Water Companies: Regulation and Financial Stability

[Mark Pritchard in the Chair]

I beg to move,

That this House has considered the regulation and financial stability of water companies.

It is an absolute pleasure to serve under your guidance this afternoon, Mr Pritchard. It is a real honour and privilege to have secured this debate on a matter of enormous importance to my constituents in Westmorland and Lonsdale and, quite clearly, to many around the room and beyond.

I wonder whether, in the aftermath of the 2019 general election, many pundits or politicians would have predicted that by the 2024 election water quality would be one of the top three doorstep issues, and a subject of discussion here and in the main Chamber within an hour or two of each other, and indeed within the same week as in the other place. That is exactly what has happened, and there are a number of reasons why.

First, leaving the EU meant that we needed to introduce our own legislation to replace what went before. In doing so, people, including MPs, looked under the bonnet, so to speak, for the first time and were horrified to see what was there: the sewage outflows into our rivers, lakes and coastal areas that had been long permitted.

Secondly, the last Government failed to take effective action to limit those outflows, allowing excessive dividends and bonuses on the one hand and inadequate infrastructure investment on the other.

Thirdly, the situation is objectively getting worse. Climate change, higher rainfall, inadequate regulation and failure to invest in infrastructure renewal means that 2023 saw a 54% increase in sewage spills compared to the year before.

Fourthly, and just as importantly, this issue has emerged because community campaigners across the country have resolved that they will not accept this appalling situation and have led the way in holding water companies, regulators and the Government to account. Organisations in our Westmorland communities, such as the Clean River Kent Campaign, Save Windermere and the Eden Rivers Trust—and many more, both in my communities and around the whole UK—have engaged in citizen science, heightened awareness and galvanised public opinion.

The Liberal Democrats have made this issue a priority, too. Water is so important to us that my right hon. Friend the Member for Kingston and Surbiton (Ed Davey) spent most of the general election campaigning about it—and, indeed, spent quite a lot of time in it! Having led my party through a previous general election, I know exactly how it feels to spend one’s campaign in deep water, and even, on occasions, up to one’s neck in poop.

I have the immense privilege of serving Westmorland and Lonsdale and being MP for, among others, Windermere, Ullswater, Coniston Water, Haweswater, Rydal Water, Grasmere, Brothers Water, the River Kent, the River Eden, the River Lune, many other rivers, and much of Morecambe bay. For us, water is deeply personal; it is precious to our biodiversity, our heritage and our tourism economy.

Failure to tackle the issue rightly raises passions, but the fault lies in the system. We have an industry financing model and a regulatory framework that are simply not fit for purpose. However, I do not want to demonise the people who work for water companies. Good, competent and decent people work for United Utilities in my community and for other companies across the rest of the country, on the ground and indeed underground. The same applies for those who work for the Environment Agency and Ofwat. They are good, hard-working and professional people working within a system that is badly broken, and that broken system has an appalling impact on communities in the lakes and dales of Westmorland.

I have a few figures to demonstrate the situation, courtesy of the Rivers Trust. Last year in Appleby, combined sewer outflows into the River Eden saw 46 spills. At Kirkby Stephen on the River Eden, there were 135 spills. At Staveley on the River Kent, there were 283 spills. At Tebay on the River Lune, there were 124 spills.

Will my hon. Friend give way?

In one second. At Greystoke on the River North Petteril, there were 146 spills. I could go on, but I will give way to my hon. Friend.

I congratulate my hon. Friend on his excellent speech. Data from Thames Water shows that Glastonbury and Somerton was the 16th worst constituency in England and Wales for sewage overflows. Does my hon. Friend agree that the commission should consider establishing pollution baselines and reduction targets?

I absolutely agree. That reminds us that, of the over 464,000-plus spills that took place in 2023, most were legal and permitted—and most of them should not have been. We juxtapose this failure with the reality of money leaking out of the sector in the form of dividends and bonuses. Since privatisation, £78 billion has been paid out in dividends and, in the last four years, we saw £62 million paid out to company executives in bonuses.

