On 16 October 2023, the House of Lords is due to debate a motion in the name of Lord Hollick (Labour), the chair of the House of Lords Industry and Regulators Committee, to take note of the committee’s report ‘The affluent and the effluent: Cleaning up failures in water and sewage regulation’, published in March 2023.

The report is the outcome of the committee’s inquiry into the work of the water regulator, Ofwat, which was launched in May 2022. A short follow-up inquiry was conducted in the summer of 2023.

1. Conclusions and recommendations from the committee’s March 2023 report

The House of Lords Industry and Regulators Committee’s 2023 report stated that since the water industry’s privatisation in 1989 there had been some positive improvements in the sector, including “the supply of good quality drinking water, investment in wastewater treatment, and protecting homes from sewer flooding”. However, the committee noted that demands on water supply and the sewage network had increased due to factors including “population growth, property development and climate change”. The committee said that the result was a “network unable to cope” and one which relied on “releasing polluted water into the environment”.

Under existing law, sewage can be released into the water network during “storm overflows” in the sewer system, which protect properties from overloaded sewers during heavy storm events. Overflows are used to spill excess wastewater and rainwater into inland waters and the sea. Water companies are permitted to allow some storm overflows, but only within conditions regulated by Ofwat and the Environment Agency.

In its evidence to the committee, the Environment Agency said that in 2021 the environmental performance of water companies was “at its lowest ever level” and the performance of most companies was declining. The Environment Agency also told the committee that, without sufficient investment and reform, in 20 years the UK would “not have enough water to match demand”. The committee said that the investment needed to fully update the water and sewage systems to reduce leaks and storm overflows could cost “tens or hundreds of billions of pounds over multiple decades”.

The committee’s main conclusions and recommendations were:

  • The government and Ofwat must set “stretching targets” to reduce storm overflows across the water network.
  • Ofwat and the Environment Agency “must go further” to hold water companies to account for environmental pollution through penalties and prosecution.
  • Ofwat has “failed to ensure companies invest sufficiently” in water infrastructure, instead “choosing to keep bills low” at the expense of investment.
  • Water companies have been “overly focused on maximising financial returns” at the expense of operational performance and protecting the environment.
  • Ofwat should ensure that water company executives cannot receive substantial bonuses if their companies have missed performance and pollution targets.

The committee’s recommendations to the government included:

  • Set “stretching targets” for reducing sewage overflows. The committee noted that in 2022 the government had published its storm overflows discharge reduction plan (for more information see the House of Lords Library briefing on the plan). The committee said the plan “lacks bite” and that the government must use the mandatory review of the plan in 2027 to set “stretching targets” for Ofwat to reduce storm overflows.
  • Legislate to introduce a single social tariff for water bills. The committee said that customers’ bills “will likely increase” in the future. The report said the government should legislate to “protect vulnerable customers from bill increases”.
  • Consider banning the sale of wet wipes that are not biodegradable.
  • Publish a national water strategy. This should set clear benchmarks for water quality and resilience of water supplies and which facilitates a “joined-up approach” between regulators for meeting those benchmarks.
  • Provide adequate funding to the Environment Agency. The funding would ensure the inspection and enforcement of environmental offences by water companies.
  • Accelerate the planning process for new reservoirs. The report stated that no major new reservoir has been built in the UK since 1991. The government should set out plans to “accelerate the planning process” for reservoirs, including by amending the national policy statement for water resources infrastructure, if necessary.
  • Make water metering compulsory for all households and businesses, where it is possible to do so.

2. Government response to the committee report

The government published its response to the committee’s report in June 2023. In its response, the government highlighted that it had published a ‘Plan for water’ in April 2023. In the plan, the government said it was intended to “address sources of pollution, boost our water supplies through more investment, tighter regulation, and more effective enforcement”.

On targets for reducing sewage overflows, the government’s committee response said the storm overflows discharge reduction plan already included “ambitious targets” for reducing overflows. It said it would introduce powers under the Environment Act 2021 to “ensure there is no local adverse ecological impact from storm overflows by 2050”.

The government said it had no plans to introduce a social tariff for water bills. It said that water companies were already encouraged to provide information about support measures for customers who have difficulty paying their bills.

On banning non-biodegradable wet wipes, the government said it had already announced a ban on a range of single-use plastic products, including wet wipes containing plastic. The ban is due to be implemented “subject to public consultation”.

On publishing a national water strategy, the government said its April 2023 plan for water, together with the ‘Environmental improvement plan’ published in January 2023, would bring together the “significant steps the government has already taken” to address the committee’s recommendation. The government said the plans would “transform our management of the water system, deliver a cleaner water environment, and secure a plentiful water supply”.

On providing adequate funding to the Environment Agency, the government said that Ofwat was the subject of the committee’s inquiry, but it “notes the recommendation”.

