Good morning, everybody, and welcome to this public session of the Environment, Food and Rural Affairs Select Committee. Our evidence this morning centres on Ofwat’s price review as part of our ongoing review into reforming the water sector. We have three witnesses for the first panel this morning. For the avoidance of doubt, we are endeavouring to keep a better gender balance on our panels, so we are aware of the need to do better, but we are grateful to you for your attendance here this morning and for your co-operation with the Committee. For the benefit of those who are watching and for the official record, can I invite you to introduce yourselves, please?

Good morning. My name is Tom MacInnes. I am the director of policy at Citizens Advice.

I am Mike Keil. I am the chief executive of the Consumer Council for Water.

I am David Henderson, chief executive officer of Water UK.

Good morning, and thank you all very much. We want to start with a few very broad questions about the price review that was announced by Ofwat, and the response in particular from the water sector. If I may start with questions to Water UK, how have the water companies responded to the price review process and its outcomes? Has the process been transparent? Generally, are your members content that they got what they wanted?

Thank you very much, Chair. The price review is a very long and complicated process. It took over 14 months between companies submitting their business plans—and 55,000 pages of information—and receiving the decision, which comprised nearly 4,000 pages of documents, in late December. Companies are looking through those documents as we speak. They have until around the end of next month to decide whether they wish to appeal. Overall, we are looking forward to getting on with a step change in investment. For too long, we have not had enough investment in our system, and that is, in our view, the principal reason why performance is not what it should be. We have consistently had investment cut, in real terms, by the regulator, Ofwat, since 2010. Last December, we finally had the recognition that we need to play catch-up by increasing tremendously the amount of investment to drive further improvements in environmental growth and greater resilience in our network. It will take time. Each company needs to look at it in the round and consider a lot of factors, and they will make their decisions over the coming weeks.

Is it an effective process?

It is too slow, too complicated and too expensive. Companies have spent around £250 million on their business plans, which is far too much money. We know that we need a more resilient network. We know that we need to build nine new reservoirs. We have not built a single one since 1990, despite the population rising by 20% in that time and even further pressure on the network through climate change, and yet it took 14 months, as I say, to be given the green light to proceed with those investments. I do not think that anyone could look at this and think that it is a system working as it should.

Consumers are looking at quite significant increases in their water bills. How confident are you that this is going to lead to better outcomes for them?

Bill rises are never welcome. We understand that, for many people, the cost of living pressures are very acute, and they will find these rises hard. That is why we are tripling the level of support to vulnerable households. Payment holidays, discounts and other forms of assistance, such as debt forgiveness, will be made more generously available to consumers, so that they can accommodate some of these rises. It is important to put this in context. Since 2010, bills have been falling in real terms. If they had merely risen with inflation, they would be around 25% higher than they are today. As a result of bills not rising with inflation, we have a system that has not had enough investment in it, so we are having to play catch-up. It is, sadly, going to be more expensive than it would have been if we had made this investment 10 or 15 years ago, when interest rates were near zero. None the less, it will be much more expensive if we do not get on and do it now. I am confident that the investments that we are looking to unleash from April will deliver noticeable improvements in our system. We are going to see around a halving of the activation of combined sewer overflows, which is one of the things that people are, rightly, very keen to see addressed. We are going to see nine new reservoirs, as I mentioned. We are going to see leakage reduced ever further. It is currently at its lowest level on record, and we are going to see it cut by another third. We are going to see the amount of phosphorus and nitrates that enter the environment through final triggered effluent continue to fall. People will start to see noticeable benefits pretty quickly, from April, but we are talking about a very large system, which, laid end to end, would stretch to the moon and back. Some parts of the network are over 150 years old, and we have not been investing anything like we should have in it, which is one of the main reasons why we see it increasingly unable to cope, as I say, with climate change and population growth.

I have every confidence that we will come back to some of that and unpick it later on in our proceedings.

You said that bills have fallen in real terms and that the investment that you would like to have seen has not taken place. What has changed? Why are water companies suddenly coming forward with proposals asking for this huge investment?

We have consistently come forward with proposals and consistently had those proposals rejected. At the last price review, in 2019, Ofwat cut our proposed investment by nearly £7 billion. It is not the case that we have not been seeking to invest. We have, and we have consistently had those applications for investment denied. Again, we sought £112 billion, which has been cut by £8 billion by Ofwat in its decision published last month, so we are still having cuts to the investment programmes that we are seeking. It is the job of Ofwat to scrutinise our plans and to make sure that we are investing as efficiently and as productively as possible, but we do feel that too often the regulator’s focus has been on keeping bills lower than what we feel they need to be in order to sustain the investment that we know our environment—and, increasingly, our economy—requires.

Mike, has consumer and political pressure changed the dynamic there in terms of the investment required to make those changes?

Consumers want to see investment. When you do research, they understand the need for investment. Multiple things are going on in this price review. You have investment that is welcomed, and you do not need to look very far to see those areas that need investment, such as CSOs and leakage. This comes with a big price tag, of course, which is going to be very difficult for many households, who are going to struggle with a 36% rate rise over five years; that is the headline figure. Bear in mind that that does not include inflation, so when you add in the forecast for inflation, you are talking about more than 53%, which is going to be really difficult. On the point that David made about investment, companies put in a business plan and, if they do not like what Ofwat says, they can appeal or contest. If you look at all the price reviews since privatisation, there have been 136 opportunities to contest. Only 10 of those have ever been taken, which means that, in the round, companies have said, “We can live with that outcome”. Companies have chosen to live with the outcome from price reviews. In fact, their boards signed a statement saying, “This business plan is sufficient for us to meet our obligations”. If they did not feel that they could live with that, they should have contested it. From around 2010, there was mood music to keep bills low. That is true, and everyone bought into that—regulators, companies and ourselves. There is some attraction to flat bills, and people bought into that mood music.

Are we now in a better position in terms of achieving what we want to from that investment, although it is coming at a significant cost to the taxpayer?

If delivered, this price review and this next five-year period could be significant in terms of seeing that step change of improvement. I say “if delivered”, which is really important, because, if you think about it, customers will pay up front for this. The biggest chunk of that 36% increase, or 53% once you add inflation, is coming in year 1—20%—which is going to hit people’s pockets. They want to see a return on that investment in terms of better services, which are going to have to materialise and be noticeable. If people do not see a difference in their services, why on earth would their view of the water companies change? As you know, it is not a good view at the moment. Their trust is at an all-time low, and that needs to change. The way to change it is for people to notice a difference through the services that they receive, and through the support that they receive if they are struggling to pay their bills. That is absolutely crucial, because that needs to go hand in hand with these bill increases.

For us at Citizens Advice, the issue here fits into the broader cost of living context. About half of our case load at the moment is to do with the cost of living and with people not being able to afford things, and the knock-on effects of that. Our concern here is more about the provisions put in place by companies to help the most vulnerable in society and those who will not be able to afford this. I can go into more detail about that sort of stuff around social tariffs, but what we have not really seen as a result of the review is a match between where the increase in hardship is going to come and where the increase in social provision or social tariffs is going to come. There is a real mismatch there, so that would be something that we would want to raise.

This whole process becomes a bit of a Mexican stand-off, does it not, when you have Ofwat saying, “We are going to put your bills up by this” and the water companies saying, “We will make improvements, but only if we get our own way”? Is that a healthy process? Some companies said that they would only make improvements contingent on them getting what they wanted out of the price review. Is that right?

Companies put forward their investment plans, which say that they will achieve the statutory obligations placed on them by regulators, Government and Parliament, and that the price tag attached to it is as set out in the plan. It is for Ofwat to scrutinise those plans and to make sure that they are as efficient and productive as possible. Ultimately, we need a system in which investors feel confident enough to put their money into it. They have choices and do not have to put their money into the water industry in the UK. They do not even have to put their money into this country. If we want them to put their money into the water industry, they need to feel confident that they are going to receive a sufficient return. Right now, eight companies are making a loss. Average returns are 2.1%, which is far less than you or I, or anyone else, would receive from a fixed-term deposit with a high street bank right now. Returns are very modest and, if we want investors to stump up the enormous wave of capital that we need to transform our environment and to increasingly underpin economic growth, we need them to feel confident that they will receive a sufficient return.

What Mike is describing, though, is a process where customers are now major investors in the industry, is it not?

The way that the system works is that investors always put the money in up front, and that money is slowly recouped through customer bills. That is a far more efficient way to fund investment, in our view. If you had customers paying it all up front, it would be tremendously more expensive and very much more volatile. You would have increasingly higher bills coming forward than we are about to see in April. This system, where we have investors put the money in up front, enables a smoothing of the costs and is a more efficient way of allocating the scarce resources that we know are around.

We have touched on investment, and I was wondering whether, Mike, you could talk about the changing opinions towards water companies over time, and the main drivers of those opinions.

There is a point that David just made about investor return, if you do not mind me picking up on that. We hear a lot that returns have been only 2%, and that you can get more than that in a high street bank. That is using return on regulated equity, which is one way of measuring it. Another way is total market returns, which, in this current period, have been over 8%. There is a slightly different complexion if you look at a different measure. Not many customers can get 8% from a high street bank, so there is a slightly different perspective if you look at different metrics on this. To get to your question, customers are not very happy with the water sector at the moment. Satisfaction is falling and trust is declining. We know that, because we do a big tracker survey each year. We ask 5,000 people, and it has a sample for every water company. We see trust at an all-time low. We see that only 55% of people believe that their bills are fair, and 50% of people say that companies do not care about the services that they provide. When you look at what drives that, it is environmental performance. All the metrics in the survey that we ask around the environment are those that have fallen the most over the last few years. Just to give you an example, one of the questions that we ask is around how satisfied customers are with companies in terms of their treatment of sewage and safely returning it to the environment. That is at 35%. It has fallen by 18% in one year, which is incredible. The survey tends to go up and down by 1% in these metrics, but that is an 18% fall, which is driven by environmental performance. It needs to be said that one really key metric has not fallen, and that is satisfaction with water service, which is at 89%. It has been around the 90% mark for many years. It is really important to note, because that is a core part of the service. That reflects the fact that services are pretty reliable. We have world-class drinking water in England and Wales, and that context is really important when you look at a lot of other stuff that is quite gloomy.

