Independent Water Commission

Statement

The following Statement was made in the House of Commons on Monday 21 July.

“With permission, I would like to update the House on the Government’s plans to reform the water sector.

The water industry is clearly failing. Our rivers, lakes and seas are polluted with record levels of sewage, and water pipes have been left to crumble into disrepair. I share customers’ fury at rising bills. Right now, hosepipe bans are in place across the country because not a single new reservoir has been built in over 30 years, and the lack of water infrastructure is blocking economic growth. Water companies have been allowed to profit at the expense of the British people when they should have been investing to fix our broken water pipes. They got away with this because of a broken regulatory system that has failed both customers and the environment. The public expressed their fury in last year’s general election and voted for change. That change will now come.

In just one year, we have put in place the building blocks for change. First, we restored accountability by giving the regulators more teeth and introducing a ban on unfair bonuses, severe and automatic penalties for breaking the law, and jail sentences for the most serious offences. Secondly, we are investing £104 billion of private sector funding to rebuild the water network, upgrading crumbling pipes, repairing leaks, building new sewage treatment works and digging out new reservoirs. It is the single biggest investment in the history of the water sector, and it allows me to make a new commitment to the country: this Government will cut water companies’ sewage pollution in half by the end of the decade. That is the most ambitious commitment ever made by any Government about water pollution, and it is just the start. Over a decade of national renewal, we will restore our rivers, lakes and seas to good health.

The third building block for change is today’s final report from Sir Jon Cunliffe’s Independent Water Commission. I express my thanks to Sir Jon, his officials, and all those who have contributed to this outstanding piece of work. I agree with Sir Jon that water regulation has been too weak, too complex, and ineffective. Having four separate regulators with overlapping and conflicting remits has failed both customers and the environment. Ofwat has failed to protect customers from water companies’ mismanagement of their hard-earned money, and it has failed to protect our waterways from record levels of pollution. Today, I can announce that this Labour Government will abolish Ofwat. We will bring water functions from four different regulators into one—a single powerful super-regulator responsible for the entire water sector, with the teeth it needs to enforce the high standards that the public rightly demand.

The new regulator will stand firmly on the side of customers, investors and the environment and prevent the abuses of the past. For customers, it will oversee investment and upgrade work, so that hard-working British families are never again hit by the shocking bill hikes that we saw last year as customers were left to pay the price of failure by the previous Government. For investors, it will provide the clarity and direction required for a strong partnership between government, the sector and investors to attract billions of pounds of new funding. For the environment, it will reduce all forms of pollution to clean up our rivers, lakes and seas for good. We will work closely with the Welsh Government to devolve the economic regulation of water to Wales.

I will publish a White Paper this autumn giving the Government’s full response to the Independent Water Commission’s final report and launching a consultation on it. Following that, I will bring forward a new water reform Bill early in the lifetime of this Parliament. Ofwat will remain in place during the transition to the new regulator, and I will ensure that it provides the right leadership to oversee the current price review and investment plan during that time. To provide clarity during this period, I will issue an interim strategic policy statement to Ofwat and give ministerial directions to the Environment Agency setting out our expectations and requirements. We will publish a transition plan as part of our full government response in the autumn.

Today, we are immediately taking forward a number of Sir Jon’s recommendations. First, we will establish a new statutory water ombudsman—a single, free service to help customers resolve complaints such as incorrect bills, leaking pipes or water supply failures. The new ombudsman will have the legal powers to protect customers and will bring the water dispute resolution process in line with other utilities, such as energy. It is part of the Government’s ambition to put customers at the heart of water regulation.

Secondly, we will end the era of water companies marking their own homework. We will end operator self-monitoring and transition to open monitoring to increase transparency and help restore public trust. Water companies are already required to publish data on some sewage spills within one hour. We will roll out real-time monitoring across the wastewater system, and all this data will be made publicly available online. That will ensure that the regulator and, importantly, the public have the power to hold water companies fully accountable.

Thirdly, we commit to including a regional element within the new regulator to ensure greater local involvement in water planning. By moving to a catchment-based model for water system planning, we can tackle all sources of pollution entering waterways, so that they can be cleaned up more effectively and more quickly. This will ensure—for the first time—that water infrastructure investment plans align with spatial planning to support faster regional economic growth. The lack of water infra- structure that held back development around Cambridge and Oxford for so long will not happen again.