On accelerating the planning process for reservoirs, the government said the national policy statement for water resources infrastructure, published in April 2023, would “bring further clarity to the planning process and be a key enabler for accelerating water supply infrastructure, such as reservoirs and strategic water transfers”.

The government said it had addressed the issue of making water metering compulsory in its plan for water. That plan committed to “encouraging water companies to consider how to rapidly increase smart meter installations”.

3. Ofwat response to the committee report

Ofwat published its response to the committee’s report in May 2023. Ofwat said that it “strongly supported” the committee’s view that water companies must “transform their performance” to protect the environment. Ofwat said it was clear that companies were “falling well short of expectations” and it was “calling for a reset” in the sector. It said that water companies had committed “£10bn of new investment by 2030” to address the issue of storm overflows.

Ofwat also said that it understood the “vital role” it plays in collaborating with the Environment Agency and the government to drive improvements in water companies’ performance. It said the government had approved an increase in funding for Ofwat of £11.3mn for 2023/24 and 2024/25. Ofwat has said the extra funding would be used to treble its enforcement capacity.

On targets for reducing storm overflows, Ofwat said it had “asked all companies to reduce the use of overflows immediately”. In response, Ofwat said companies had committed to reducing such overflows by 25% by the time of the 2024 price review (the five-yearly process for setting wholesale and customers’ water prices, at which companies also submit their business plans and investment commitments). Ofwat said that targets for further reductions to storm overflows would form part of the 2024 price review outcome.

On banning bonuses for under-performing water companies, Ofwat said it had introduced “new plans to ensure customers do not fund executive bonus payments”. The proposals would allow Ofwat to adjust water companies’ revenue allowances if the regulator considered the company was not meeting its expectations. Although Ofwat admitted that this “does not go as far as banning bonuses outright”, the recovery mechanism would ensure that “customers do not pick up the bill” for companies that fail to meet performance targets.

4. Sewage overflows: Office for Environmental Protection findings

On 12 September 2023, the Office for Environmental Protection (OEP), a body which holds the government and public authorities to account on environmental issues, announced it had identified “possible failures to comply” with environmental law on regulating sewage overflows. It said the government, Ofwat and the Environment Agency may have “misinterpreted” the law on how often sewage overflows should be allowed to occur without sanction. Helen Venn, the OEP’s chief regulatory officer, said:

Where we [the OEP] interpret the law to mean that untreated sewage discharges should generally be allowed only in exceptional circumstances, such as during unusually heavy rainfall, it appears that the public authorities may have interpreted the law differently, permitting such discharges to occur more often.

The public bodies have two months to respond to the OEP’s findings, after which the OEP will decide next steps.

The OEP’s findings was the subject of an urgent question in the House of Commons on 13 September 2023. In response, Thérèse Coffey, secretary of state for the Department for Environment, Food and Rural Affairs (Defra), said the government was clear that sewage overflows were “totally unacceptable” and that the Conservative Party had “taken more action than any other government on the issue”. She said that Defra “would, of course, comply with the requests” of the OEP, but the department did not agree with the OEP’s assessment of its compliance with the law.

The Labour shadow environment secretary, Steve Reed, said the government were “up to their necks in a sewage crisis of their own making”. He claimed that cuts to the Environment Agency’s budget had “led to drastic cuts in monitoring, enforcement and prosecution”. He said the Labour Party would introduce “severe and automatic fines for every illegal discharge to pay for a tougher regulation and enforcement regime”.

The answer to the urgent question was repeated in the House of Lords on 14 September 2023.

5. Follow-up inquiry: Conclusions and recommendations

In the summer of 2023, the House of Lords Industry and Regulators Committee held a short follow-up inquiry to its work on water and sewage regulation consisting of oral evidence sessions with representatives from Defra and water industry regulators.

On 18 September 2023, the committee’s chair, Lord Hollick, wrote to Thérèse Coffey with the committee’s findings. In that letter, Lord Hollick criticised the “dismissive brevity and complacent tone” of the government’s original response from June 2023. He said the committee objected to the “apparent insinuation” that several of its recommendations were outside the scope of the original inquiry, which Lord Hollick said appeared to be an attempt by the government to “avoid parliamentary scrutiny”.

In setting out the follow-up inquiry’s conclusions and recommendations, Lord Hollick said the committee was disappointed that the government had not committed to legislate for a social tariff for water bills, which he reiterated were likely to rise to finance the “huge level of investment” required to reduce storm overflow discharges. The committee also criticised the government for failing to issue clear guidance to Ofwat on balancing the trade-offs between investment and the affordability of customers’ bills. In addition, the committee was critical of what it called the “unnecessary” delay in banning wet wipes containing plastic.

Although the committee welcomed the publication of the government’s April 2023 plan for water, Lord Hollick said the committee was concerned that there is “insufficient policy or drive to meet the government’s targets and what appears to be a lack of leadership demonstrating deep-rooted complacency”.

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Cover image by kazuend on Unsplash.