There is an increase in sewage flooding the water supply, which presumably has a big impact on customers.

In terms of the effects, interruptions to supply are very disruptive. Sewage flooding is the worst service failure that you can possibly have. Sewage can wreck your home. You can be out of your house for 18 months while you get your replastering done. It has a very big effect. In terms of the survey and overall customer satisfaction, it is the environmental metrics that are driving the overall dissatisfaction.

Are water companies sufficiently supported when those incidents happen?

We have been doing quite a lot of research on how companies handle incidents, and it is quite revealing. We did five deep dives into various incidents, such as sewer flooding, supply interruptions and boil water notices. We have looked at different types of incidents, and you see some real themes coming through. There are areas that really need to be improved, particularly communication during incidents, which has not been good. People feel completely left in the dark. Often, companies will use methods of communication that work for them but not for consumers. For example, if you are not digitally enabled, there is no point in driving everyone to the website. We see that communication is very poor during incidents. We also see that support during incidents, in terms of bottled water, is not great. Locations are often inaccessible, and people need a car. If they do not have a car, they cannot get their bottled water. Then, of course, there is gridlock, so that is a key issue. If you are on the priority services register, which is where people who need extra help get bottled water delivered to their house, you see people who may be infirm having bottled water just dumped in their front garden. They physically cannot go and pick up 20 litres of water. You hear these stories, so there are lots of things that water companies can do to improve during incidents. Also, after the event, people are not getting an apology or payments due under the guaranteed standards scheme, or any further good will. You see a picture where this is an opportunity for companies. As I said, trust is at an all-time low. If you handle the incident well, you can build trust, but the flip side is also true: you can make things worse by mishandling an incident. We have seen some incidents that have been handled very well, but we have also seen plenty of room for improvement.

Tom, would you accept what Mike has just set out about how outages and supply issues often impact the most vulnerable in our society?

Our advisers would deal with that kind of stuff as well at a local level when it happens. We know that there is real variation in how that happens, so I would broadly agree with what Mike said.

David, you have talked about the investment aspect for companies, and we have talked about the rate of return. What are water companies doing to improve their customers’ experience? That often gets missed when we are talking more generally about the industry as a whole.

The last thing that any water company ever wants is for the quality or supply of drinking water to be affected. It happens very rarely, but whenever it happens, it is a major inconvenience. Companies really do work their very hardest to ensure that it does not happen and that, on the rare occasion that it does, full supply is restored as quickly as possible. It is important to bear in mind that the resource that Ofwat supplies to companies to manage interactions with customers, which is called a retail allowance, has fallen, in real terms, by a third since 2015. That is the money that enables companies to run billing systems and call centres and to fund the teams that go out and read meters. With a third fewer resources in real terms than were available in 2015, it is very hard to maintain, let alone to improve, the ability to deal with customers, and that is a great shame. We are looking forward to having that slightly increased—although unfortunately it is not going to go back to where it was in 2015—through the next round of the price settlement, which starts in April. That will enable us to have slightly more resources to enable a better service. Customers really are companies’ first priority in these situations, and companies work as fast as they can whenever there is any issue at all. The frequency of those issues has been coming down. Supply interruptions are a fifth of what they were in 1990. Of course, we want them to be at zero, but they are a lot rarer than they used to be.

Are you satisfied with the changes announced by the Government to the guaranteed standards scheme?

Yes, we welcome those changes. Companies have been going above the statutory minima that were set in 2000. They were very much out of date, so we were very happy to see the Government update that standards scheme. We are looking forward to the secondary legislation that will give it effect after the consultation ended last month, and it will do two main things. It is significantly increasing the compensation payable to businesses and to households whenever there is an issue, and it is broadening the criteria. Any supply interruption after 12 hours will now see compensation payable, which was a good move by the Government.

I broadly agree with David. An update of the guaranteed standards scheme is something that we have been campaigning for, because it was woefully out of date, and we were very pleased that the Government picked up our proposals and have run with it. That is what was consulted on. There is another element that is a real improvement. There are a lot of get-out clauses in the guaranteed standards scheme that allow companies to avoid payment, particularly for extreme weather. Those are going to be removed in the future, which is a very good thing, because, first, of course, customers want to receive compensation, and just because the weather is bad does not feel like a good reason for them not to get these payments. Secondly, with climate change, we are going to see more extreme weather events. This is a really good incentive for companies to adapt to climate change, as well as to get it right first time in terms of providing good service. These are really positive changes that will hopefully act as a real incentive for companies to get things right, and will benefit hundreds of thousands of customers each year.

David, on your response to the GSS update, with the figures going up and the number of incidents that will be covered going up, you mentioned that, when these changes are made, compensation will be payable in incidents where the interruption lasts 12 hours or more. Is it your understanding that that covers both an outage where the water company turns off the supply because of, for example, an issue that it identifies in the supply, and incidents where the supply goes off because there is a burst and it is out of their control?

It is my understanding that any interruption to supply will see compensation being payable.

Is it your belief that that should be the case, and that all incidents should be covered?

As I said to your colleague on the Committee, we welcome those changes.

I just have a final point, on consumer representation within the water companies. We have the Water (Special Measures) Bill coming through Parliament. I would be interested to hear your views about what further steps we could take. You have talked about the importance of hearing that voice within the industry. Clearly, there is a lack of satisfaction. Are there any further steps that you would like to see being taken?

Within the special measures Bill, there are proposals to have consumers more involved in decision making. One of the things related to that that we would like to have is independent consumer panels for every water company—not experts, but customers who can challenge their companies directly. This would increase accountability. It would also give companies a view on the lived experience of their customers and hold that mirror up to their performance. That would be very helpful. It could also help with decision making. We just talked about the price review. Where is the customer voice in that? That can often be drowned out by some other, very well-resourced groups, and particularly investor groups that have a very loud voice. The consumer needs a strong voice there too. Consumer panels would be a really good step forward and really positive. They should be independently run, and CCW, as the independent consumer body, should be the right body to oversee that too.

David, do you have any views on that?

Companies already engage extensively with customers. Customers are consulted very broadly on the business plans that are put forward and dictate the amount of investment that we propose to Ofwat. We welcome the Government’s efforts to increase that further. We are looking forward to Ofwat producing the final rules and, of course, will give effect to and comply with whatever is put in place. Customers are at the heart of company operations. We do care very deeply. Actually, I think the incentives with investors that Mike just mentioned are aligned. We want to invest in order to improve performance for customers. We want a stronger network for customers. We want a more resilient network, and one that provides better environmental outcomes for customers. That is exactly what investors want too.

Are consumer panels good or bad?

I think they are quite a good thing. We need to see the detail, which Ofwat is continuing to develop, and we await that.

I want to focus a bit on the impact of the price review and how consumers are feeling it. There has been a lot of press about it, and this 36% rise has been trailed. How have you found that consumers have responded to it, and particularly those who may be on lower incomes? Is there worry and concern? How are people thinking that they will approach it?

For us at Citizens Advice, we are definitely seeing a concern. We have seen a rising number of people coming to us about water debts, but these debts are also connected to other debts. If you treat it as part of the whole problem, we are seeing a huge impact from it. From our perspective, our debt clients are an example of a vulnerable group. They do not necessarily have water debts, but they have debts right across the piece. Before the price review, 7% of that group were in water poverty, which is defined as more than 5% of disposable income. After the price rises, that will go to 14%. That is before the effect of social tariffs or anything like that. The point for us is that those social tariffs vary so widely from one place to another that the effect is a classic postcode lottery. By crossing a border from one place to another, you can massively increase the support that you are entitled to. We also see that people do not know and do not apply for what they are entitled to. We have spoken to the industry in preparation for this, and they would make the point that there is more than just social tariffs. That furthers the complication of the situation, because there are so many things that people could be entitled to but are not aware of and do not get. It is dependent on the customer service in each location. It is dependent on the attitude of each company. For us, there is a massive simplification task to do here of standardising the social tariff right across the piece and just having one, and then looking quite hard at how you go about automating that. We are doing work on social tariffs across other utilities, in energy and telecommunications. For us, standardising the thresholds at which people qualify, and sharing the data between Government and companies to automate this, would make an enormous difference and would help those concerned customers. We have people who come to us for advice, and we are having to pass the advice from the company back to them about what they are and are not eligible for. We have trained advisers who are struggling with the complexity of the services. Yes, the price rise is big. We have heard that. It is in the middle of a cost of living crisis—our numbers will tell you that that is ongoing. The complexity of the support offers is making that worse, so there is definitely a piece of work to make that simpler for people who need it.

Do you all agree that the social tariff system is confusing and needs changing? How would you suggest that that should be done?

Back in 2021, we carried out, on behalf of the Welsh and UK Governments, a review of water affordability. We had a really thorough look at that, and the issue of the postcode lottery in social tariffs came up. It is ridiculous that you could have two families living in different parts of England and Wales, in exactly the same financial circumstances, and one may get 90% off their water bill and one may get nothing. That is not a way to set social policy. As Tom said, it is confusing and inconsistent. That is why that review back in 2021 recommended one social tariff, with consistent criteria, across England and Wales, funded by a central pot. That central pot is important, because, of course, deprivation is not evenly spread between water company boundaries, which are just where they drew the lines back in the day. The design principles behind a single social tariff are there and would benefit millions of people. With these price rises coming, we know—and this is in the water companies’ own figures—that there will be over a million households still left in water poverty, despite the increase in support that is coming alongside this price review. This is urgent and important.

Those recommendations seem really quite clear. Do you agree, David, that they are necessary?