The new regulatory framework will recognise the risks investors take and, if they meet their obligations, they will see a fair, stable return on their investment. Just last week, I signed the Government’s new water skills pledge to make sure that the sector has the skills and workforce it needs to deliver this vast investment.

This Labour Government were elected to clean up water pollution and ensure that unacceptable bill hikes can never happen again. We now have all the building blocks in place to make that happen. We are establishing a new partnership based on effective regulation, where water companies, investors, communities and the Government will work together to clean up our rivers, lakes and seas for good”.

16:04:00

My Lords, first, I congratulate Sir Jon Cunliffe and his team on this thoroughly detailed review of the water industry. There are many of his 88 recommendations we support, including the replacement of Ofwat. In the other place and on the airwaves last weekend, the Secretary of State for Defra tried to demonise the last Government for lack of progress on water improvement. Will the noble Baroness the Minister acknowledge that £93 billion of the £104 billion the Government boast they have raised was raised by the last Government and that the target to cut 50% of sewage discharges is less than the target of cutting phosphates by 80% set by my noble friend Lady Coffey in the last Government? The Government are able to set meaningful targets now only because the last Conservative Government increased monitoring of storm overflows from 7% under Labour to 100% in 2023. We welcome the new regulator. Does the Minister agree that it should be independent of the water industry but completely answerable to the Secretary of State and, through that, to Parliament, so we get proper parliamentary scrutiny for the first time? I note there is a recommendation for metering for all and for a social tariff system. While metering and paying for usage is a legitimate aim which would benefit low water users, a social tariff system is just a euphemism or another term for a tax based on income or wealth. Does she accept that turning water charges into a tax to make some people pay more, such as retired pensioners, even if they use little water, is regressive and unacceptable?

My Lords, I thank the Government for making time for the repeat of this Statement. I also thank my noble friend Lady Grender for having another critical engagement at this time, thus allowing me to speak on the subject which had become routine for me over the preceding years. The noble Baroness the Minister and I have made many contributions on this subject in the years running up to the general election, both of us vehement about the lack of control Ofwat was exercising. Sir Jon Cunliffe’s report is lengthy, robust and to be welcomed. We look forward to knowing exactly how many of his recommendations the Government will take forward. Since 2022, Liberal Democrats have called for the abolition of Ofwat. It is an organisation that is completely out of its depth. It had no real way of dealing with water companies, which seemed to have forgotten that their real remit was to provide a plentiful supply of clean water and dispose of sewage in an efficient and environmentally friendly way. Although some water companies were fined by Ofwat, their sanctions bore no relationship to the number of bonuses and dividends that the executives and shareholders received for doing an abysmal job. Like others, I welcomed the Government’s ban on bonuses for water company executives who oversaw sewage discharges. However, at least one chief executive and his colleagues got round this by receiving a 100% increase in their pay by way of compensation for the absence of a bonus. It is ordinary water users and taxpayers who have to foot the bill for this, just as they have to contribute to the bill for the increases which will be needed to repair the creaking and dilapidated sewerage system and to build new reservoirs. The Government have stated that they will cut water companies’ sewage pollution by half by the end of the decade. This is to be welcomed, but how exactly will this be achieved? Bringing the oversight of the water industry under a single regulator which has the means to ensure high standards is essential, but I have some concerns. Previously, we have seen a rotation of officers from the water companies into Ofwat and from Ofwat into the water companies—a merry-go-round of incompetence. Is the Minister able to give the House reassurance that no existing or previous officer of Ofwat or any of the failing water companies will have a role in the new regulator once established? It is essential that the incompetent are not rewarded with having a role in the new regulator. A fresh start has to be just that, and not tainted with previous failure. We look forward to the interim strategy policy statement giving directions to Ofwat and the Environment Agency on how to move forwards towards the transition plan. The Environment Agency is not without involvement in the sewage discharge debacle. While the EA has been underfunded over recent years, and with ever more responsibilities thrust upon it, a radical rethink of the way it operates has to be part of the solution going forward. Since Liberal Democrats have been raising the issue of sewage spills in this Chamber and the other place, the EA has found that last year alone, there was a 60% increase in serious pollution incidents. We are at the start of the school summer holidays. Children and their families will be going to beaches and rivers to enjoy relaxation and at least a paddle, as well as swimming to cool down in the heat—which we hope will return. So many of these children will be in water that is polluted with raw sewage spills, discoloured and stinking. Certainly, I would not want my grandchildren to swim in such waters. Families should be able to take their children for a day out at the beach without having to worry about whether the water is contaminated. The sooner the Government can bring the water companies to book, the better. The lackadaisical approach to sewage discharges has to stop, and quickly. Last year, water companies breached their permits more than 3,100 times, at the same time as paying out a total of £9.3 million in executive bonuses. No single stretch of river in England or Northern Ireland is in good overall health; no English river is in good chemical health; and just 14% of English rivers are in good ecological health. This is a far cry from my childhood, when the babbling brook ran with clear, transparent water and I could see the minnows swimming along, trying to escape my small fishing net. I am confident that the Minister is as concerned about these issues as the rest of us. What is needed is: more access for communities and citizens to hold water companies to account, including representation on water company boards; improvements in how pollution is measured and strict targets set, using volume flow meters and penalties for missing targets; an urgent implementation of a social tariff on water bills to help eliminate water poverty; and legally binding targets on the quantity and quality of bathing waters and sensitive nature sites, with independent and transparent testing of water quality. Local authorities, although already overstretched, should have strengthened powers to monitor the health of our rivers, lakes and coastlines in order to restore our natural environment and help tackle climate change. I look forward to the Minister’s response on this vital issue, which affects every single water user in the country.

