Independent Water Commission

Statement

The following Statement was made in the House of Commons on Wednesday 23 October.

“With permission, Mr Speaker, I would like to update the House on the action that this Government are taking to fundamentally transform our water industry and clean up our waterways for good.

Fourteen years of Conservative failure have left our water sector in disrepair. The rivers, lakes and seas that we all love have record levels of pollution. Severe droughts are set to leave parts of the country facing significant water shortages by 2050, particularly in the south-east, and water companies forecast that England will need to find an extra 5 billion litres of water a day to fill the gap between supply and demand by that same year. A rising population and the increasing impacts of climate change are putting strain on the water system. Firmer action should have been taken by the previous Government to ensure that money was invested to fix the water and sewerage system. Instead, they allowed that money to be siphoned off for bonuses while our water infrastructure crumbled.

A secure water supply is essential for every home and business throughout the country. It is the foundation of our economy, our communities and our global security. It is essential to life itself. We use water to cool power stations, and it is vital to our electricity supply. We use water to grow the crops that provide the food on our plate, and we use it to supply our leisure industries. Without a resilient water supply, we cannot build the new homes and critical infrastructure that we need to grow the economy.

Concerns about pollution, water shortages, bill increases and the sector’s financial resilience all point to the need for profound change. The water sector needs a complete reset, with a reformed water sector working in partnership with government to bring in the investment we need. We need a clear long-term plan to ensure that the sector puts customers and the environment first and can attract investment to upgrade our infrastructure. We need a water system fit for the future. We cannot clean up our rivers, lakes and seas overnight, but we have a plan, and the work of change has started.

On 11 July, I made a Statement to the House on the agreement that I reached with water companies and Ofwat to ring-fence money earmarked for investment in water infrastructure so that it can no longer be diverted for shareholder payouts and undeserved bonus payments. On 9 September, we introduced the Water (Special Measures) Bill, which sets out new measures, including measures strengthening regulation to ensure that water bosses face personal criminal liability for serious and repeated lawbreaking; giving the water regulator new powers to ban the payment of bonuses if environmental standards are not met; and boosting accountability for water executives through a new code of conduct. Today, I am pleased to announce the third stage of our plan.

Together with the Welsh Government, we are launching an independent commission that will lead the biggest review of the water industry since privatisation 35 years ago. The commission will ensure that we have the robust regulatory framework that we need to attract the significant investment that is required to clean up our waterways, build new infrastructure to address water scarcity, and restore public confidence in the sector. I am delighted that it will be led by the former deputy governor of the Bank of England, Sir Jon Cunliffe, who has decades of economic and regulatory experience. Sir Jon will be supported by an advisory group of experts covering areas such as the environment, public health, engineering, customers, investors and economics. He will seek advice from wider groups of stakeholders, including environmental campaigners, consumer champions, water companies, regulators and the public at large.

The commission will conduct a root-and-branch review of the water sector’s regulatory system. It will cover the water industry in England and Wales and the strategic planning framework under the water framework directive and river basin management plans to ensure that strategic water planning across sectors is effective at catchment, regional and national scales. Where housing, planning, agriculture and drainage interlink with strategic planning across the water system, they are also in scope.

The commission will set a new framework for the future. It will not make recommendations that affect the current price review 2024 process, to ensure that there is a stable climate for investment as that process concludes. It will be pragmatic and will focus on reforms that improve the privatised regulatory model. Nationalisation of the water sector will not be in scope, because of the high costs of buying out the current owners, lack of evidence that it would lead to improvements, and the long delays that it would cause in the process of cleaning up polluted water and serving customers better.

The commission will make recommendations in the first half of 2025, reporting to me as Environment Secretary and to the Deputy First Minister and Cabinet Secretary for Climate Change and Rural Affairs in Wales. Once it has made its recommendations, the UK and Welsh Governments will respond and consult on proposals, including subsequent legislation. Further details of the commission’s scope, delivery, approach and timelines are set out in its terms of reference, which will be available on GOV.UK today.

This Government will deliver an ambitious, long-term and collaborative approach to reforming the water sector, creating a strong new partnership between government, water companies, customers, investors and all those who work to protect our precious environment. The commission will set the groundwork for the reformed water sector that we want to see. I thank Sir Jon for leading this important work.

This is our opportunity to ensure that our children, and their children, have the chance to create memories that will last a lifetime—to splash about at the seaside, row on our rivers or enjoy a picnic on the lake shore. This is our opportunity to inject billions of pounds into the economy and to power UK growth by attracting global investment into a transformed water sector. This is our opportunity to clean up our water once and for all”.