The desired outcome of common criteria for eligibility across England and Wales, and at least a minimum level of support to meet those common criteria, is absolutely right. It is the Flood and Water Management Act 2010 that restricts the funding of any social tariff to within a company’s area, and it is Government guidance issued in 2012 that means that companies need to obtain the consent of their customers for any social tariff. There is greater ability and willingness to fund social tariffs across the country, which is why we see the discrepancies that have just been mentioned. The aim of common criteria and at least a minimum floor of support for meeting those criteria can be achieved in a number of ways. One is a single social tariff, which is a matter for Parliament, given the restrictions that I just mentioned. We would be happy to adopt whatever it is that Parliament thinks is appropriate, but we do absolutely support the overall objective to establish minimum criteria that are consistent across the country.

You mentioned that people do not know what help they can get. What can the Government and water companies do to increase awareness? There are other things that can be done, and people just do not know about them. What can we do about that?

I am just going to push the point on automation and making it something that just happens. You do not have to be aware, and you do not have to go to Citizens Advice to find out about it; it is just a thing that you are passported on to. The data Bill is making certain provisions, and I would definitely look into that.

I have spoken to the Secretary of State for Work and Pensions on this. There are a few things that the DWP could do so that people who are on certain benefits and in need of assistance can have that information flow to companies automatically, and the appropriate assistance provided automatically. We would very much welcome that. As soon as we have that information, we will provide the support that is available. We want to ensure that anybody who is eligible for support receives it, and I would really encourage you to communicate to your constituents—as we are, as best we can, to our customers—that anyone who is struggling to or has any fear about being able to pay any future bill should get in touch with their water company, which will be only too happy to discuss the range of support that is available.

David and Tom are quite right. There is loads of potential in passporting, so that you can automatically get support, but we also have to remember that there are people who may find themselves temporarily in difficult circumstances, and passporting will never work for them. They might just need a payment break or one-off support. There is a whole basket of support available, and I urge you to let your constituents know that that help is available and that they should reach out. We have a great hub on our website that has it all listed for water, so you know exactly where to go.

We have outlined that the need for investment in our water infrastructure is clear. We have heard that 20p in the pound goes on water company debts, and 11p in the pound on dividends. The Consumer Council for Water’s survey indicated that about 40% of consumers in England and Wales would struggle to afford the increases to their bills. Is that fair? How will they be helped if they cannot afford those price rises? Are social tariffs enough? We have a basket of support, but is that going to be enough for the 40% of people who cannot afford their bills?

It is currently not enough—water companies’ own figures say that it is not enough—and that is absolutely why the need for a single social tariff is urgent. Is it fair? A really important point to make is that people understand that the water sector needs that investment. If you think about the equation, bills are going up, but people need to see something in return from that. The crucial point going forward is delivery. The amount proposed to be spent on enhancement programmes in this price review is £44 billion. That is a four-times increase in what is being spent now. In this current period, companies are struggling to spend all of that enhancement pot, which is concerning to me. If they are struggling to deliver a much smaller programme of work, how are they going to deliver a much bigger programme? If consumers do not see those improvements, that will be very damaging for the sector, and the sector cannot afford further damage.

I would echo that. We are seeing a really serious rise in the number of our clients who are going to go into what we call a negative budget—more going out than coming in every month—just as a direct response to these price rises. We would say that the support is not enough. It is also just not accessed and not accessible.

The first thing to say about pay is that it is set independently. CEOs do not set their own pay. It is set by remuneration committees appointed by boards, which will benchmark performance against stretching targets, and against comparative companies and industries. Average pay for CEOs fell last year. Almost every company that paid a bonus did so using shareholder funds rather than customer funds, and many companies did not pay any bonus whatsoever. I absolutely understand why people look at compensation and are struggling to see the justification. These are complicated businesses. There is a huge amount of scrutiny on these companies, as evidenced by this Committee hearing, and they are, rightly, under a lot of pressure. If we want to retain and attract the people who are required to deliver the very difficult job of transforming the industry, we need remuneration committees to be able to set performance in the right way. As I say, average pay has been falling, and many companies did not pay any bonus at all. Those that did, by and large, did not use customer funds to fund it.

I absolutely do. This is one of the reasons why we apologised for failing to keep up with shifting public expectations around company performance. We have owned up to our role in that. More importantly, we have a plan to put it right. Fundamentally, people are frustrated because performance has not been anywhere near where it should be. The main reason for that is not having sufficient funds to invest. Our system is increasingly failing to cope with climate change. It is increasingly failing to cope with the changing business needs for water. We have data centres that are very hungry for water. It is increasingly unable to cope with population change. It is because we have not been investing in it. That is the main reason why people are very frustrated, and they are right to be frustrated. Nobody wants to see homes unable to be built for lack of water. Nobody wants to see a cancer hospital delayed in its development, as was the case in Cambridge. Nobody wants to see data centres not able to be built because of a lack of water. Unfortunately, we are increasingly seeing homes rejected, cancer hospitals such as the one in Cambridge held up, and data centres unable to be built, for no other reason than a lack of water. That is because of a lack of investment. That is what we absolutely need to focus on, but we do accept that people are angry. Nobody looks at sewage flowing into waterways and thinks that that is an acceptable thing to happen. We have a plan in place to end it as quickly as is physically possible, but this is a very large and old system, and so it will take time. The first step down the path of restoring trust is to admit that we have not always got it right, which is why we have apologised, and to put a plan in place to put it right, which is what we have. That will start from April, with a very large increase in investment across the board.

As I say, I do not set pay. It is set by independent remuneration committees, which look at a range of factors. They have taken decisions to reduce pay, and many CEOs have waived bonuses. They have decided of their own volition not to take bonuses, in recognition of some of the issues that you have pointed to. The sector is not just one company; it is multiple companies, and there is a range of decisions that have been taken on pay and bonuses. Overall, we have seen pay fall in recognition of the issues that you have described.

Water companies just need to be better at reading the room. There is a lot of anger out there. There is a feeling that water company bosses are being rewarded for failure, which goes down like a lead balloon. There should be better explanations for why people merit salaries. We heard “remuneration committees” twice, as if that is something that is done to them. A company still sets up a remuneration committee, which, again, does not go down well with customers. It feels like hiding behind remuneration committees. We also heard “complex”. These are businesses that do not have to win any customers. If you are running a business, what are you worried about? You are worried about how to take in money, and then how to spend it well. Half of that equation is gone for a water company. They have guaranteed income streams. Although providing water and sewage services is incredibly complex—of course it is, and it is a hard job running a water company—and it is a 24/7 business, with loads of responsibility, I just think that there should be much better explanations to consumers if they are going to change their view. Sometimes, some of the things come across as tone-deaf, and there should be better explanations.

No. There are lots of things that need to be done to rebuild trust. There is no silver bullet. We all have to recognise that there is not a single thing that is going to rebuild trust. There are going to be lots of smaller things done over a sustained period, if we are going to turn this around. We heard about some of them already—how you handle incidents, payments if things go wrong, communicating why people merit a bonus or not. They are just some of the factors, but there is a lot more that needs to be done to help rebuild trust. It is going to be a long haul, but I do believe that it can be done with real focus. There is an opportunity to turn service around with this price review, and if it gets delivered, it gives a fighting chance of turning it around.

On the complexity point, David, it amazes me that you have a natural monopoly but increasingly complex ownership structures, with the level of financial chicanery that goes on. I feel like the level of complexity is imposed by certain companies rather than being anything to do with the inherent nature of the water industry.

The task of supplying, 24/7, the highest-standard drinking water in the world, which is what the UK has, along with three other countries—it is regularly, independently assessed internationally as such—just about always, throughout the whole of the country, is not easy. To then take away the wastewater and treat it to about the highest standard in the world is not easy, either. Compliance with the rules that govern how that should be achieved is running at about 98%, as agreed with the Drinking Water Inspectorate and the Environment Agency. Yes, we would love it to be at 100%, but I do not think that it is fair to suggest that it is an easy thing to do to supply water to 70-odd million people, 24 hours a day.

It feels like the focus is all wrong. In certain areas, things have not been updated since the Victorian times. If it is a complex industry, why are we having such issues around pay structures, bonuses and all this other stuff that goes on and takes up time and energy, and not concentrating on the inherent nature of the business, which is to supply water at a good-quality level to the British public?

Yes, exactly. We have been very frustrated that we have not had sufficient funds to do what we needed to do. The focus has been on keeping bills ever lower, and the regulator has done a very good job of that. That is why bills have fallen in real terms, and they would be a whole quarter higher today, if they had risen merely with inflation. Given the challenges of climate change, they should have risen by more than inflation. They have not even followed inflation, by a long margin. As a result, performance has not been where it should be. We could have appealed some of the decisions, as Mike mentioned earlier. There is an inbuilt incentive against doing that. It is very expensive, it is a distraction for management, and it causes troubles with the supply chain. The system does not encourage a neutral view of whether one should contest the opinions of Ofwat. On top of that, there is an inbuilt incentive not to ask for sufficient funds in the first place. If Ofwat does not describe a business plan as being, in its view, good, a penalty is attached. The system has discouraged asking for money. It has then consistently cut every request for money. We now have a system increasingly not delivering anywhere near where it should, so we are having to play catch-up, and it is going to be very expensive. It is very sad that that is going to mean higher bills than what should be being incurred. That is a function of not having sufficient funds to invest.

David, you represent the water industry. Your evidence today suggests that you are somewhat struggling to read the room in terms of the level of anger out there in our constituencies at how water companies have behaved in polluting our seas and failing in their basic services. You have blamed lots of other people for those failures today. You have blamed climate change. You have blamed changing public perceptions, as if it is the public’s fault and they have changed their mind about what they want to see. You have blamed lots of things, but you have not put your hands up as a water industry and said, “It is our failure to invest the money in the ageing infrastructure over many decades. It is our siphoning off that money for shareholders and bonuses instead of fixing the crumbling infrastructure”. I do not know any other industry where it is somehow somebody else’s fault if you do not invest in your own equipment and infrastructure. If you had a food manufacturer, for example, they would not be sitting here saying, “We cannot supply food any more, because we failed to invest in the pipes or the equipment that we needed 20 years ago”. Do you not accept that the industry needs to take responsibility for siphoning off the money meant for investing in crumbling pipes into the pockets of shareholders and bonuses?