I thank noble Lords for their broad support for the recommendations that have come out of the Cunliffe report. This is a very important step forward in cleaning up our waterways. The Statement talks about the five recommendations that we are taking forward immediately, including: the new statutory water ombudsman, ending operator self-monitoring, and the new single water regulator— I think there is consensus that Ofwat has not done its job effectively. The noble Baroness, Lady Bakewell, makes an important point when she says that we should not reward incompetence, and I am sure that will be fed through. There will also be greater local involvement. The noble Baroness talked about communities; we want them to be more involved, and customers to be right at the heart of how we move forward with these changes. That is one of the reasons for bringing forward the regional element: to enable communities and consumers to be more central in water planning and how we manage pollution going forward. There will also be an improved strategic direction, because water strategy has failed abysmally over the last few years. Of course, this is not the limit of our ambition. We will respond in the autumn in full to the recommendations in the Cunliffe report. We will publish a White Paper, which will be open for consultation, and we intend to follow that up with a water reform Bill. So, many of the questions that the noble Lords asked, and I assume will continue to be asked, will be able to be addressed once we see that White Paper, and that consultation will be available for people to take part in. The noble Lord, Lord Blencathra, asked a few questions, which I will address. First, he talked about funding. I stress that it is actually this Government who secured the £104 billion of investment, which is so needed because of the lack of investment in the water industry over many years. That is going to be critical to improving leakage, for example, and providing better service for customers. He asked whether the regulator would be independent of the water industry but also answerable to the Secretary of State and to Parliament. We have said in the White Paper that we are going to have this new, single water regulator. Those are the kinds of questions that will be debated as we move through that process in order to inform our further legislation when it comes forward. Social tariffs were mentioned by both noble Lords. As I said, we want to put customers at the heart of the new model that we are developing. The recommendations made by the Independent Water Commission talk about national social tariffs and the introduction of compulsory smart meters. These will be considered alongside all the other recommendations as we move forward. As I said, further information will come out this autumn, when we have developed the White Paper. The noble Lord, Lord Blencathra, also talked about the monitoring of overflows and mentioned that in 2010, 7% were monitored, and by 2023, at the end of the previous Government, it was 100%. In answer to that, a lot of this monitoring came in because of public pressure and because of the absolute horror at the amount of pollution that was going into our waterways. People had not been aware of that before. While we are very pleased that the previous Government increased monitoring, there is responsibility to be taken for the amount of pollution that had gone into our waterways and the complete incompetence of the regulators at the time, which is what we are now trying to address. The noble Baroness, Lady Bakewell, asked about the target to reduce pollution—50% by 2030—and how that was going to be delivered. We have combined this with the existing commitment in the environmental improvement plan to reduce phosphorus from treated wastewater by 50% by 2028. Together, those two targets form the pledge that we are making on this commitment. Ofwat and water companies previously agreed a commitment for water companies on the PR24 agreement for storm overflow spills to be reduced by 45%, based on a 2021 baseline. To be clear, the data between 2021 and 2024 does not compare, because in 2021, only 88% of storm overflows were monitored. Although it looks less, the amount has increased, as has our knowledge. Our target for storm overflows is based on the 50% reduction in spills from storm overflows by the end of 2029, compared with 2024 levels. We can do that because we now have 100% of storm overflows monitored. More broadly on communities, we are engaging for the first time on entire river catchment systems. As part of that, we want to bring local people, local authorities —which have an important voice—businesses, and farming communities, of course, into the work that we are doing to improve pollution systems in their local area. As I said, that will be done on a regional basis and then into the catchment model system. That will be more effective, I hope.