I thank the right hon. Member for giving way. He has a very beautiful constituency in the Lake district and has campaigned strongly on this issue. Would he therefore welcome this Government’s commitment to cleaning up the water industry and that they called in the water bosses within the first week of the Labour Government to say that investment must be ringfenced for infrastructure and not spent on bonuses, and will he be supporting the Water (Special Measures) Bill?

First of all, I am merely, and happily, an honourable Member, although it is very kind of the hon. Lady to call me “right honourable”. Secondly, we welcome many proposals in the Bill. We have already tabled many amendments in the House of Lords because although we think that the Bill is a step in the right direction, a lot more could be done. I will make more of that in a moment.

It is worth saying, as we are talking about bonuses, that although there was a 54% increase in spills between 2022 and 2023, it did not rain 54% more in 2023 than in 2022; there was no justification for that increase— and yet, the bonuses happen. I have never worked in an industry where bonuses were the norm, but my understanding is that they are paid for success, not as a commiseration for statistically proven and repeated failures.

It is easy to be angry about all this—I am, and maybe it is essential to be so—but it is just as important to be constructive and seek solutions. The depth, seriousness and complexity of this crisis means that the only answers that will work need to be radical and ambitious. Today’s announcement of a water commission, which will consider these things, is welcome, but also a little frustrating. Do we really need to spend the best part of a year stroking our chins and pondering, when what is needed is radical action now? With respect, most of us pretty much predicted the likelihood of a Labour Government two years ago. Did the victory strike them as a surprise? Why were they not ready with a plan to deliver much sooner than this?

I have a similar view, as I have just suggested, about the Water (Special Measures) Bill. It contains many positives, including criminal liability for CEOs responsible for severe environmental failure, but it does not amount to the radical structural transformation that is so obviously needed. The British people rightly believe that they voted for a far more ambitious plan to be urgently delivered. Indeed, those who voted Liberal Democrat absolutely did vote for that, so we are determined to keep our word and fight for that action.

To my hon. Friend’s point about the need for a regulator with teeth, West Dorset saw 45,000 hours of sewage released into our rivers and beaches last year. The River Lim last year was declared “ecologically dead”. Does my hon. Friend have a view on whether the regulator should be able to impose fines on the water companies that reflect the damage they are doing to our natural environment?

I completely agree, and I will answer that point more fully in a moment.

Does the hon. Gentleman agree that the conflicting regulatory directives, which sit across all the different agencies that he has just referred to, are part of the problem and should be urgently addressed, without necessarily waiting for the long-awaited review?

I thank hon. Members for both interventions. First, I agree with my hon. Friend the Member for West Dorset (Edward Morello). One problem is that Ofwat has fined three—or maybe four—water companies in the last year or so to the tune of about £170 million, and has collected precisely zero pounds and zero pence of those fines.

Secondly, to answer the point made by the hon. Member for Bognor Regis and Littlehampton (Alison Griffiths): absolutely—having regulators with conflicting responsibilities and rules is part of the problem. We have two inadequately resourced regulators with inadequate powers being played off against each other by a water industry that is far better resourced and able to run rings around very good people—but very harassed people—with the job of holding them to account.

The Liberal Democrats propose a unified and much more powerful regulator that we would call the clean water authority. That new authority would end the practice of monitoring being done by the water companies themselves—in other words, setting and marking their own homework. Let us put that right. Water companies should be charged the full cost of monitoring, but the monitoring itself should be carried out by an independent regulator so we can be sure that we are seeing the whole picture. Successive Conservative Ministers committed to changing that, but none actually did, so will the Minister commit the new Government to making that necessary change?

It is a pleasure to serve under your chairship, Mr Pritchard. My constituents in Bicester and Woodstock are deeply concerned that Thames Water wants to hike its prices by more than 50% over the next five years. Just a month ago, I stood in the front rooms of constituents whose homes had been flooded with sewage because of the backing up of foul water drainage. Does my hon. Friend agree that the regulator he proposes, and which the Liberal Democrats support, should insist on and compel water companies to put performance before profit in their operations?