The food industry is not an absolute monopoly that is regulated in its economics. Aviation, transport and energy are, and they are able to invest only as their respective regulators permit, and the same is the case for water.

Do you accept that there is a problem with the structure of the water industry?

Yes, absolutely. The system is not working.

Would you like to see a different structure and model of ownership in the industry?

I represent companies in Northern Ireland, Scotland, Wales and England, where the ownership model varies from privately owned to completely state owned, and the challenges are the same. We saw in Paris—a state-owned system—so much sewage in the Seine that triathletes had to have their Olympic schedule adjusted. This is a common problem across lots of the western world, because we mix rainwater with wastewater. It is an engineering problem. It is going to take a lot of time and of money to fix. Yes, we should have been on this earlier, and we have apologised for that. I have made that very clear. We are sorry for not recognising that sooner. As I say, though, our ability to deal with that recognition is limited entirely and absolutely by how much money we have, which is not set by us. We do not siphon any money off at all. It is the returns generated by the investments only authorised by Ofwat that enable any return to be made in the first place. We have not been able to invest anything like what we should have been able to. As you say, it is a very old system, and we have not been investing.

£1 billion was paid out in shareholder dividends in 2023-24. Could you just outline the link between performance and dividends? Do you foresee dividends decreasing following Ofwat’s new regulations?

Dividends are paid out of profits, and profits are set by the regulator. We ask the regulator for an amount of money to invest, and Ofwat scrutinises that. It says that we should do it more efficiently. It sets very stretching targets for the performance commitments associated with that investment, and attaches what it thinks is a reasonable return on top. As I say, last year, returns were 2.1%, so they are very modest.

What about previous years following privatisation?

Since 2020, they have been under 3%. Eight companies made a loss last year. Six companies made a loss the year before that. One company, Affinity Water, has not had a dividend in eight years. Several companies have not paid dividends in over five years. There are many companies whose investors have received nothing but losses for many years.

Does that give consumer confidence?

No, it does not, which is why it is not working. Everyone who I—and, I suspect, you—speak to thinks the system is not working. It needs major reform. It has not been keeping up with public expectation or statutory obligations. It has not been keeping up with the increased pressures placed upon it. We have the lowest pipe replacement rate in Europe. It is a tenth of the average. That is because Ofwat, the regulator, has not been giving us sufficient funds to replace those pipes more frequently.

Yet dividends are still being paid out.

As I say, in eight companies, there are no dividends, because they have been making a loss, and in six companies the year before that. The dividends of which you speak come from returns that are 2.1%. We have a system in England where investors put the money in up front, with the expectation that they will receive a modest return. We have a system in Northern Ireland where the Exchequer pays for the full upkeep. Anybody who goes to see the network there will see very similar challenges, if not greater challenges than we see in England. This is a common problem, and I do not think that the ownership model is seeing tremendously higher or lower rates of investment. As I say, in France, it is a state-owned and run system, with the same problem and the same challenge. It is going to require a lot of time and money across the western world to address a structural flaw in the design of our wastewater system, which is that we mix rainwater with wastewater. Thanks to climate change, we are seeing much more intense downpours of rain happening much more often. Frankly, the system was not designed anywhere in the world to cope with that. This is the challenge. It is a global challenge. It is going to take a lot of time and money. We absolutely want to make sure that everyone is protected as much as we can, because the cost is not small, which is why we are tripling the level of support for vulnerable customers.

We have hit a very rich seam of discussion here. Unfortunately, we are up against the clock. I suspect that we will be returning to this in some way, shape or form in the course of our inquiry. For the meantime, gentlemen, thank you very much indeed for your attendance and participation in this morning’s proceedings.   Witnesses: Lawrence Gosden and Stuart Ledger.

Good morning, gentlemen. Thank you for your attendance here this morning. For the benefit of those watching our proceedings and for the official record, can I invite you to give the Committee your names and occupations, please?

Good morning. My name is Lawrence Gosden and I am chief executive of Southern Water.

Hello. I am Stuart Ledger and I am the CFO for Southern Water.

Good morning and, again, thank you for your attendance. You are the only water company that we are hearing from this morning, but, lest you feel picked upon, let me assure you that we now have a forward programme of business in which we will be seeing a further eight of the water companies that are in operation. You were in attendance for the earlier part of the proceedings. I hope that, if nothing else, you will have taken from that that the members of this Committee are very concerned to ensure that, in our inquiry and deliberations, proper focus is given to the customer experience. The customers—our constituents—bring us concerns, with which we are charged, in large part, to deal as Members of Parliament. We have some fairly high-level questions around strategy, ownership and leadership, but I want to start this morning’s proceedings with some questions concerning outages, interruptions and incident response.

I need to start by declaring an interest as a customer in Hastings—I lost my supply for five days last May—and as co-chair of the all-party group on water pollution. Lawrence, your company has the worst record of any water company when it comes to water outages, with customers losing their supply sometimes for many days at a time. In recent history—over just the last 12 or 14 months or so—we have seen three major incidents, two of which were in my constituency. In 2023, in Rye and the surrounding areas, around 10,000 people lost their water supply for up to eight days. In May 2024, in Hastings, 30,000 people lost their water supply for up to five days. Just over Christmas, in Hampshire and Southampton, we saw up to 60,000 customers lose their water for several days over the Christmas period. We have heard directly from the Members of Parliament representing many of those consumers—Satvir Kaur and Caroline Nokes—about the impact that that had on the ground. I have to say, having had two of those incidents in my own constituency, and from speaking to other Members about the experiences in their patches, that exactly the same failures play out in incident after incident. To give some examples, we get bottled water promised but not delivered, particularly to vulnerable people. We get not enough water stations opened. Members push for more water stations to be opened; the request is refused. We get traffic gridlock unleashed in our towns. We get the situation of people having no water for many days. In Hastings there was no water for five days. After the second or third day, that situation becomes really unbearable. Parents were unable to change their babies’ nappies. A hotel in my constituency was filling buckets of water from the sea in order to flush its toilets and try to keep the hotel in operation. Old ladies were walking up huge hills trying to carry six two-litre bottles of water. Vulnerable people were simply not getting what they need, as well as the issues with basic sanitation and hygiene that you get when you cannot wash or wash up for several days. Businesses were forced to close, losing much money at key times. Schools were having to close. In Southampton, even the hospital was impacted. Your director of water, Tim McMahon, said that, in the incident in Hastings last May, the Army nearly had to be called in. Do you think your handling of these incidents was adequate—yes or no?

It is a completely unacceptable position for there to have been any incidents. We are charged with turning around a company in a very difficult position. I started as chief executive two and a half years ago and was brought on board with my colleague to build a team in order to get this company turned around. It is the product of about 15 years before it, with many of the investment points that were made in the previous session. The level of impact and the duration of the incidents that you have mentioned are inexcusable.

You would agree that Southern Water’s response to those three incidents was unacceptable.

It is completely unacceptable for the incidents to have occurred in the first place.

What about the response when they did happen?

Our response throughout all four has in no way been good enough.

Why have the lessons not been learned? In October 2023, in Rye, I fed the lessons directly into Southern Water. I then saw the same failures played out in Hastings, and we have heard about exactly the same happening in Southampton. Why does your company not learn the lessons each time?

We have learned many lessons. Could I unpack a couple of the incidents to help understand some of the differences between some of them?

We will come on to the specific incidents in a minute. If you accept that your handling of these incidents is not adequate and that they should have never happened in the first place, why did you choose to take a bonus of £160,000 in July last year?

If I could answer the question about the incidents first, they differ in nature. In the interests of keeping it succinct, I will not talk through all of them. The incident in Rye related to a burst pipe underneath a railway line. It was an extraordinarily difficult fix. Ideally, that would not have happened, but it was an extremely difficult operation. In contrast, in Hastings, we had a pipe coming down from the main reservoir that burst, right in the middle of a woodland, which required chopping down 50 trees just in order to get there, working day and night to try to get supplies restored. It is not that the company is not working extraordinarily hard. Some of these incidents are genuinely very difficult to deal with in a very short timeframe.

You need to take some responsibility. You came into Southern Water in 2020. You became chief executive in 2022. These incidents have all happened on your watch. Take the Hastings incident that you refer to, for example, where a member of your own team said that the Army nearly had to be called in. In 2007, Southern Water submitted a planning application to repair the strategic pipe that burst, causing that incident in May 2024. In their own planning application, they referred to a need to replace an “existing outworn raw water pipeline”. That work was not done, the pipe burst, and my constituents were left without water for five days. Why will you not accept responsibility for that?

When we have met before, I have taken responsibility. I did not cause the incident. I have come in place to get the company turned back around, but I take full accountability for where the company is, because it is my job to get the company turned around. I cannot go back in time. I can deal only with improving the company from the position that I am in at the moment.

Why did you think that it was right, just two months after that incident, to take such a large bonus?