16:19:00

My Lords, the Minister and I have a long and mainly happy history of trying to reform the water industry, including the replacement of Ofwat. I read with interest the 88 recommendations in this very timely and useful report. There is a lot to discuss, much of it welcome, but for now I will focus on two questions. First, the report underlines the need to recognise the very long-term nature of water infrastructure investment. It says that the strategic policy statements have been too short term and that water company plans, typically of five years, encourage short-term thinking. I have often asked successive Ministers to make it clear that there is no quick fix here. This will be very disruptive to consumers, cost billions of pounds and, crucially, will take at least 25 years to implement. That is five parliamentary terms. The Government need to be honest with the public on this, so I ask the Minister to underline this and to make clear the likely timeline for this refurbishment of the water and sewerage infra- structure. Secondly, the report summary on page 29 calls for more “senior engineering and financial expertise” on its board. I agree with that, but a key problem at Ofwat was that it lacked the financial engineering skills to grasp what private equity investors were up to, which led to so many of the debt problems and other issues in the finances of the water companies that we see today. Will the Minister be pressing for expertise in financial engineering in this area to be included in any new board?

Any new board must have the right expertise if it is to deliver what we want for the industry. The noble Lord makes a very important point that whatever that expertise is, we must ensure that any future regulatory systems are set up to do the job they are supposed to do and that they have the knowledge, ability and skills to do that effectively. Otherwise, we will end up with a regulator that is, again, ineffective, which is not how we want to move forward. The noble Lord makes a good point—this will take a long time. I hope the general public recognise that this is a long-term rebuilding programme. We are rebuilding a lot of a very old system, and we must get it right. This is also why will be bringing out the White Paper in the autumn, as quickly as we can, following the publication by the committee. From that, we will do the consultation, which must inform the public of what we are looking to achieve and what the timescales will be. We want to bring in new legislation as swiftly as practically possible following that White Paper. That will also be part of the discussion on how we bring people with us, because people want to see the water industry cleaned up.

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My Lords—

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My Lords, we have 16 minutes, and I am sure that we can all get in. Let us hear from these Benches and then the Opposition Benches.

My Lords, one of the things we discussed in the Climate Change Committee was the performance of the regulator. An issue raised by the noble Baroness, Lady Bakewell, in her instructive comments, was the revolving door between the water companies and the regulator, in both directions. What action will the Government take to make sure that the door is slammed shut?

As I have already said, we must get the regulator right, we must get the boards right, and we must move forward with this. There is no point in making the same mistakes that have been made over a number of years, and in not learning from what went wrong before. Getting the regulator and the boards right will be critical to achieving that.

My Lords, I congratulate Sir Jon Cunliffe and the Independent Water Commission on their excellent work, and I declare my interest as co-chairman of the All-Party Parliamentary Water Group. What legislative timetable is envisaged? In the Statement, the Secretary of State says that he will bring forward a new water reform Bill early this Parliament. We are more than halfway through this parliamentary Session, so it would be interesting to hear exactly what timetable the Government envisage. Can the Minister also confirm that National Highways will be made responsible for the water run-off and the pollution it contributes to?