15:31:00

My Lords, we on these Benches welcome the independent commission led by such a respected figure as Sir Jon Cunliffe. However, after 14 years of criticising our government policy in this area, why did the new Government not have clear ideas of their own to fix this industry by the time they took office? As has been discussed at Second Reading and in Committee on the Water (Special Measures) Bill, there is concern over the timetable for bringing forward legislation for a full reform of the water industry after this review is complete. Will the Minister make commitments on the timing of that legislation for noble Lords’ consideration when deciding whether to press their amendments that might increase the breadth of the Bill’s impact? The Secretary of State has given a commitment that the review will not make recommendations that affect the 2024 price review. In another place, it has been suggested that the review would not, therefore, lead to legislation that takes effect before 2029. Does the Minister agree? It is reassuring to see the Government adopt our own previous policy of removing rights to bonuses for water company directors; however, will the Minister inform the House of the total amount of performance-related pay within the sector since privatisation and what percentage of total investment that is? Taking away bonuses will not change the finances of the water industry. It is most pressing to ensure that the industry is properly capitalised to undertake the investment programme that this country needs to deliver clean water at an affordable price. How much has been ring-fenced for that in the agreement between the Secretary of State, the industry and Ofwat announced on 11 July? It was disappointing that only the last of the terms of reference addressed financial resilience at all. It is critical, given the parlous state of some companies in the sector and the need for investment to deliver clean rivers, lakes and beaches, that this issue is addressed quickly and effectively. My own amendment to the Water (Special Measures) Bill limiting water company leverage was not much liked by the Minister. What other measures are the Government taking to restore financial stability in the short term? It has also been reported that the Government will consider forcing the sale of water companies in England to firms that would run them as not-for-profits. Can the Minister confirm whether this is part of the Government’s review, and is she willing to give the House some examples of this kind of approach working elsewhere? For example, does she consider Welsh Water’s record in Labour-run Wales to be a good one? It has been a source of much frustration to this House that there is a lack of accountability to this House for the actions and inaction of the regulators. We welcome the terms of the review to clarify regulators’ relationships with Parliament. Does the Minister agree that, when she is speaking at the Dispatch Box on behalf of the regulators, it might be desirable that they were more accountable to her and to this House?

My Lords, I declare my interests as set out in the register and thank the Minister for this Statement updating the House on the launch of the independent water commission. There is much that we on these Benches welcome, most importantly that this Government, through the Water (Special Measures) Bill presently being considered by this House and the launch of the water commission, have given a clear signal that they are determined to try to fix our broken water system. The intent is a welcome step change, and I am thankful for it. That said, there is a time for reviews and commissions and a time for calm, direct and decisive government action to fix systems that have been broken for far too long. The Government talk proudly about their longer-term approach, when the electorate is keen for more radical and immediate action. My friendly warning to the Labour Government is that the people who voted for them did so with the expectation that real action would be taken to resolve this mess, at scale and at pace. Labour has had many years in opposition; quite frankly, we expected the Government to be better prepared and to have come up with the necessary plans and answers by now that are urgently needed to fix these problems. The water industry is a mess, and the sewage scandal was a critical issue at the last general election. The Liberal Democrats are determined to put the protection of our precious natural environment at the heart of everything we do. In 2023, water companies dumped 54% more sewage into our lakes, rivers and coastal areas than they did in the previous year. This amounts to 464,000 incidents and 3.6 million hours of untreated sewage discharges in England alone, damaging our freshwater ecosystems. Meanwhile, water bills are set to rise by some 40%. We are clear that we would abolish Ofwat, create a new, unified and far more powerful clean water authority and replace the failed private water companies with public benefit companies. The Government have taken a different policy direction. My worry is that the magic trick of making Ofwat fit for purpose, securing investment while keeping consumer water bills low and protecting our environment lies way beyond the measures contained in the Water (Special Measures) Bill and that, when further legislation finally arrives, it will be too late. I welcome the Minister’s engagement, but I call on the Government to work with all sides to make the measures in the Water (Special Measures) Bill more radical and robust. Our environment cannot wait while Labour decides on the real systemic reforms that are the only solutions to this crisis. Only 14% of our rivers and streams are in good ecological health. With the commission taking at least a year to consider evidence and report back to government, and with further legislation only then to be prepared and debated in Parliament, the radical change required appears unlikely to be implemented before 2028-29 at the earliest. I hope that the Minister can acknowledge a growing sense of concern on all sides of the House that the measures in the Water (Special Measures) Bill are not enough to fix the problem and that further legislation derived from the conclusions of the water commission will just not arrive in the urgent timescales required. The 30% by 2030 target for protection of nature is coming up urgently. How will this review help support that process? My understanding is that the water review will not report until 2025, which leaves a short timeframe for making the necessary changes and requirements to meet our targets. Further, if we find after the Water (Special Measures) Bill is passed that problems in the water industry persist and we are still in the gap before the water commission finishes its work and is ready, are the Government prepared to put forward additional urgent legislation to help fix any remaining problems?