Absolutely. That would be exactly the case at the heart of our community benefit model, which would be governed by a clean water authority. Profit would not be the overriding motive, and having the right people on board, including environmental campaigners in each area we are talking about, would keep the water companies honest and prevent the outrageous things mentioned by my hon. Friend.

The issue with the lack of reliability of data is key. It leaves us suspicious that the scandal could be even worse than we think. Just last week the BBC reporter that between 2021 and 2023, United Utilities illegally dumped sewage into Windermere for 165 hours, of which 118 hours were not reported to the Environment Agency. According to Environment Agency figures, United Utilities was the best-performing water authority in England in 2022 and, as a reward, it was allowed to raise £5.1 million extra by increasing bills, but—as we saw have now seen from last week’s revelations—United Utilities did not report hours and hours of illegal spill decisions made on the basis of inaccurate information.

When water companies mark their own homework, there are consequences; indeed, there are deep consequences for my communities in Westmorland. Some 7 million people visit Windermere every year, alongside the other 20 million who go to the lakes as a whole. I will state for the record that I happily swim in Windermere and have confidence in its safety in most places and at most times, but on behalf of our local community and especially our local hospitality and tourism businesses, I am deeply angry that the failure of the water company and its regulators to identify and solve these problems is not only beginning to damage our environment, but doing damage to the precious brand of the Lake district. That is why we need urgent, comprehensive, tangible and ambitious action, and why I am very grateful to my noble Friend Baroness Bakewell, who has tabled a Liberal Democrat amendment to the Water (Special Measures) Bill in the Lords to create a special status, with special protections, for Windermere.

Esher and Walton is a river community. The Thames borders our constituency, and the River Mole, which is a chalk stream, runs through it. The River Mole is one of the most polluted rivers in the country, and a quarter of the sewage poured into is from my constituency. This amounts to a failure that impacts on our health, our environment and our democracy. Why our democracy? Because it means the public believe that our Government turn a blind eye to this outrage and the ransacking of our public utility, therefore neither representing them nor serving their interests. Does my hon. Friend agree that this must not be allowed to happen again, and that we—and the new Government in particular—must deliver clean rivers and get this right?

I very much agree. Regulation is the key. Welsh Water is not for profit and Scottish Water is publicly owned, yet they both still face major problems with sewage discharges. As my hon. Friend is getting at, there is evidence that although ownership and finances matter, effective regulation is the key, and we simply do not have that at present.

I thank my constituency neighbour for giving way. Does he agree that as well as regulation, commissions and the initiative proposed by his party, there is a massive breakdown of trust within the industry? I spoke to one of the major investors in Thames Water and asked them to tell me the last time that the regulator, the Government and the company’s investors were in a room together, and that had never happened. Among all these initiatives, does the hon. Gentleman agree that getting people together to talk about their different equities and priorities, and how they deliver for the consumer, is also key?

I agree. Although I also think an urgency is needed that many people who own water companies do not demonstrate, and that is why the Government need to lead—but I do think it is right that we get people together to make things significantly better.

Over the past 33 years, for every pound that water companies have spent on infrastructure and doing their job, 80p has drained away to finance debt and pay dividends. That is an appalling waste of billpayers’ money and water company assets. The separation of operating companies from parent companies, where the regulated operating company racks up huge debts to allow the unregulated parent company to pay huge dividends, has been a disgraceful scam. I am sure that my hon. Friend the Member for Witney (Charlie Maynard) will say more about how that model has done such damage to the customers of Thames Water; suffice it for me to say that that model of ownership must cease. For the regulator to have stood idly by while that has happened is unacceptable, and for it not to step in as similar asset-stripping begins in other water companies is an abysmal dereliction of duty by it and the Government.

What is to be done? I just want our waterways to work and to be clean and safe. I am not convinced that renationalisation would be a good use of public money. It could mean putting taxpayers’ money into the pockets of those who have already made so much money out of them without a single extra penny going to improving infrastructure. We propose a radical move away from the current model: water companies should be community benefit corporations, ensuring that all revenue goes into keeping environmental standards higher and solving the long-term problems of our network. Given that 45% of all water company expenditure has gone on debt financing and dividends, that kind of ownership and governance reform should mean that there is more money available for infrastructure renewal.