On the timetabling, clearly, it is not something we can bring in this Session. We do not yet know when the end of the Session will be—we have not been informed about that—but when we have reached the end we will look to see when it will be practically possible to bring in such a Bill. All I can say to the noble Baroness is that this is a government priority. The run-off from roads and agricultural run-off is being taken very seriously, and our response and how we will manage it as part of our overall approach to water pollution is being worked on.

My Lords, the Minister will know that Sir Jon Cunliffe was not given the option to look at renationalisation. In the other place, the Secretary of State for Defra has twice replied to Green MPs Adrian Ramsay and Ellie Chowns, saying that his department looked at the cost of renationalisation and it came out at £100 billion. I have two sheets of paper here with lots of ideas about how we could renationalise without that sort of figure being necessary. The most exciting one suggests that, if we stack the liabilities against the assets of these companies, they would be worthless. So, perhaps the Minister could tell the Secretary of State to get new accountants or consult the professor of accounting we have here in your Lordships’ House. I would be pleased to give him these two sheets of paper with all these different ideas.

The noble Baroness is correct: we have ruled out nationalisation. But if she would like to share the paperwork, I would be more than happy to look at it.

My Lords, Ministers claim that public ownership of water would somehow cost £100 billion, which is a totally unsound claim. Let me explain. The £100 billion figure is generated by Ofwat, which calls it “recognised capital value”. It is calculated by taking the value of the company at the time of privatisation, adding the annual investment and multiplying it by the annual rate of inflation. It adds that 35 times—that is, over 35 years—and comes up with the figure of £100 billion, which does not represent anything. On the same basis, a £10,000 Reliant Robin bought by Del Boy in 1990 would now have a value of over £50,000. There is no way that Del Boy would be able to sell it for £50,000, because that figure has absolutely nothing to do with value. So, can the Minister explain why the Government consider £100 billion to be a credible figure for the cost of public ownership?

I would just say to my noble friend that we have discussed this on a number of occasions, including with officials in the department. I am sure that we will continue to discuss it.

My Lords, will the Minister have the White Paper consider, and perhaps consider for the Bill, the idea of setting minimum annual investment requirements? I do not know much about Ofwat, but I know a bit about Ofgem. During the time when I was on a power company board, our annual bids to spend our money on improving our network were cut down by an average of about £1 billion a year. So long as the regulators feel that they are under pressure to keep costs to the consumer down, that is what will happen. It seems to me that Parliament and the Government need to take responsibility for setting a requirement on replacing the crumbling infrastructure. That should be at least discussed in the White Paper, and I hope it will find a place in the Bill.

The noble Lord makes an extremely good point. Part of the reason why we have got into this mess is the focus on keeping bills low. People do not want to pay high bills, but if you are constantly putting pressure on that and not investing in the infrastructure, that is when you end up with a lot of these problems. That is why in PR24 we gave the most investment ever—to try to turn around some of the problems. The noble Lord makes a good point about what we need to look at going forward, in order to ensure that we do not have these sorts of problems in the future. He is absolutely right that this needs to be part of what we look at following the White Paper. I would be very happy if he has any ideas to share with me following his experience with Ofgem. That would be very interesting.

My Lords, I declare an interest as a former water company director—one involved in clean water only, not wastewater. In the speech made on Monday by the Secretary of State, he made it clear as a priority that the customer would come first in all these considerations. The customer matters more than everybody else in terms of the environmental effects and, in particular, in the pricing of this utility. There is a price review going on. Can the Minister confirm that the role of the ombudsman, certainly in the pricing review, will give priority to pricing because of the incredible increases recently in water bills? In particular, will standing charges be looked at thoroughly because, in many cases of low consumption, the standing charge has become an enormous impediment in an awful lot of people’s water bills?

My right honourable friend said in his speech down the other end that the new regulator “will stand firmly on the side of customers, investors and the environment and prevent the abuses of the past”. That basically demonstrates that we need to look at the big picture about what went wrong in the past and what we need to do to rectify it in the future. I am sure that we can look at the noble Lord’s suggestions as we move forward to ensure that we have regulation and pricing that are fit for purpose.

