Welcome to this meeting of the Environment and Rural Affairs Committee. We return to our inquiry today in relation to the water industry, and we are delighted to have with us—more than a little relieved, let me say, given the events of last Friday—Emma Hardy, the Minister for Water and Flooding. Emma, just for the benefit of the official record and for those who are following our proceedings, can I invite you to introduce yourself and your colleague to the Committee?

Yes, of course. I am delighted to still be the Minister for Water and Flooding, and I am joined by David Hallam, who is one of the Directors from DEFRA.

Emma, we are going to be looking at the Government’s response to the Cunliffe Commission, and to our own inquiry and report into the need to reform the water sector. Can I just go right back to first base on this; what is your vision for the water industry? Everyone is going to move on from their jobs in politics at some point; if you are able to do everything you want to do in this job, what will the water industry look like when you have done it?

To sum it up with one word—which is probably not the official word I am meant to use—I want it to be boring again. I want it to be something that just delivers and does not create pollution instances, does not create crises, does not have supply interruption, does not prevent us building homes where we want them to be. I want it to be efficient, effective and boring, and something that does not interfere in the day-to-day running of people’s lives. What we have seen over the past however many years is a water industry that, quite frankly, has not been working properly for people. I know from my surgeries with members around here that people are facing interruption, people are facing sewage pollution, and, in some instances, people are facing sewage in their back garden or in the street where they live. So, my vision for the water industry is for it to be effective and to be boring again. It should not be an industry that is grabbing the headlines on the front page of the news; it should be an industry that gets on with its job and operates in a fair and transparent way. I want it to work for everybody. That is where I want it to go.

What would you identify as the single most important factor that has meant that it has not worked hitherto?

It is regulation: regulation has fundamentally failed because of the perverse incentives that are in the water industry. Maintenance is a key example. Why do we have so many problems with supply interruption and pollution incidences? It is because we have a system where maintenance has not been effectively followed. The National Audit Office produced a report on the rate of replacing water pipes; it is absolutely shocking. Maintenance is a huge reason behind some pollution. Also, the regulation system has not incentivised companies to upgrade their assets. Why do we not have homes being built where we need them? It is because those assets are not at the standard they should be. Fundamentally, what has failed in the water industry has been a problem of regulation. It has been weak, it has been light touch, and that is at the core of the problem. We want to fix this and get it working in a way where we do not have to have parliamentary committees asking about it because it just works and does what it is meant to do. You have to have an effective regulator holding them all to account. That is why Sir Jon Cunliffe’s key recommendation of one single powerful regulator, which we have announced we are adopting, is so essential.

You will have seen the report the Committee produced. We identified the culture within the industry as being one of the things that had brought us to this point, albeit that clearly there have been failures of regulation, there is a cluttered landscape of regulators, all those things. But you have an industry where, instead of being providers of an essential public utility in a monopoly situation, big financial institutions are buying up and behaving like they are high-rolling hedge fund managers, not somebody who is looking for a low reward for a low-risk investment. Do you think that culture is something that you will fix with regulation?

That is exactly where I want it to go as well. As Sir Jon Cunliffe said, that low reward, low risk, long-term investment, is exactly where we want to be. Can I genuinely say that the report you did was excellent, and I particularly enjoyed some sessions you had, which were very good; really impressive. One thing we have done—which I am happy if I am able to share with the Committee—is to look at your recommendations and the independent water recommendations to see where there is alignment. I have to say there is really strong alignment on many of the recommendations, so that was super helpful. But you are right. That is why I talk about making it a stable system. In our ambition for growth and what we want to do around the country, we should be able to know that we can do something in a particular area and have the water and wastewater services needed for that. It should be about long-term investment. People should not be thinking about quickly turning something over in five years, but about what they want to do for 10, 15, and 20 years. We are talking about building reservoirs; if you are building reservoirs, you are not thinking about turning a profit in five years, you are thinking about investing in assets for 10, 15, 20 years to get a return. That is the stability we need to get back into the water sector. I genuinely love this brief because water is so fundamental to absolutely everything. You will know, Charlie, about farmers and the difficulties they are having with drought because we do not have enough water. They are carrying out fish rescues around the country because there is over-abstraction, the chalk streams are affected, and housebuilding too. Everything revolves around making sure we have the water we need. The system has failed and that is why, when we talk about revolutionary change, we mean it.