If I could very quickly answer the previous question on planning permission, I will come to that one straight afterwards. The planning permission relating to that pipeline was as a direct result, when you look back through the records of the company, of the company trying to juggle and work within an underfunded scenario. It did not have enough money. When you look back at the allowances that the company is being given by the regulator, independently modified, as it should be, there just was never enough money to cover all of the maintenance needs of the company. The company was having to make tough choices as to which pipes it replaced and which it did not. With the benefit of hindsight, it got that decision wrong, but that is very much with the benefit of hindsight. Under my management team, we are now replacing that pipeline, as we have committed to you to do. Furthermore, we are adding extra resilience, with a dual pipeline, which will mean that that supply also has a standby system, if you like. We are taking action now. I cannot go back in time. What I can do, though, is make sure that the right things are done going forward. In relation to bonuses, I have been chief executive for two full years and am partway through my third. For my first year, I declined a bonus, because it just was not right that I took a bonus in a year when the water sector was coming under such scrutiny, and public concern and anger was at such a high level. In my second year, the majority of the bonus was disallowed. You are right that I did take a bonus, related only to water quality and safety improvements. That was because our bonus scheme is directly related to the performance improvement of the turnaround plan. That is directly back-to-back with that plan, and we set very stretching targets. Although we improved, we did not deliver everything that we set out to do, but we did move from bottom of the industry on water quality through to just outside the upper quartile of the industry in one year. It was related to that, and that was the specific condition there.

You have spoken about the need to invest in crumbling infrastructure, and decades of under-investment in that infrastructure. What I have here is, just in the Hastings area, a list of all of the pipes that your own documents define as “aged assets prone to failure”. I am sure that the pipe that burst would be one of those on that list. You say that there have been decades of under-investment. The investment in Southern Water has not gone into that infrastructure, which is why we have such a long list in front of us. In 2017, Southern Water paid out £60 million in dividends to shareholders. Why was some of that £60 million not used to try to reduce this list of pipes bound to fail?

That is exactly what has happened since 2017. Since 2017, there have been no dividends paid by the company whatsoever, and we have deliberately overspent to reinvest that money back in. You will see from the record of Southern Water that, last year, it was a loss. That is because what would previously have gone as returns to provide the financing and the incentivisation through to dividends has been stopped.

Do you accept that that was a failure? Before 2017, you accept that it was a failure of Southern Water to not invest in fixing this infrastructure.

It is easy to look back at that position and wish all sorts of things. I would love the sector, to be frank, let alone Southern Water, to have challenged the regulator more. We should have fought harder for the money that we needed to keep pace with customer expectations. We should have done that, without any doubt, but I cannot go back in time. We now have shareholders on board who are supportive. They have put £1.6 billion into the company over the last two years. That is paying for the turnaround of the company and getting it back on track. With that support, we are able to move quickly. There is no sign, in the immediate future, of them needing to take any further dividends. They are supporting the position of, effectively, profits back into investment, and that is the plan in front of us.

Turning now to compensation for these incidents when they happen, following the incident in 2024 in Hastings, no compensation has been paid to residents, including myself. In fact, we have had to pay our water bills for the days when we did not have any water. In the Southampton incident last year, around £30 per 12 hours was promised to households for the time that they were without water. In the most recent incident, at Christmas, Southern Water has already come out and pledged £9.7 million. That equates to about £160 per household. Both of those figures are above the legal minimums that you are required to pay. To date, you have refused to compensate residents in Hastings. Can you explain that, and will you look again at that decision?

If I just briefly talk about Southampton, I will pick up the contrast with Hastings. In Southampton, on the last day of the incident, which lasted three days, I issued a formal apology. In that formal apology, we confirmed that the compensation would be due at the new guaranteed standards system that is proposed by the Government. That is not in place yet, but we voluntarily put that forward because it felt like the right thing to do. We entirely support the increases in GSS. It is absolutely right. It is far too outdated. We did that voluntarily. The Hastings outage back in May last year was way before that particular period when the GSS was forecast.

That was under the last Government.

It was indeed. We have spoken previously, and you will be aware that I am in dialogue with the local authority. This week, I am going to meet the local authority for the third time, having faced public meetings down there personally, to talk about further—

Will you commit to review that decision and to look at giving compensation to the residents of Hastings for that outage?

In very simple terms, yes.

By when? Could we look at an announcement in the next month or so?

I have my third meeting with the local authority, and I hope to meet you shortly after that to confirm what that will be. There is a conversation to be had about how we do that. We do not think that this is right, but, under the rules of the current GSS system, no compensation was due. That seems absolutely crazy, which is why we voluntarily put forward £1 million of community funds. That system is in place now. What I am promising you is to review that and to go further, and that is the meeting that we have with the local authority later this week, and with yourself afterwards.

Lawrence, I want to have a look at the issues of corporate governance around Southern Water. You described yourselves as being the chief executive officer and chief finance officer of Southern Water, but that is a bit of a shorthand, is it not? You are CEO and CFO of the Southern Water Finance Group. That is the operating company. Is that right?

I am chief executive of the operating company only, so the company that runs the day-to-day service for the organisation. I am not a director of any other company.

You are not CEO of the other 14 companies in that structure.

No.

I am a director on some of the financing companies in the group.

For the benefit of the Committee, can you list the companies that you are CFO of?

I am the CFO of the two financing companies that sit underneath the structure and also of the financing company that sits above.

For the benefit of the Committee, can you list the 14 companies that make up Southern Water?

Yes, I can.

Would it help if I listed them for you, and you can tell me if I have them all?

I am on Southern Water Services Group Ltd, which is the holdings company, Southern Water Services, and the two financing companies that sit underneath that, which are Southern Water Finance plc and Southern Water Finance Ltd.

The full list of companies is Southern Water Finance Group, Southern Water Services Group Ltd, SWS Holdings Ltd, Southern Water Capital Ltd, SW (Finance) II Ltd, SWS Group Holdings Ltd, Greensands Finance Holdings Ltd, Greensands Senior Finance Ltd, Southern Water (Greensands) Financing plc, Greensands Europe Ltd, Greensands Finance Ltd, Greensands (UK) Ltd, Greensands Junior Finance Ltd, Greensands Investments Ltd, and Greensands Financing plc. Is that correct?

They are all the companies in the group.

Do you think that corporate governance helps or hinders the delivery of good outcomes for your customers?

To be really clear, the main focus and where we spend all of our time is on Southern Water Services Ltd. That is the main company. That is the company where we sit and spend all of our time focused upon and dealing with stuff. The structure that sits above that is predominantly holding companies. Most of those do not function and are historic. There is some holdco debt that sits further up that chain, which is common across water companies and other utilities as well. That is managed by our shareholders. It is not managed by and does not encumber the operating company.

Why is it necessary to have this corporate structure?

It is necessary to have the corporate structure that sits immediately around the operating company in order to fulfil the requirements of our financing, which, effectively, take the licence and add extra sets of requirements. They put the licence on an extra setting, which is really to make sure that we do all of the right things in that space. The rest of that, as I said before, is either a historic thing or is a piece for shareholders.

They are still live companies, according to Companies House.

That is correct, yes.

So it is not historic. They are still functioning.

They are still functioning, but they were there for historic reasons. Most of those companies do not perform a great deal of transactions. There are companies that sit at the top that do, and they hold the debt.

This is a ridiculously over-complicated structure, is it not?

It is not uncommon across utilities, full stop, not just water.

That was not quite the question that I asked.

On a piece of paper like the one that is sitting in front of me and the one that is sitting in front of you, it does look more complicated. The reality of managing it is much simpler.

You are 82% owned by Macquarie. Is that right?

It is 87%.

Your other owners are JP Morgan, UBS and Hermes Infrastructure.

They are the main other ones that are left. That is correct.

In 2021, Macquarie assured Ofwat that it would strengthen the financial position of Southern Water and adopt an attitude of zero tolerance to pollution. How is that going?

We have made strong progress, but we have a lot to do.

Have you been subject to a zero-tolerance approach from your owners?

Yes, absolutely, without any doubt. We individually receive rigour and scrutiny directly from our shareholders. We meet with them monthly to talk about the performance of the company and the turnaround that we are effecting. If I might just make one quick point on the track record, just prior to ownership, the company, through failed infrastructure, had around 400 pollutions a year, which is an utterly unacceptable number. We have been able to reduce that number to about 230 to 240 on this current year, which is a substantial reduction.

So 230 to 240 incidents this year under a zero-tolerance approach from your parent company. What are the penalties in terms of zero tolerance?

We cannot turn the company around overnight. We are bringing it down 40% over the last two years, and we plan to take it down by a further 20% to 30% over the coming year. At that point, we are getting to the point where we are good in terms of industry comparison. We have a lot to do.

Accepting for a second that that is progress, it does not sound like zero tolerance. It sounds like quite a tolerant approach.

It is not at all.

What are the penalties?

The penalties are directly personal. In terms of the remuneration that is directly related to the environmental performance of the company, that has paid out at zero. There has been no payment. We aimed to reduce pollutions by a larger number than 40%; we aimed to reduce them by 50% in the first year. We did 40%, which, to be frank, was a huge achievement in the time available, but we did not quite get to the 50% that we set and agreed with our shareholders, so the remuneration paid out at zero, and quite rightly so. We are directly being held to account for that performance improvement.

You told Helena that you did not take a bonus in your first full year. You did in the second. Did I understand you correctly to be saying that you would have been entitled to but chose not to?

In the first year, yes, but it would have been relatively small. It was really because the performance in the first year made a substantial improvement, but not quite the one that we ended up wanting to push the company towards. That is because we are setting stretching targets.

So you forwent a bonus, but it was not a very big one.

That is one take on it. The take for me personally is that it was the right thing to do. When I came into this company, my friends and family asked me what on earth I was doing. This is not an easy sector. It is particularly not an easy company within a difficult sector. If people do not step into these difficult jobs and start to turn these companies into what consumers and the public want them to be, we are going to be in a very sorry state. I did it because it really matters. It is a choice of heart as much as of head.

Staying with the question of Macquarie, you both worked for Macquarie when they owned Thames Water. Is that correct?

We worked for Thames Water for part of that time.

Can you tell us how long you were there for and what you did?

I joined the company in 2006 to deliver the capital programme, and delivered many construction projects, including the early part of the Tideway Tunnel, which delivered about a 40% improvement to water quality on the River Thames, plus a whole host of capital projects. I finished my time at Thames in 2019, having turned around the company’s environmental performance and taken it from a one and two-star company on the Environment Agency’s league table to a three-star company.