My Lords, I thank both noble Lords for their questions on the Statement made in the other place recently. Both noble Lords mentioned the fact that we had been in Opposition for 14 years— I would suggest that is probably one of the reasons why the water industry is in such a mess. It is a little bit rich of the Opposition to say that we should have sorted it out when we were in Opposition. In answer to a few questions, the review will be reporting in the first half of next year. It is not that long until next year; it is only a few months away. The idea is that the review will develop new legislation that will make water companies and our water infrastructure fit for purpose for the future. I thank the noble Earl, Lord Russell, for his broad support. He talked about urgency. It is important to point out that we came into government at the beginning of July. On 11 July, my honourable friend the Secretary of State made a Statement to the House on the agreement he had already reached with water companies and Ofwat to ring-fence money earmarked for investment so it could not be diverted to shareholder payments. On 9 September, we introduced the Water (Special Measures) Bill that we are considering in the House. Yesterday, the review was announced—so we are pretty well cracking on with this as an urgent action going forward.

15:40:00

Does the Minister agree with me that the failures in the UK water industry derive from extractive financial engineering, which in turn led to poor investment in infrastructure, which in turn led to the environmental failures that have become so publicly known? All these things should have been picked up by the regulators far sooner and acted on. Will the commission focus on that aspect?

The commission will focus on regulation, among other things, and I urge noble Lords to input into that part. Clearly, regulation is an area of particular concern. We need to look at how it was possible for water companies to have managed to get into such appalling debt; the commission will want to look at that very carefully.

My Lords, I said yesterday in Committee on the Water Bill that I very much welcome this review and congratulate the Government on having instituted it. Perhaps I could probe the Minister on a particular point about the structure of regulation. In the other place last week, the Secretary of State said: “The Commission will conduct a root-and-branch review of the water sector’s regulatory system”.—[Official Report, Commons, 23/10/24; col. 280.] However, in the press release, among the listed objectives of the commission are: “Better regulation: rationalising and clarifying requirements for companies … Empowered regulators: ensuring regulators are effective in holding water companies accountable”. I hope that within the scope of the commission is the question of whether the structure of regulation is correct, in that it is divided principally between Ofwat and the Environment Agency, and whether it would not be more appropriate to have a single regulator for such an important group of monopoly companies.

My understanding is that the whole structure of the regulator and anything around how effectively it has been working will be open for the commission to discuss. My understanding is also that we are not committed to any particular structure going forward and that the commission will look at the whole thing right across the board.

Can the Minister reassure the House on the scope and delivery of the commission? I very much appreciate that this commission is being established and that it has got such a wide remit. It very specifically says in the account of the scope and delivery that the commission will be asked to work within the framework of the UK carbon budgets and the targets of the Climate Change Act, but it does not give a concomitant assurance that it will also have to meet the requirements of the Environment Act, including the legally binding biodiversity targets in particular. Can the noble Baroness reassure us on that matter—that it will be part of the remit?

The noble Baroness is right that it specifically refers to the UK carbon budget framework and the Climate Change Act. We discussed this very briefly in the Water (Special Measures) Bill yesterday during the environment amendments. The biodiversity targets set within the Environment Act are certainly ways to deliver the changes that we need and I suggest that anything that is currently in law is something that the commission would be discussing.

My Lords, I will pick up the point that the noble Duke, the Duke of Wellington, made about regulators. While we welcome very much the independent water commission and what it will look at in its scope, last week the Secretary of State introduced another review by Dan Corry of the Defra regulatory framework, which will report before the independent water commission. I did not want to think that that might preclude any of the broader structural issues that we know need to be addressed in the water industry. Therefore, I ask the Minister: what relationship will there be between the Dan Corry review of Defra’s regulatory framework and the independent water commission?

That is a really good question. I have met with Dan Corry and spoken with him about this. He is doing a very broad overview of everything; it is not limited to the water industry. His review is entirely separate from any work that the commission is doing. If there is any overlap on the effectiveness of the water industry regulators, I am sure that it will be fed into the commission as part of its discussions.

My Lords, the water commission’s terms of reference are full of motherhood and apple pie statements. They promise to protect customers and the environment, but matters such as flooding, agriculture, waste, the pricing formula, profiteering and the failures of privatisation are beyond the scope of the inquiry. Such constraints mean that the review will not be comprehensive. Can the Minister explain why the Government have handicapped the commission from the outset?