Does it worry you that Water UK, the industry body, thinks this is a great report, but groups such as Surfers Against Sewage and River Action are somewhat less enthusiastic about it?

I love Surfers Against Sewage and River Action, and I speak to them frequently. They have done an amazing job raising the issue of sewage pollution in their area. I know they were both keen for nationalisation, but we were straight and upfront in our terms of reference from the very beginning. We did not mislead or lie to anyone; we said nationalisation was off the table. I know that was something they wanted, but they also knew that was not something we were going to deliver. But where we are strongly aligned is with the concerns Surfers Against Sewage raised around pollution going into bathing waters. Our plan is for £11 billion to go into upgrading the 3,000 storm overflows. We have said that shellfish sites and things like that which are ecologically important will be prioritised, together with sites that are important for humans—bathing sites—because we want to focus on improving the sites that people use and that are really important for nature. It obviously wanted us to nationalise and we are not going to do that. But in other ways, we are hugely supportive of what it is doing; it has done a fantastic job, and the same for River Action as well. I regularly catch up with the environmental NGOs and let them know what we are doing. They can challenge me, that is fine, and we can have that conversation. But the way I do things, Chair, is the way I do all politics: regardless of where people are from and their background, I look for where we agree and then we can all push in the same direction. Fundamentally, this Committee, the environmental groups, and certainly I, are all aiming for the same thing, which is cleaner rivers, lakes and seas, and a more effective water system. That is what we should focus on.

One of the areas where you will find easy agreement is around the subject of executive pay and bonuses. We have had the Water Special Measures Act; you will also have seen the areas that we explored with Thames Water around its employment retention package, as it called it. Over the summer months, we have seen bonuses still being paid in Yorkshire Water and Southern Water. Is the Water Special Measures Act going to be enough here?

Last Thursday, the previous Secretary of State left everyone in no doubt as to what he thought about the situation; I wrote it down because I wanted to make sure I quoted him correctly. He was quite clear. He said, “The payment to the CEO of Yorkshire Water by its holding company has outraged customers and we have asked Ofwat to assess its legality as a matter of urgency. We will not tolerate any company attempting to circumnavigate this Government’s ban on unfair bonuses through exorbitant salary increases, secret bonuses, payment for parent companies or other deception.”

That is what he said, but still it happens.

This is what we have to address. The Water Special Measures Act was about banning unfair bonuses; if companies are trying to circumnavigate that and find a way around it, then we want to hold them to account.

Is that an indicator of a problem with the culture? If water companies think that they are too big to be pulled into line by Government, is that not pretty serious?

It illustrates the importance of having the right regulation. We have asked Ofwat to investigate and look into this; it is not just about the letter of the law; it is about the spirit of the law. These companies had their bonuses banned because of pollution incidents and various other reasons. We did not do it on a whim. There was a metric, there was a measure, and that was why the bonuses were banned. These companies need to accept that, recognise that it has been done in a fair and transparent way, and therefore adhere to it and not try to circumnavigate it.

We have seen quite impressive figures coming in from the water companies about what they have spent on legal advice. They are clearly more interested in the letter of the law rather than the spirit. Is that not a cultural problem?

That is one of the things we want to change. As I said from the beginning, my vision is for an industry that works and behaves in the right way. There is always going to be a range of things in terms of how you drive behavioural change or cultural change in any organisation, but fundamentally, the water companies need to know how serious we are. Some of Sir Jon Cunniff’s recommendations that we are looking at illustrate, I hope, how seriously we are taking this because, as I say, the supply of water and wastewater fundamentally underpins so many of the Government’s wider ambitions on growth and building. We have to get this right.

