Water Companies: Regulation and Financial Stability

Luke Charters Excerpts

Wednesday 23rd October 2024 Westminster Hall

[Mr Luke Charters (York Outer) (Lab)]

It is a pleasure to speak under your chairship today, Mr Pritchard.

I genuinely thank the hon. Member for Westmorland and Lonsdale (Tim Farron) for securing this debate. The previous Conservative Government weakened water regulation, let our rivers fill with toxic pollution and allowed companies to pay themselves with huge bonuses while household bills soared, which was shameful.

Many constituents in York Outer are disgusted by that situation. We have the beautiful Rivers Foss and Ouse flowing through our constituency. To watch both of those rivers being degraded is not only unforgivable but bewildering. The mismanagement and lack of regulation by the previous Conservative Government have created a plethora of issues.

I have had constituents writing to me since I was elected about the stench of sewage seeping into Rawcliffe, water pump failures near Haxby and concerns about flood alleviation in Fulford. Although the Tories are no longer in power, those issues are not water under a bridge; they still need to be fixed.

That is why today’s statement by the Secretary of State on the independent water commission is a great first step, and I am also delighted that my hon. Friend the Minister is tackling these issues at pace. At this early stage, my main suggestion is that we must take lessons from other regulated industries and regulatory failures within them when designing the future water regulation system.

When I was at the Bank of England, Sir Jon Cunliffe was highly regarded, so I warmly encourage him to look at the areas where there has been disjoin in the financial services regulator, and we should move to a centralised, smart regulator. For me, that involves looking at scrapping and replacing Ofwat. Perhaps Sir Jon could publish an interim view on that suggestion.

Although it is great to see so many people engaged in today’s debate, it is still frustrating to see that we are here. It is clear to me that the Government are turning the tide against chronic underinvestment in our water industries. Water companies must be regulated properly and the regulators must have the power to regulate the sector adequately, which must be the goal. If we can make that happen after 14 years of Tory failure, we will soon be sailing in smooth waters.

--- Later in debate ---

[Olly Glover (Didcot and Wantage) (LD)]

It is a pleasure to serve under your chairmanship, Mr Pritchard. I congratulate my hon. Friend the Member for Westmorland and Lonsdale (Tim Farron) on securing this critically important debate. In my Oxfordshire constituency of Didcot and Wantage, over 90% of water infrastructure is managed by Thames Water—a de facto monopoly. The constituency impacts of the current arrangements are stark. In south Oxfordshire, sewage from storm overflows into water bodies exceeded 11,000 hours in 2023 during 810 spills. Recently, in East Hanney and Didcot, overwhelmed sewage pumps have led to flooding, including with contaminated water.

Thames Water was the worst performer in the country for leaks, leaking 570.4 megalitres a day last year, or more than 200 billion litres in total, equivalent to just under a quarter of its entire water supply. Analysts estimate that Thames Water’s current debt amounts to about 80% of the value of its business, making it the most heavily indebted of the water companies in England and Wales. At the same time, Thames Water has said that its bills need to rise by 59% between 2025 and 2030 or it will not be able to recover from its financial crisis.

It is in that context that proposals for a reservoir in my constituency are causing concern to local residents. Even putting to one side the fact that many are sceptical of the case for the reservoir, there is concern about whether Thames Water can be trusted to competently programme, manage and deliver what would be the second largest reservoir in the country and one of the largest civil engineering projects in the land.

[Mr Charters]

Since 2020, £41 million in executive bonuses has been paid out by companies such as Thames Water. That is a disgrace that the Conservatives allowed to happen. Does the hon. Gentleman agree that change is needed to stop companies such as Thames Water paying such ridiculous bonuses when their house is clearly not in order?

[Olly Glover]

The hon. Member has anticipated the next line of my remarks: that it is time for change on bonuses and many other aspects of the current workings of the water industry.

I am pleased to see the Government initiating today an independent review of the water sector, including the question of regulation, but I hope that they will also consider some bold Liberal Democrat ideas, such as setting legally binding targets to prevent sewage dumping in bathing waters and highly sensitive nature sites by 2030, giving local environmental groups a place on water company boards, and introducing a single social tariff for water bills to help to eliminate water poverty in the course of this and future Parliaments.