I declare my interest as a board member and director of the Water Retail Company. I thank the Minister for the Statement, and we welcome the report. I am sure the Minister will join me in thanking all the members of the public, charities and NGOs who have done so much work to ensure that we are aware of the level of the sewage crisis and the pollution in our water system. I noticed that there is no direct recommendation in the report to support citizen science. What action will the Government take to support these citizens? What is happening with the water restoration fund?

The noble Earl makes an important point about citizen science and input from local communities. He is right that, in many ways, we are standing here today discussing the outcome of the commission because of the recognition by government of the problem that was originally raised by organisations such as Surfers Against Sewage and anglers’ associations, and by individuals such as Feargal Sharkey. It is important to recognise that this was brought to government’s notice because of the campaigns and the work by volunteers and charitable organisations. That is why it is critical that we continue those discussions with those organisations as we develop the White Paper and the legislation, because if you have experience of dealing with problems on the ground, you can bring valuable suggestions to the development of legislation. Citizen science will be an important part of this. An example is Lake Windermere: there is a local group of people working there that we are trying to work with and support to look at how we specifically deal with the challenges there.

My Lords, like others, I would have preferred renationalisation, but a strengthened and unified regulator was my second choice so I welcome much of this report. However, will the next stage, the White Paper and the later legislation, envisage a situation where there is a system closer to franchising than to the total freedom of the water companies to carry on doing a disastrous job, as they have done since privatisation? My other point is that, in relation to consumers, there seems to be a bit of confusion between the role of the Consumer Council for Water, which represents consumers, and a new ombudsman, which is a quasi-judicial body resolving problems raised by consumers. Possibly the Consumer Council for Water should be run by Citizens Advice, but there should not be confusion between the two jobs.

I take that point, which is a good point well made about that confusion. I am sure we will take it back to the department. The report includes proposals about ownership, which will be part of any consultation from a White Paper. That is another important point that we need to consider.

My Lords, some very high salaries have been reported payable to senior water officials. Can the Minister say whether those salaries require ministerial approval?

Water companies are private companies so, on that basis, no, they would not require ministerial approval.

My Lords, there are 83 recommendations from the report on which the Government have yet to decide what view they will take. Some of them are quite small wins—for example, the recommendations by Sir Jon on rainwater harvesting to address the shortages in housing. That could be sorted out, before a White Paper, in the Planning and Infra- structure Bill. Will the Government take all reasonable opportunities, including the Planning and Infrastructure Bill, to address some of the sensible recommendations outlined in the report?

That is a sensible suggestion by the noble Baroness. I am happy to discuss those considerations with the Water Minister and the Secretary of State to see if we cannot move things forward as quickly as we can.

Having worked so closely with the Minister, I know how dedicated she is to getting this right. I congratulate her and the Government on their decision to act swiftly on Sir Jon Cunliffe’s excellent report. I relay congratulations from my friend, the noble Duke, the Duke of Wellington, who was a leading voice in this House on this issue. What safeguards will be in place to avoid the kind of hideous bureaucracy that we have seen bog down the industry and the monitoring of these water pollution incidents? Will the new regulator—a long called-for and excellent move—have the right remit from the start to avoid the kind of financial engineering that the noble Lord, Lord Cromwell, referred to? Will it have proper data so that the public can have confidence that they know what is going on, including tying pay for water companies to performance and perhaps having delayed compensation schemes so that, for example, we can get pension funds investing profitably in them for the long term rather than the short-term profitability that we have so often seen?

Investment will be critical. That is a very important point. The answer to most of the noble Baroness’s questions will lie in the consultation and the response to the White Paper on how we move forward. In particular, it is important that we have the opportunity as early as possible to start talking about it and considering how to prioritise what needs to be in place in order to start delivering on our concerns and the outcomes as soon as we can. It is worth pointing out that the existing regulators will stay in place until the new system is in place. The Government will clarify our expectations to the existing regulation system ahead of that, because we do not want the regulators just to continue as they have been. We will publish a strategic policy statement, which will have ministerial direction attached to it, at some point this year.