Commissioners are recommending a national water strategy but there is no indication of what that should comprise. We have identified the various competing tensions: lower customer bills, rewarding staff, rewarding investors, improving environmental outcomes. What are you going to do with this water strategy? When will we see the shape of it?

You are absolutely right. It reminds me of a boss I once had—I will not name them—who used to send an email every Friday telling us, “This is the priority.” It was this week’s priority as well as last week’s priority and the priority from the week before. At some point somebody needs to say, “What is it we actually want to achieve from the industry?” The national strategy that we want to produce is dealing with these tensions. Is the focus on water bills, on infrastructure for growth, or on the environment? The national strategy needs to set out what the Government want to do, and that is something we are working through now. In all honesty I cannot give you a timeframe, but we are working through it right now to address, not contradictions, but tensions within what we are trying to achieve.

That is the high-level stuff. Jayne, did you want to come in?

I was just going to ask about ownership; are you going to come on to that next?

I was not going to at the moment. Do you want to ask your question quickly?

Jon Cunliffe’s review was a big chance to look in the round at the water industry, and we have touched briefly on state nationalisation. That was obviously something that was ruled out initially, but there are other methods of ownership. We went to Germany and spoke to their Minister for water; it has many small municipal boards and companies, and we have not-for-profit models and co-operative models. Some of us thought that Jon Cunliffe was going to cover these things, but he did not really touch on them. Looking at his background and what he did with bank regulation more than anything else, it is pretty obvious that was what he was going to do, but do you think it is something that should or could have been explored?

As you say, we were really clear on nationalisation. I did not want to mislead people by putting something in an inquiry that we were not going to adopt. I do not need to explain to anyone on the Committee that obviously, with any decision on spending money in Government, if you are spending money somewhere, you are not spending money somewhere else. So nationalisation was ruled out because of the cost to Government. I should say that we are looking at all 88 recommendations from the Independent Water Commission, but recommendation 46 says, “On a case-by-case basis, would it be appropriate for a water company to transition to an alternative ownership model where they request to do so or following special administrative regimes.” So that recommendation is there, but I want to be clear that such a transition would not involve state funding. It would not involve money from Government because we are quite clear that we are not going to be involved in state money going into companies.

I suspect we are going to come back to the question of special administration later on. I want to move on to reforms to the regulators and we are into the specifics here. We have a lot to cover today, so can we keep all our questions and answers tight? Andrew, you are going to kick off for us.

Thank you both for joining us. You will be unsurprised that in a place like mine in Peterborough and the Fens, regulation—in terms of how the systems do not work together—is one of the big bugbears, whether for farmers, drainage boards or constituents. People have already been contacting me this morning thankful that Ofwat has confirmed the £62 million fine for Anglian Water. But on one level that is also a sign of failure because it means that regulation has not worked well upstream. We have reached the point where Ofwat has needed to fine for failure. One of the issues about replacing Ofwat with a more integrated water regulator is that DEFRA has looked at bringing EA and Natural England responsibilities into that. One challenge is that people do not feel regulators work well together; if it goes wrong, combining them together could cause worse outcomes. Can you tell us more about how you think those bodies will come together, and why they will deliver better outcomes for industrial and farming use as well as residents? Do you have a sense of the timeline yet?