Thank you, Mr Pritchard, for the opportunity to speak. I look forward to hearing the Minister’s response.

--- Later in debate ---

[Robbie Moore]

I thank the hon. Gentleman for joining the debate; I see that he came in right at the last minute just to make that contribution.

My answer is no. When we were in Government, we absolutely wanted to embolden the regulators with as much power as they required, which is why we specifically linked dividends to environmental performance so that Ofwat had more power to hold water companies to account. Not only that: we increased the amount of funding allocated to the Environment Agency and empowered the whistleblowing portal so that employees within water companies, or indeed within the EA or any of the other regulators, could make their concerns known. In that way, we as the Government—and now the incoming Government—could make proper progress and ensure that proper, positive change was implemented to improve water quality.

The financial stability of the water companies is, of course, a serious issue, and that affects our constituents through not only potential price increases, but performance-related issues. Sensibly, Ofwat expects water companies to maintain a level of financial headroom to manage short-term volatility and shocks to their financial structures, and to meet their obligations and commitments, which are set both by Government and internally by the regulator. Above all else, however, consumers must be protected so I welcome the fact that Ofwat strengthened its powers to improve financial resilience. That includes stopping water companies from paying dividends when financial resilience is also at risk.

The new Government have said that cleaning up England’s rivers, lakes and seas is a priority and to achieve that the Water (Special Measures) Bill has been introduced through the House of Lords into Parliament. Perhaps I should not have been so surprised that that is effectively a reworked version of the policies introduced under the last Government. In the Bill, the Government pledge to introduce new powers to block bonuses for executives of water companies that pollute our waterways —something announced by the last Conservative Government. However, the powers are not quite the promises constantly regurgitated by the Labour party when they were out on the doorstep— they were telling many of their voters that water company bosses would end up “in the dock” if their water company had been falling foul of environmental permitting obligations. The Water (Special Measures) Bill simply does not achieve that. By introducing the Bill, the new Government have frustrated not only campaigners but investors who want to invest in the sector.

Opposition Members spent many a day out on the doorstep also promising that they would take swift and bold action, but as we have seen from today’s announcement of a new commission, a new review and a new taskforce, the Government are just throwing the hard decisions into the long grass and simply kicking the can down the road.

[Mr Charters]

Does the hon. Member not welcome the Government’s appointment of former deputy governor of the Bank of England Jon Cunliffe? He had that expertise as deputy governor in financial stability. Does the hon. Gentleman not think that we need to look again at the whole system when it comes to the financial instability of water companies that he and his colleagues left behind?

[Robbie Moore]

I thank the hon. Gentleman for his intervention. I absolutely welcome anything that will improve the water sector. When I was a Minister in the Department, many issues needed to be addressed. I noticed that the hon. Gentleman commented in his speech that the Minister was working at pace, but the review will take at least a year to implement. I want to ask the Minister, as I did the Secretary of State in the House earlier: when will the positive recommendations from the review be implemented? We know that we are entering price review 2024, which exists from 2025 to 2030, but when is the industry likely to see any positive implications of the results of the commission that has been instigated today?

The Government have also confirmed that they will work with farmers to reduce agricultural pollution. I understand that Ministers have said that that will be through a series of

“proportionate and effective regulations, advice and incentives to deliver improvements”.

Can the Minister clarify how that will roll out? What new regulations does the Department anticipate bringing in? The farming budget is rumoured to be slashed by at least £100 million, so how will the Government incentivise farmers through public money to do the right thing in reducing run-off from fields and from their agricultural activities?

Will the Minister also outline whether any regulatory easement will be applied to water companies going forward? Many Members have raised concerns to do with Thames Water and the like, but I would like to specifically understand whether the Minister, her colleagues or the Secretary of State are looking at implementing a regulatory easement, as the Opposition would not want to see lower standards, the relaxation of environmental permits or a reduction in agreed levels of investment by any water company, irrespective of their financial circumstances.

Sound management of water companies is vital if customers are to receive the high level of service that they expect, and better environmental performance must be driven forward.