to a dual approach of reducing demand and increasing supply. However, even if we are successful in reducing demand significantly, some new infrastructure will still be needed.

The noble Baroness, Lady Scott, asked why the sunset clause was introduced, and the same question was asked by my noble friend Lord Naseby. The answer is simply that it coincided with a moment of government where there was a renewed effort to cut unnecessary regulations and try to prevent the pile-up of future unnecessary regulations. A number of sunset clauses was used at the time for that reason.

The noble Baroness also asked what happens to water quality standards once EU legislation no longer applies. We are committed to future environmental standards that either equal or improve on those of the EU. The European Union (Withdrawal) Act 2018 ensures that the body of existing EU law, including the water framework directive regulations, continue to take effect in English law after the transition period.

A number of noble Lords put questions to me about timescales. The evidence in the case of the four projects that I mentioned in my introductory remarks is still being worked up by the water companies in the RAPID framework established by Ofwat and decisions on details will be taken over the next few years, so I am not in a position to set out a complete timetable. However, further details can be found in water companies’ water resource management plans.

The noble Earl, Lord Erroll, raised the issue of smart metering, which was also raised by the noble Baroness, Lady Bakewell of Hardington Mandeville. Smart metering has the advantage of being able to detect leaks, which is hugely important, as a number of noble Lords said. It also has the advantages of energy reduction, demand forecasting, enhanced awareness campaigns, the promotion of efficient appliances and performance indicators. Thames Water announced last week that smart metering helped to achieve a 15% reduction in leaks last year.

My noble friend Lord Caithness also raised the issue of leaks, as did a number of other noble Lords. The Government are completely committed to reducing demand for water; we know that we have to do that. We have challenged the water companies to halve leaks from distribution systems by 2015. He asked whether that is ambitious enough, and I can only say that I hope we will be able to go much further.

There is no doubt that we need to use less water, in addition to dealing with leaks. We undertook a consultation on measures to reduce personal water consumption, including measures such as amended building regulations, water efficiency labelling and metering. As part of the latest price review, PR19, Ofwat is incentivising all water companies to help customers to reduce their personal consumption.

A number of noble Lords raised the issue of nature-based solutions to the problems that we are discussing. That is high up in the Government’s and my own agenda. We already expect water companies to consider them when evaluating a range of solutions to meet their water resource needs. Nature-based solutions can be enormously effective in reducing run-off and increasing infiltration. They can slow the flow of surface water in the wet season and help to prevent flooding, and can help to reduce the impacts of flooding. They can also improve the ability of land to hold on to water for use during the drier seasons. That is why the Government are keen to support tree planting along watercourses where appropriate. Tree planting helps to regulate water flow and reduce flood risk as well as stabilising river banks and reducing pollutants that might otherwise drain into watercourses. This is a big part of the Government’s flood strategy, and noble Lords will be hearing more about that as the Government publish it in due course.

My noble friend Lord Blencathra raised a number of issues. He asked whether, given that only one project has been ascribed to this regulation, that means the evidence is limited. He is of course right: on the basis of one project, the evidence is limited. However, we sought the views of those already operating under the regulations, including the regulator, who are best placed to advise whether, and the extent to which, the 2013 regulations have achieved their aims. The view across the board was that there are many tangible benefits, including contributing to lower water bills for customers.

My noble friend claimed that Thames Water is now owned by a holding group called Kemble Water Holdings, consisting of mainly Macquarie Bank and eight other private equity holders. I want to put on the record that Macquarie sold its stake in 2017. The largest shareholder owner now is OMERS, a pension fund for local government employees in Canada.

My noble friend also raised the hugely important point about building regulations, particularly around new buildings and car parks, and the issue of rainwater rushing off into sewerage systems. I strongly agree with him about the importance of sustainable drainage systems; as well as reducing the risk of surface water flooding, such systems can deliver water quality, biodiversity and amenity benefits. So we have plenty of benefits from such a scheme, and planning policy makes sure that they are provided in all new major developments unless there is very clear evidence that that would be inappropriate.

I am conscious that I may run out of time so I shall try to speed up a bit—apologies. My noble friend Lord Naseby referred to the devolved Administrations. Water is a devolved matter and these regulations will not change that. It is possible that some of the water projects that I have described and which will be specified under these regulations might impact on Wales, but we are told that any impact is likely to be very limited and obviously the Welsh Government will be consulted as appropriate. There is a very good relationship between the UK and Welsh Governments on this issue, and that is underpinned by a memorandum of understanding between Ministers.

Briefly, in response to the noble Lord, Lord Mann, the Thames Tideway Tunnel has not been referred to the CMA. However, in the current price review four companies have appealed to the CMA, showing Ofwat’s push to ensure value for money.

My noble friend Lady McIntosh raised a number of issues. The first related to rewarding farmers for public good. That is the very heart and essence of the Government’s environmental land management scheme, which will replace the common agricultural policy. It will specifically pay farmers, foresters and other land managers public money for providing public goods through the management of land and water.

A number of other issues were raised. The noble Baroness, Lady Jones of Whitchurch, referred to privatisation. The Government’s view, although no doubt she and I will disagree, continues to be that we believe that the privatisation model, so long as it is underpinned by strong independent economic regulation, provides multiple benefits. Today privatisation has unlocked around £150 billion of investment, the equivalent to around £5 billion annually—investment that is almost double the pre-privatisation level. Privatisation has delivered a range of benefits to customers and the environment, including the fact that the UK now has world-class drinking water and consumers are five times less likely to suffer from interruptions to their supply, eight times less likely to suffer from sewer flooding and 100 times less likely to have low pressure. Two-thirds of our beaches are classed as excellent compared to just one-third pre-privatisation. Customer satisfaction levels have risen to around 90%.

There is of course much more to be done, of course, and this Government remain absolutely committed to doing so. I apologise to noble Lords if I have not answered all their questions but I will do so in follow-up letters as appropriate.

Motion agreed.