Thanks for mentioning the Ofwat enforcement announcement that came out this morning: Anglian Water and its shareholders are paying £62.8 million because of failings. It shows that this Government are serious about holding companies to account. When I went into the Department and looked at the responsibilities, I noticed that at some points two different agencies were doing enforcement: you had the EA and Ofwat, as I have just mentioned, both fining, so there was this overlap in responsibilities. It was difficult, therefore, to have that one powerful single regulator, which is the vision I am trying to get to. Having it all under one roof will actually be a much more effective model because everyone will be very clear about who is responsible for what and what needs to be done. My vision for the regulator is that it is clear, transparent, and fair. Another thing I want to look at is whether our current regulatory system has all the tools it needs to hold companies to account. That is something I am in the weeds of with the Department right now: making sure that it does because there is no point in having a single regulator if it is not able to intervene in different ways when we see problems arising. That is where I am wanting to get to. From the point of view of customers, if they have concerns about having a single powerful regulator and do not think it will be effective, we have announced that we have accepted the recommendation to have an organisation with ombudsman powers. The Consumer Council for Water does an amazing job, but it never had the same powers as an ombudsman, and that is what we want to see so that customers can go to it. I am sure that when your constituents come to you with an issue, you sign off for them to see the ombudsman. That is what we need to have in the water industry—we have not had that before—to give customers a greater say. We have had issues around the table where customers have felt completely let down by the service and they have not been able to address problems properly unless they have had a Member of Parliament on an EFRA Committee who is able to hold the water company to account. So that is also what we need to do. The single powerful regulator will make things much clearer and simplify things. It should know what its roles and responsibilities are. I am not trying to catch companies out; I am trying to create a system that is fair, open and transparent and has very clear objectives on what we are trying to achieve. But likewise, as with anything, if you are not going to behave in the right way there is a consequence, and if you do then there is more of a positive consequence as well. I should also say, to be as balanced as possible, Chair, that there are of course some water companies that are just getting on with the job and behaving and acting in the right way; I do not want everything to become overshadowed by the announcements that we have had this morning.

Talking of getting on with the job, one of the real frustrations—particularly in the farming community—has been that the EA, Natural England and water are just not joined up and that does not work, so this could be one of the benefits of it. But we also want to get on with building our new reservoir in the east of England and the Fens. People are shocked and appalled that we have not built a reservoir since 1992. Can you reassure us that the timetable for bringing this regulation together will actually help to ensure we have some speed in getting on with that, rather than it being a block? I know too much of our farming development has been held up by the EA or Natural England, causing friction in the system rather than actually helping farmers. Will it speed it up? Secondly, do you think there is a wider responsibility in water regulation if we are going to build major infrastructure like the Fens reservoir to deliver social value to communities like mine? We want to ensure that the jobs and skills that are needed to build a reservoir in our patch come from places like Peterborough and the Fenlands, and we ensure that people do not just get regulation, but that the regulator supports investment into communities.

Yes, as a short answer. In terms of speeding up and when the single regulator will legally be created, the current system is set up through primary legislation so we have to go through that to create a new one. However, that does not stop us encouraging greater interaction—which is what we are working on now—and working together and getting that ready for when the legislative change actually comes in. You are absolutely right about the building of reservoirs: it is shocking that we have not built one in such a long time. Our population has increased, climate change is here as well, and we are literally not able to build what we need where we need it because we do not have enough water. It is an appalling state of affairs but there is also the Water Delivery Taskforce, which looks at some big water infrastructure projects and how we can hold them to account on cost—which is another issue—as well as the timeframe in getting these built. Your point about social value is brilliant. One of the things I loved about the Thames Tideway project, which I went to see, is that it did loads of stuff in the local community. It provided apprenticeships and jobs for the local community, offering greater opportunities to the people who lived round there. That is a great example because whatever the big infrastructure project is, it is doing it in place as much as it is needed and it will therefore have an impact on the residents as well. To be able to offer that extra value to the people who live in that community is a hugely positive thing and something to be encouraged.

Can I just add—this plays into your point about what the new single regulator is tasked to do—the Ministers have been clear that this is not a merger of Ofwat and some functions in the EA and the DWI: this is a new regulator. We will decide what that regulator is going to do and we will bring the functions in; one of those functions needs to be around engineering, asset building and asset health. That is something that has been missing from the situation, so it should drive that more positively in the future.