I joined in 2008 and left in 2017. During that period, I held a number of finance roles, as a financial controller and then a divisional finance director.

Macquarie is out of Thames now, but, as water industry professionals, how would you characterise the condition in which it left it?

I honestly believe that those questions are best answered by Thames Water.

You know the situation. You worked there. You have 30 years’ experience in the industry. How do you think Thames Water sits now that Macquarie is no longer in it?

Without a shadow of a doubt, the characterisation of my personal time inside Thames Water was that Macquarie pushed very hard for the capital programme to be delivered effectively. I received support for all the capital projects that we were putting forward for all sorts of improvements, from replacing Victoria mains in London all the way through to major tunnelling operations. My personal experience was one of support for delivering the capital programmes and getting the infrastructure build done. There are many challenges that Thames Water has suffered, but one of those is, undoubtedly, that the company has not had adequate funding to keep on with some of those capital programmes. If you look back particularly over the last 10 to 15 years, as is the same with Southern Water, this last decade or 15 years of flat bills has certainly done damage. Good progress was made in the first half of privatisation. In the second half, that flat bills area has been a huge lost opportunity, not just for Thames Water but for all of our companies, and particularly Southern.

For reasons that I am sure we can all understand, you do not want to characterise the influence of Macquarie on Thames Water. There has been no shortage of people, though, who have been prepared to do that. To read it shorthand, there has been a widely held view that they left it with high levels of debt, having taken large dividends to shareholders and bonuses to executives working in the company. You now have them as your owners in Southern Water. What are you doing to ensure that Southern Water does not go the same way as Thames Water?

Its record is direct and can be seen. Within the first year, they initially put £1 billion of equity into the company. When we went forward with the turnaround plan to get the company back on track, which required a further injection of equity, they directly supported that and, within a few months, we had a further £600 million of money coming into the company from Macquarie. Their record is one of direct support, bringing in the equity that we needed to fuel the turnaround of the organisation. As we look to the following five years and the PR24 determination, they are also committing to further equity to support the turnaround of the company through that period, and this huge investment programme that we are planning to deliver. Their record is one of investing in Southern Water to enable the company to get back on track and to deliver these huge infrastructure improvements across water quality, river improvement, combined sewer overflow reductions, nutrients from rivers, and replacing water supplies in Hampshire by over 40% of our current supply. They are directly engaged on that endeavour.

Finally, after all of that, can you tell us how you are rated by Moody’s and S&P?

To be clear, we have three credit ratings. We are rated as investment grade by S&P and Fitch, and one notch below investment grade by Moody’s.

What does that mean?

Do you mean what are the consequences of that?

I have heard it described as “junk status”. Is that correct?

That is the term that the press likes to use. “Sub-investment grade” is generally the official term.

Thank you very much. We are delighted to be joined today by the chair of the Environmental Audit Committee, Toby Perkins. Toby, can I invite you to pick up the questioning on the financial challenges? Q83            Mr Perkins: Thank you very much. Just going back to the question that was asked about Macquarie and its role in this, you worked for Thames Water when it was run by Macquarie, and then were brought in by them at Southern. Are you suggesting that Macquarie’s time at Thames Water was a success? Is this some kind of model that you are going to be following now at Southern Water? Do you see that as a success?

No, not in any way. I was not brought into Southern Water by Macquarie. I was brought into Southern Water by the previous shareholders and by the previous management team. One of the first things that we had to do was to sell the company, because it needed refinancing. It needed new shareholders who were prepared to put money into the company, and the result of that process was Macquarie. I had no idea that that was going to be the case. Its direct action in putting money in gives me the assurance that it is a supportive shareholder that is doing the right thing by the company.

But you would not see their time at Thames as a success.

I honestly believe that questions on Thames Water are for Thames Water to answer. In terms of the significant levels of debt, Macquarie has already been very transparent that that would not have been the case in the current environment, with higher interest rates. In a previous environment, with lower interest rates, when you are trying to genuinely optimise the repayment of your capital between debt and equity, it is not an uncommon thing to do to be able to increase the debt during a low interest rate era. That is not the case now. Q85            Mr Perkins: How confident are you in the stability of Southern Water’s finances right now?

We are much more stable than we were, but we are coming from a pretty low base. The downgrade that was just talked about a moment ago was industry-wide, so the whole industry was downgraded. Because of where Southern Water has been at historically, it was already operating at a lower level. The whole industry moved down, but Southern Water moved down a bit further. I have complete confidence that, with the support of Macquarie’s further equity as we go into the next five years, together with what it has done already, that will put us in the right financial standing that we need to turn the company around. Q86            Mr Perkins: Would you encourage your friends and family to buy shares in your business?

We are not a listed company, but I certainly have confidence in the future financial stability of the company, although we have a lot of work to do. We are coming from a low base, and we have come into this company to get not only the financial stability turned around, with the support, but also the performance. Q87            Mr Perkins: Aside from the credit agencies that you referred to, Ofwat’s financial resilience report stated that it was unconvinced that your plans would ensure the company’s financial resilience. How concerned are you about the performance?

Specifically in terms of the financial stability, that related to Ofwat’s confidence about future equity. That was at quite an early stage in conversations with the regulator. With further dialogue directly with our shareholders and with the management team, we believe that we are now in a confident position with that further equity support.

Our plan targets a two-notch improvement. Our business plan for AMP8, the next regulatory period, targets a two-step improvement in our credit rating over that five-year period, to be absolutely clear, supported by our shareholders. Q88            Mr Perkins: You said that the entire industry had a downgrade, but that you were starting from a low base. If there was confidence in the steps that you are taking to try to shore up the moneys being put in by Macquarie, should we not be expecting Southern Water’s finances to be bucking the trend and people growing in confidence, whereas what we are seeing is that there is a lack of confidence?

I think we just need to go back to the beginning of the year, when we were in no different a position from where we were when we had that downgrade, in terms of the position of the company’s finances. It was well financed, it had strong liquidity—it was in a strong place in terms of that position. The major thing that changed during that period is that we had our draft determination. The draft determination from Ofwat was quite challenging for the whole sector, not just for us. That resulted in those credit rating changes. Because we are more financially stressed in terms of where our metrics sit and, at that stage, there was not equity in the plan, we then went through that rating downgrade.

As a result, the interest rates that Southern is paying are above the market average—above those being asked of other companies. What impact does that have on your performance and your ability to turn the ship around?

The most recent debt that we raised was expensive. We took a choice to take that, and the reason we made that choice is that we wanted to make sure that we had liquidity. It is really important we have the money in order to run the business, pay all the bills and keep functioning. We had the support of our shareholders to do that. It was really key that we did that at that time. We did that at that time because we were not sure where the final determination was going to come out. We might be in a place where we could be appealing that. We could be locked out of the market for a period of time. It was the right thing to be prudent and to make sure that we had the financing in place. Since the final determination has come through and since we have put forward our further plans around equity, we have seen the pricing of debt come down for us; we have seen that tighten by around 100 basis points from where we were. We are still more expensive than a number of the other people in the industry and that is part reflective of where we are in terms of our performance, because performance affects revenues. As we move forward and we start moving forward with performance, we will start to see that shift and credit ratings moving as part of the plan. Credit ratings do not just look at your finances. They look at the whole performance of the company in the round.

Precisely. On that point, the Chair referred to the very complicated structure of the company. You somewhat dismissed that and suggested that there are lots of different companies, but many of them do not do anything. There is also the situation in terms of gearing. I believe that, if the way that you report your figures did not leave out the £1.2 billion of liabilities relating to inflation-linked swaps, the company’s gearing level would actually be almost 85%. Do you think there is confidence in the way that you structure the business? Do you think that investors potentially look at the myriad complicated arrangements that you have and it shrinks their confidence?

Just to be really clear, everything that I have been talking about in terms of our credit rating agencies all really refers to the operating company and the two companies that sit underneath it that effectively do the financing. They have to be separate under our rules, but that is it. All I am talking about is that small element that sits there, not the rest. The rest does not affect that. That is where we sit. That is what I am talking about in terms of that position.

What about the question about gearing, and liabilities being left out?

To be absolutely clear, under the accounting rules, the nearer-term inflation-linked swaps are included in our numbers. The longer-term elements are not, and the reason is that, effectively, we are hedging inflation. Our business moves with inflation. The value of the company moves with inflation, but, under the accounting rules, we have to recognise that change, as you are talking about. When inflation changes, we have to recognise what the whole value is, but the whole value has not been added yet to the value of the company. So they are longer-dated. They sit a long way out, and the value of the company will move as time moves, and we will then catch up in terms of that value. The gearing is correctly reported in our accounts relating to the accounting rules that we have to follow. However, we do, for full disclosure, show what the value of those future payments would be if they were to be paid today.

I have a few pithy questions about the price review and bill increases. I will cut to the chase. Mr Gosden, how satisfied are you with the outcome of the price review?

We are presently still looking at the details of the price review. It is extraordinarily complicated and you have to look at it beyond the face value of the investment numbers that we need. What I can say is that we are about £1 billion short of what we really need to provide the investments that our customers are looking for. That does provide me some significant concern. I realise it is a difficult position, because an extra £1 billion would also have a relatively modest impact on bills. That is largely because investment is paid for, effectively, like a mortgage, over the long-term life of the assets, but we are about £1 billion short from the investments that we really need. That is the first point. The second point is an unpopular thing to say, but the practical reality is that we are running a private company and we do, therefore, need a cost of capital that we can actually work with and finance the company efficiently on. That cost of capital is presently too low for current market rates. That presents us with a challenge. The third point on the price review that we are considering is really about the risk, the reward and the penalty structure that sits around the delivery of price controls. The framework is absolutely right. Water companies should and absolutely need to be held to account to deliver for their customers. There is no problem with that at all but, as we are a turnaround company and we are coming from a low performance base through to improving the performance of the company, we naturally go through a period of paying penalties before we get the company up to the standard that it needs to be. Those penalties manifest themselves in, effectively, cuts to our revenues. If you can imagine, it is like you have fallen over and you are desperately trying to get up. When it cuts your revenues, it cuts your lifeblood for being able to deliver change, investment and the things you need. If you are not careful, albeit that risk and reward structure is in place for good reasons, you can end up in a vicious circle where you are getting revenue cuts for performance, which in turn prevent you from being able to get the investment to turn the company around. Those three areas represent challenges but, on the positive side, it is a substantial improvement on the draft determination. That is very much welcomed. The capital programme and the overall total expenditure now stand at £8.5 billion, which is about double what we will have delivered in the current regulatory period, so it is a substantial step forwards.