The Government have not handicapped the commission; they have given the commission a clear target, overview and scope. Where housing, planning, agriculture and drainage interlink with strategic planning for the water system, they are in scope. In some circumstances, that could include, for example, agricultural run-off or housing development—it just has to be within that scope. Having said that, just because the other areas that my noble friend referred to are not in scope of the commission, that does not mean that the Government are not taking them very seriously or not continuing to do further work on these issues.

My Lords, I welcome the review and, in particular, the appointment of Sir Jon Cunliffe, who, in his time regulating financial services at the Bank of England, proved his thorough understanding of regulatory frameworks. My point is about scope and timing. We are told that an advisory group will be established to inform him and that he will refer to, and consult with, expert stakeholders. After that, the commission will also publish a general call for evidence to bring in a broad range of other views, which I assume is the public part—I see the Minister nodding, so presumably there will be a public consultation. My question therefore is: does she sincerely believe that six months is adequate? This review is profoundly important and pulls together so many different strands, as others have mentioned, so it is more important to get it right than to get it on the record quick.

As the noble Baroness said, Sir Jon Cunliffe is an excellent choice as chair, and we are very pleased to have him. He is already looking at who could be part of the advisory group—that is taking place—and who the broader advisers will be. We want to have it open to the public and consumers, because it is important that they too have their say. Now that we have the chair appointed, we are, as a matter of urgency, getting the other members of the advisory group in place and getting the other people involved who need to be involved, including the public, as quickly as possible.

My Lords, I am sure that the Minister will agree that the pollution through sewage overflows into our waterways is abhorrent and needs to be dealt with urgently. Here is the problem: the water companies have their price review—their five-year plan, if you like—to be agreed at the end of this year for the next five years. So, unless the Government are able to influence the scope and size of the agreement of investment in our wastewater pipes and treatment works, nothing will happen—well, not enough will happen —in the next five years. The danger is that the Government are putting this off until 2030. That is not acceptable. Can the Minister reassure me and many others that this will not be the case?

As the noble Baroness is aware, the commission will not do anything that will impact on PR24—the price review that is due to report at the end of this year. I point out that this price review is £88 billion, as Ofwat has proposed. That is the largest investment that we have ever seen going into infrastructure. The Government were very keen that we had a really good infrastructure deal for PR24 so that we can start putting right some of the things that so badly need attention at this very early stage.

My Lords, like everybody, I very much welcome this report. However, point 12 says that the Government are specifically ruling out looking at agriculture at the moment. Given that the public really worry about pollution and, particularly in the west of England, that so much pollution in our rivers and reservoirs comes from agriculture, when will the Government look at this? Will any further legislation come through separately from Defra to look at the waste that comes from chicken farms that affects the River Wye?

The situation in the River Wye is the most dreadful example of what can happen when you get too much run-off from agriculture. We are looking at what needs to be done around the River Wye in particular, but we are looking more broadly at how we manage pollution from agriculture. I met my colleague Daniel Zeichner, the Minister for Farming, only earlier today, and we discuss these issues on a regular basis. Although agriculture is in scope only where it interacts with water regulation, that does not mean that we are not serious about tackling the problem. It is a huge part of this; I think that over 40% of pollution in our rivers comes from agriculture. It is very much high on the Government’s agenda.

I urge that the commission takes a serious and practical look at resourcing. The Environment Agency has had its budget halved in the last decade, and it is pointless producing complicated recommendations if they are not going to be resourced—something which we as legislators do far too often.

The noble Lord makes an extremely good point. Resources and enforcement are a crucial part of ensuring that any legislation is delivered.

My Lords, the Minister has indicated how quickly the Government have sought to address this issue, but they very quickly announced the intention to develop 1.5 million new homes across the country. We are all aware that there are development deserts across the country, particularly catchments affected by the nutrient neutrality rules on phosphates and nitrates. I have also heard that the Environment Agency has declined a number of major developments, including around Oxford and Cambridge, due to lack of available water to supply those new developments, as well as lack of suitable sewerage to remove waste. Will the commission focus, and how quickly will it be able to do so, on the limitations that the poor performance of our water companies is placing on the Government’s ambitious agenda for economic and housing development?

As the noble Earl heard, the commission has a very wide remit. I ask him to feed in anything like this that he feels it should be giving attention to. On housing and nutrient neutrality, we have ambitious housing targets, and Defra and the MHCLG are working together on how we can protect the environment and look at what needs to be done in the area of drainage. On water shortages, one of our manifesto pledges, and something we are very keen to work on, is the introduction of new reservoirs. We have not had new reservoirs for over 40 years in this country, and it is absolutely critical that we move forward on that.