Brilliant. One of the issues Dan Corry talked about in his report was around regulators having more of a supervisory approach within contained discretion areas and being proactive in looking at how they manage their responsibilities. Could you tell us the Department’s view on that? Do you think the new water regulator will have more of a proactive supervisory role within areas set by the Department? Given the transparency a new regulator has, do we have your commitment to work with Parliament and the Committee to ensure that there is some transparency as the regulator is set up?

Jon Cunliffe recommends a supervisory approach: he envisions that within the new powerful regulator you would have a team of experts who are expert in that company, who know and understand the particulars of that company. You cannot always say one size fits all, because geography is different around the country and I completely accept that there are different challenges. Some areas of our country are wetter, some areas are drier, some are more rural. There are lots of different challenges, wherever you are. The idea of the supervisory approach from the regulator is that it knows and really fundamentally understands that company and therefore can hold it to account more effectively for what it is doing and how it is behaving. Now, with the particulars of all this we are very much in the weeds at the Department, looking at the detail and analysing exactly how all these different things will work. But in terms of broad brush, what we are looking for within the regulator is that level of expertise and knowledge. The system that we have right now, which we are changing, is a system that was based on light-touch regulation. Under the previous Administration, it was based on outcomes rather than outputs. You might think, “Okay, that sounds fine,” but that meant projects were not built and delivered; instead, money was returned to the customer. I want to be really focused on outputs. I want to make sure that, if it says it is going to upgrade a sewage treatment works, it upgrades that sewage treatment works. If it is going to upgrade the water treatment, it does it. If it is going to build the reservoir, it does it. I want to be much more proactively involved in making sure it delivers on these big projects. That is my vision for the supervisory approach. But as for the specifics we are working through, is there anything you want to add, David?

Just to pick up on the point about constraint and discretion from the Corry review. Some examples that we have talked about are around where regulators feel obliged to have certainty, and that can often drive expensive solutions. Giving them the discretion to find alternative ways of doing things might deliver wider benefits, including for nature, carbon or communities. That will need some regulatory reform, but it is one of the things we are looking at.

To be super quick, it is the reason why we do not have so much in terms of nature-based solutions; if you want absolute certainty you do concrete, whereas if you have nature-based solutions, there is that element of uncertainty. That is one of the things we are trying to look at.

A lot of this is good in substance, but I am not hearing any timelines. You said that with the water strategy, you honestly could not tell us when it would be. You were out the blocks fast in signing off what was going to be history—I do not think many people quibbled with that—but it is now a bit of a lame duck regulator. The chief executive is moving on and I am not hearing any timelines or any great sense of urgency that you are going to move on this. Can you give us more specifics? When it comes to the new regulator, I presume—you can tell me if I am wrong—that this Committee will have a role in its oversight.

Of course, Chair, I will give you timelines. We are expecting to bring the White Paper forward in the autumn. We are working on that right now. It will be our vision for what we are going to do going forward, and a response to all the 88 recommendations. In conjunction with that, we are also having meetings with all the different regulators on how we can start to bring them together in a more informal way. That is happening right now, and you should hear more in October; we will maybe be saying a little then. After the White Paper—we should not be too specific on timelines, but I want to be respectful to the Chair—we are looking forward to bringing the Water Bill forward next year. That is what we are looking at in terms of timeline at the moment; the regulators are having conversations about working together because they know we want to create a single regulator. We are doing our White Paper, and then next year we are looking at doing a Water Bill. Obviously, politics is politics and things might happen, but that is the timetable to which I am working. The conversations we are having are around how we could create shadow organisations ahead of the primary legislation because, as I say, to change the regulator you need primary legislation. So that is what we are doing right now, and there is an absolute sense of urgency with this issue. If nothing else, I hope I can convey how important this is to me and how quickly we are trying to move through it all.

Urgency and White Papers do not always go together in my experience.