In terms of that shortfall, Southern requested the highest bill increase of any water company, 83% over five years, and that would have increased the average household bill from £420 to £768. Why did you think that substantial increase was necessary and why do you think your assessment of what was necessary differed so far from that of Ofwat, who, ultimately, have settled on 53%?

There is one quick contextual point, which is really about the south-east of the country. The south-east of the country is designated as water stressed. That means that this part of the country receives less rainfall per capita than Namibia. When we are in the middle of the winter and it is grey clouds, it is hard to believe, but it is absolutely true on a per-capita basis, because there is a significant population in this part of the country. That means that we have very large forward investment plans for water resources, with everything from water recycling to us already building the first reservoir in 30 years with Portsmouth Water, which is halfway through construction now. These are very large water resources to safeguard this part of the country from climate change, and that is on top of a substantial environmental improvement and investment programme to redesign sewer systems, effectively. There is double the impact of investment in this part of the country because of the geography of the region. A substantial part of the investment programme is related simply to geography. Our job as water companies is to look at the major regulatory requirements from the Environment Agency and the Drinking Water Inspectorate, put together the most efficient plans that we can put forward and submit those to the regulator, Ofwat. That is what we have done. They have come back with a different view on that and we are mid-dialogue with them as to how we can bridge that gap or not.

Do you think you will appeal to the CMA?

It is too early to say, I am afraid. We have until 18 February to make that decision but, based on the evidence from the previous session, I would say that this is a very serious moment. As water companies, we do need to stand up for the investment that the country needs, albeit, at the same time, being sensitive to how we can support those who will struggle to pay for those bill increases through a discount of between 45% and 90%. That is our support scheme for customers.

Lastly, Macquarie previously suggested that they might inject £650 million of equity into Southern if the price review was favourable to its finances. Are you in a position to be able to say whether that conditionality has been met and whether that injection of cash will happen?

I believe it will, but my colleague will pick up further.

We have no reason to think that it will not, but Macquarie have to go through a process before they can make their announcements.

How long will we have to wait for that?

I think it will be within the next few months.

Is that in any way related to whether or not the company might appeal the price review?

Again, we are jumping ahead in terms of our decision process. We will see, but we are certainly, regardless of whether we appeal or not, having conversations about further equity into the company.

Are you confident that might come forward at this stage? Can you say that?

I am confident that that would come forward, but I am not in control of all of those decisions.

I have a quick question, because I am conscious of time, on the discussion about the availability of water, particularly in the south-east. You are saying that it is a particularly water-scarce area. There is less rainfall and there are plans to build one reservoir as a result. Is the problem not that no reservoirs have actually been built for the last few decades, in the south-east or anywhere within your remit as Southern Water? Was that a failure?

No, it is not, for the simple reason that we actually put less water into supply now than we did over 30 years ago. Over 30 years ago, we used to manufacture 750 million litres of water a day. 30 years later, despite all of the population growth in the south-east, you would expect that number to be higher, but it is not; it is lower. We now only put 560 million litres of water into supply and that is because we have cut leakage and we have installed universal metering right across the region, so our customers have been able to be more efficient. That means their water bills have, at the same time, been lower. Both of those things have been really important in keeping pace with population growth but, as climate change becomes more and more of a reality, we now need to start building reservoirs. There is still further to go on leakage. We now need to start systematically replacing cast iron pipes with plastic ones. We are already building the first reservoir with Portsmouth Water now. That is under construction right now. If the Committee would like to visit that reservoir site and see some of the challenges of the south-east, we would be very happy to facilitate that, Chair. We are also supporting Thames Water with the building of a large reservoir in the Abingdon area, which will also benefit, because the water will come down to the Southern region. That is the first part in this interconnected national water infrastructure, where we can start to be more adaptive. Depending on where the water lands in the UK, we can start to move it around the country. There are also water recycling plants, which is a new technology that we will be building the first of in the next few years. There is a whole system of measures going forwards.

It has been reported that you are planning to import water from Norway. Is there any truth in that?

That is a less than 1% chance. We have a three-year delay in the reservoir build. For a three-year period, we need to find a way of mitigating that supply.

It is not a hard no, then.

I do not think it will see the light of day.

We talked about scarcity consumption. If a household supplied by you reduced its consumption by 20%, would it become a loss-maker for you?

No, it would not. Already, customers in the south-east do an exceptional job. In terms of per-capita consumption, their water usage is about 144 litres per head per day, which is significantly lower than the UK average. We plan to make all those meters smart meters, so we can provide even more intelligent information to customers and they can help moderate their own water use.

What about flow controllers?

Sorry, could you explain further?

Flow controllers are proven to reduce domestic water consumption by about 20%.

We will provide the smart meter and the information, but we do not get involved in the internal plumbing of housing. That would be very much for customers to do, but we do provide water features such as efficient showerheads, efficient taps and inserts you can put in taps. We do provide those kinds of things.

You have access to the meter chamber, so you could install a flow controller if you wanted to, to reduce consumption by 20%.

We could do. You have to be very careful doing that, because restricting water, as we very painfully know through any outages, is challenging. It is better done by engaging customers and working with them to reduce water consumption, rather than by us restricting it going into the house.

I am going to move on, because we are under time pressure. We have already strayed into some of this, but I want to look a bit at water infrastructure, scarcity and sewage.

Southern’s sewage spills nearly doubled between 2022 and 2023, to nearly 25,000 in 2023, and 182 storm overflows managed by the firm discharged 60-plus times in 2023. Southern Water has said that 65% of the high rate of spills is due to maintenance assets. You have come under quite sustained criticism for your environmental record. What innovative measures are you putting in place to improve your environmental record and how are you reducing those sewage spills?

Sewage spills are fundamentally caused by rainfall. The point that I mentioned earlier about the fact that we actually put less water in supply now than we did 30 years ago means there is less water going into a house. That means there is the same or less water coming out of a house as sewage. The problem is not sewage itself; the problem is too much rainfall, and there is too much rainfall coming into the system. That rainfall comes from roofs and it comes from roads, and that is largely as a result of urbanisation. Tarmacking over driveways and more and more impermeable areas in our towns and cities has caused too much rainfall to run off through local authority systems, through road systems, through domestic housing into the sewer system. The way we are approaching that innovatively is to tackle it at its root source. 70% of our storm overflow reduction programme is all about taking out surface water, stopping it going into the sewer system and keeping it safely in the environment, where it can nurture nature, rather than going into a sewer pipe, where it can overflow and pollute the environment. 70% of our programme is all about those kinds of measures. Practically, that looks like water butts on domestic housing and we have had extraordinary success in trials on the Isle of Wight. We have been trialling all of these measures over the last five years. We have installed water butts that have reduced storm overflows from a local community by over 80%. It is quite extraordinary what these slow-drain water butts can do. They fill up quickly when it rains and then they drain out very slowly. That takes the pressure off the sewer system and stops the overflows. We can do industrial versions of those for big warehousing developments and those kinds of things. Lastly, we are working with local authorities and we have partnership arrangements in place with all of our local authorities to work together with them to install sustainable urban drainage, so that road runoff goes into, effectively, regreening high streets and swales. It can transform how a high street looks and feels for local communities, but it also stops that water runoff going into water systems. We have been trialling this for five years. It works. It really works, and that is how we are intending to prevent sewer overflows and reduce them in the future.

Can you explain dry spills?

Of course. Dry spills are mainly—when I say “mainly”, I am talking 95%—related to groundwater. Because of some of the geography in our region, we have chalk. The water drains through the chalk and then, in the areas at the foot of the chalk, provides very high aquifer pressure. That means that the groundwater pushes into sewer pipes, sometimes approaching at least 1 bar or 10 metres of head. Even brand-new, perfect sewer pipes cannot withstand that amount of pressure. When we have sustained rainfall and the groundwater comes up high, all that groundwater is pushing into those sewer pipes. Although it is not raining, the volume of water coming to the sewage treatment works is too high for it to be able to deal with. Therefore, there is a directly related overflow. The important point is what we are doing about it. There are two things that we are doing. First, there is an option to treat it using wetlands, and we have a wetland that we built about three years ago now, which performs exceptionally well and cleans that overflow to a better standard than the adjacent sewage treatment works—all the grey, concrete infrastructure. Nature really can do a very good job of that. Secondly, we have used new, innovative technology that we imported from Germany to seal up the pipes. I do not know whether the Committee will remember, but in the 1970s there was a product called Radweld, which fixed the radiator of your old car. It effectively works in the same way. You pump a chemical in, and it seals the tiny little cracks around the pipe and prevents the groundwater coming in. We have a very effective programme that we have been delivering over the last two years to prevent dry spills through that mechanism.

You are telling us that dry spills are caused by rain. Is this a new development?

It is effectively the delayed effect of rain. It could be many, many weeks since the rain landed, but it goes into groundwater and the groundwater causes pressure. That is what we have to keep out of the sewer system, and those are the measures that we have put forward.

So suddenly, it is a problem.

No, it has been a problem for many, many years. The first 15 years after privatisation was all about building massive sewage treatment works right across the south coast. I grew up around Brighton. Thirty years ago, all of that sewage was going into the sea every day. Every day it was going into the sea, because there was no sewage treatment works infrastructure across the south coast. It is horrifying to think of that position. Building all of these plants was the first job.

To cope with higher rainfall and emergency situations, Southern Water had installed pipes for the pumping of diluted sewage near the River Test and a rare chalk stream. Following protests from residents, rightly, you said the plan was a mistake and it was cancelled. In 2021, the Crown court issued Southern Water with a record £90 million fine and found that it showed “shocking and wholesale disregard” for the environment, human health and delicate ecosystems. The Environment Agency argued that the offences were committed for financial gain and arose from “deliberate disregard for the law from the top down”. What steps have you taken to change your company’s culture?

This was very much part of the previous culture of the company. The offences that you have referred to relate to a period around 2016. We have undertaken a root-and-branch culture change across the organisation. There were many members of staff that left the company at that time, as the culture was changed under my predecessor, and then, after that, there was a series of culture reform programmes right across the company. Now, every year, everybody goes through culture training. I do it myself. Every member of the staff does it. It is part of our mandatory training record on ethics and transparency. That will continue and strengthen. We have speak-up campaigns. We have all of the professional transparency programmes that you would expect to see. All of that was put in place directly as a result of those previous significant and terrible issues.

Will that help to prevent so much spillage?

The issue that you referred to was, I believe, at our Fullerton site. The site, under the permitting regulations, was doing what it was supposed to do, but just because it was doing what it was supposed to do does not mean that that is right for the environment. It was overflowing because of the groundwater point that we related earlier. We have taken proactive action. We have been able to ramp up the sewage treatment works to increase its capacity and we are now preventing all of those overflows. We did that directly working with local communities, so that we could understand their concerns and take action to stop it.

Southern Water was issued with £90 million of fines. What impact have those environmental fines had on the financial health of the business?

My colleague might pick up on how the fines physically affected the finances of the company. What I can tell you is that it had a major effect on how the company operates, not just in terms of ethics and transparency, but it has also fuelled the new shareholder ownership with the equity injections that we talked about earlier. It has supported the turnaround plan that I put in place two years ago and the monumental effort by all the scientists and engineers in the company to get the company back on track.

The £90 million was paid directly by our shareholders. There were actually two elements of fine that we had. We had a fine from the court, which was the £90 million you are referring to, and we then had a reparation fine from Ofwat. That was really relating, effectively, to misreporting for that period. That fine predicated itself. It goes into the revenue so, effectively, customers get a discount on their bills. That has been running all the way through this five-year regulatory period. In total, that will have cost us £125 million. It has had a really significant effect but, as Lawrence says, we do not spend lots of time talking about the money. We spend lots of time talking exactly about the impact it had, how this can never happen again and the culture reform that we need.

Despite the large fines that you have incurred, there is still a significant number of spills taking place. There were 25,000 back in 2023. What improvements are needed to clear up the mess?

This is the next five years-worth of work. In truth, we have to completely redesign sewer infrastructure in order to prevent the spills from overflows. About 95% of wastewater is fully captured and goes through sewage treatment works. About 5% overflows, but it is that 5% we now need to reduce significantly to prevent environmental harm. The programmes that we put forward in our PR24 plan are designed to do exactly that.

We have talked about the specifics of sewage incidents and the number of incidents doubling between 2022 and 2023, with sewage discharged 30,000 times. We have talked about the specifics of that and the measures you are taking to end that. I just want to take a step back and think about the impact that this has on our seaside communities particularly. Many of us represent areas that rely on tourism. They rely on local tourists coming to swim in the sea and visit the beach. The damage that this scandal has done to our reputations as tourist destinations is huge and the reputation damage hugely outlasts the individual spill. What is your message to our seaside communities that have had their tourist reputations tarnished to such an extent because of the failures of your company? How will you work with us to address that damage to our reputations as tourist destinations?

It genuinely breaks my heart. I am from the region, I grew up in the region and I live in the region. The position that we are in is genuinely terrible. The context is that bathing waters have actually improved drastically—in context only. Bathing waters over the last 30 years have gone from 40% in an acceptable and satisfactory condition to now well over 90% across the region. About two thirds of those are at the excellent standard. We have made substantial improvements from when sewage was going into the sea every day, but sewage spills have to be substantially reduced. The programme that I talked about earlier, working together with citizen science to gather more data and evidence, so that we can track the improvements from the planned investments that we are going to be making, is critical. What is very important is working with local communities. My simple message is that we are absolutely on the case. We will be transparent as to where we are making the improvements. You can go online now and see where we are making all the improvements. We will work with local communities to do this work as fast as we possibly can.

You have talked about citizen scientists. Many of us have local volunteer groups that have helped to expose the scale of the sewage dumping we have seen. They are volunteers. They go out and test the water. In my own patch, the Clean Water Action Group are currently crowdfunding themselves for additional tests to keep monitoring that water quality. Do you pay tribute to those groups for exposing this and for pressuring the industry to go further and faster to clean up the sea?

I completely do pay tribute, not just to those groups but to all of the campaigners. I genuinely do not believe that, without the campaigning that we have seen over the last few years, we would have had the policy change and the environmental regulation that is now enabling water companies to do the work that our customers and sea users want to see done. It is now time that we start to move from the quite rightful anger that there has been in the past through to starting to work together to solve this and make it better.

We have talked today about outages. We have talked about sewage. I briefly want to talk about flooding, and when failures of Southern Water’s infrastructure have led to flooding. This has happened a number of times across your region. Sometimes it is a burst main, sometimes it is a blocked culvert. Many incidents have happened. I have heard from the Member for Shoreham about incidents in his patch. There have been many situations in my constituency as well, in Hastings town centre. Homes, shops and the shopping centre, Priory Meadow, have flooded not just once but twice due to the same failure—once in January 2023 and then a second time in October 2023. People’s homes and businesses were under sewage water. Their furniture was ruined. In the case of those businesses, livelihoods were severely affected. I want to read you the experience of one of my residents whose home was flooded in both those situations. He says, “The incompetence of your company has now left us with a home that we believe will be uninsurable—or at least unaffordable to insure against flood damage—and non-mortgageable. We have worked towards this home for our entire lives, but now we feel, because of your company, we are tethered to a property that we can no longer want or live in”. That is from just one of my residents. I have many other cases of people who were flooded in the same incidents and received very little compensation. In the case of that resident, they were offered £1,000 by Southern Water for the damage, the stress and the ordeal that they have been through. I have other cases of residents who have had to leave their homes for six months while sewage damage is repaired. In a village in my constituency, Winchelsea Beach, they cannot grow vegetables because of the sewage pollution in their back gardens. What is your response to that and to these failures? In the Hastings incident, the independent report that was done into the flooding identified that, following the January incident, Southern Water was warned to take action to prevent it from happening again, but it did not happen in time, and people were flooded again.

I am genuinely just so, so sorry. It is single-handedly one of the most horrific experiences. As you know, I have personally faced those customers in public meetings, and it is an extraordinarily difficult and horrible position. The company has completed all of the work required on the pipe that caused the issue, but that pipe was a pipe that was previously owned by the local authority. We have taken that pipe over in order to get it maintained and it is now performing. We have corrected the position. The history is very difficult and, as we have spoken about, I am committing to meeting with you personally and meeting with the residents further to see if we can find a way through.

And to look at the compensation again.

Indeed, yes.

The other aspect of this is that, when we have incidents like the flooding incidents I have described, the first agency that is on the scene is very often our local fire brigade. In the incident in Hastings I have just outlined, I watched firefighters carry people from their flooding homes to get them to safety. I have spoken to the chief fire officer of my local authority and he has said that the number of incidents that they are being asked to respond to is going up and the severity is increasing. It is a huge stretch on their resource at a time when their resource is increasingly strained. Is it fair that the fire service has to bear the burden of Southern Water’s failures in this case? Will you commit to looking at how you can support the fire and rescue services to respond to these incidents when they do happen?

I am very happy to commit to that. I would personally be very happy to meet them with you. Let us see what we can do. What is equally important is stopping the incidents happening in the first place. The work that caused the most damage with the town centre flooding has all been completed and it was completed as quickly as we possibly could, as soon as we identified what the problem was and got to the root of it. Although those kinds of incidents are very damaging, they are still relatively rare. It would be remiss of me not to say that the majority of internal flooding is related to wet wipes, fats, oils and greases, which cause blockages. We cannot flush those things down the loo, and we would dearly love the Government to ban wet wipes, because that really is needed. By number, it is those kinds of remediations that are needed, but we have also put in place about 30,000 sewer sensors. We are not waiting for wet wipes to be banned. We are seeking intelligence as to where these blockages are forming, so we can act before they cause internal flooding. For the specific instances of the case that you are talking about, I would be very happy to meet further with you to see if we can find a resolution.

I have one final question. Through the course of a number of these situations that we have described, it has become apparent to me that perhaps Southern Water does not have a clear sense of exactly where all its pipes are and how often they are maintained. Are you confident that you have a clear sense of where all the water pipes are in your region and how often they have been maintained? Are there some areas where you still need to map it?

We do have high confidence for all of the public sewer system and we have submitted all that information through to the local authority as a result of the last public meeting that we had.

Is that across the whole Southern Water area?

That is across the whole area. Where there is concern, though, is related to where private sewers were adopted a decade or so ago. They were previously private, so there are not any records for them. We are building our knowledge of that system as we go. That is quite a large number of pipes, at least 20% of the network now, but that is work that needs to be done.

Would the incident in Rye have been one like that?

No.

That was a pipe you were aware of.

That would have been on the public system.

Gentlemen, we are now significantly over time even by Highland rather than Teutonic standards. We are very grateful to you for your attendance and answering our questions here today. As I indicated earlier, this is part of a wider inquiry, so it may be that we will wish, at some point, to revert to you for further clarification. For the meantime, we are grateful to you. Thank you very much for coming.