I just want to tangentially shoehorn in a constituency matter. In my constituency we have Poynton Pool, which is classed as a reservoir under the Reservoirs Act. It has not flooded in 200 years but an inspection means that there are works required to make it safe. The Act understandably has very stringent timelines, but they are now acting as a straitjacket because the proposals from the local authority are going to remove a huge number of trees and local residents are concerned. I wondered, first, whether I could pick up the issue with you privately because it is more detailed than for this place. Secondly, are you doing any work on the Reservoirs Act? Since Toddbrook and the issues that occurred there, it is causing a huge amount of work for many owners of reservoirs, not just water companies. The Canal and River Trust is having to undertake a lot of remedial works, including at Toddbrook.

I am very happy to chat to you about it. We can get relevant officials around and get into the details. In terms of the Reservoir Act, yes, we have been looking at the Act, particularly around safety. Do you want to add anything, David?

Not much, but we are aware of this issue and it is not just in your constituency that it is being raised. It is one of the items that we are discussing.

We are happy to pick that up.

While we are discussing the stripping of the water-related responsibilities of the Environment Agency and Natural England, there is a lot of frustration from farmers and others about their responsibilities in relation to water; whether it is the Environment Agency’s flooding issues, which we get in the River Hull catchment, or Natural England’s misinterpretation of farming rules for water. As part of the Cabinet Office review of arm’s-length bodies, can you commit to looking at their responsibilities and whether they are delivering on those responsibilities as they should as arm’s-length bodies of DEFRA?

If I can just express my sympathy for the wildfires that are near your constituency; I know they are creating a huge number of problems. On the farming rules for water, we have had a roundtable with the NFU and all the farming groups represented, alongside Water UK that is representing the water industry, and the Environment Agency, to look at the farming rules and regulations for water and agricultural pollution to make sure that they have a voice at the table. I know that the farming community have had a horrific time with the floods last year and then the drought this year, and I know that there have been concerns around abstraction rules and licences. One of the things I am also keen to look at, which the Environment Agency has been trialling, is to enable farmers to hold more water on their own lands to make it simpler for them to be more resilient to changing climate and the effect of droughts. Obviously, I am not the Farming Minister, but we are trying to make it as effective for farmers as possible because climate change means we might be facing regular winters of flooding and summers of drought. That is one of the things I am really interested in doing. I spoke to some farmers and they were telling me how they are unable to hold their own little reservoirs on their farms because of the rules; that is mad. We want to try to unlock that and enable the farming community to be a lot more resilient.

I am going to come back to the question of regulators in a few minutes, but for now I want to jump forward to look at the particular situation around Thames Water. If you enjoyed our sessions with water companies, there was twice as much to enjoy with Thames. We are joined today by Charlie Maynard from the Business and Trade Committee, and he is going to lead our questioning on this.

Thank you, Chair; it is very good to see you. One question I have is about mutualisation. Following up on your recommendation 46, which I was delighted to hear, if Thames was to go into special administration and there was an offer on the table for a mutualisation of the company, is that something the Government would seriously consider?

Just to be super clear on how it happens: if a company—any company, obviously—went into special administration, the special administrator would look to get the best deal for exiting that SAR. It would be looking at whatever was happening with its existing creditors or whether it would be selling it on to another company, but it would always be looking to get whatever it is. We were on the committee together, Charlie, so I know you know that on exiting the SAR, one of the requirements would be to repay the Government if the Government had spent money on it during that time so that there was no cost to the taxpayer. In that position, if an offer came forward the special administrator would look at that alongside any other offer that was made for the company. As a Government, we are not stipulating anything but obviously we would be interested in making sure that the offer was credible and would not put the company back in another bad situation. But we are quite open to any offer that any company came forward with.

My next question is about the definition of ultimate control under Ofwat’s regulations. The Business and Trade Committee received a reply from Ofwat which I forwarded to you this morning. I do not expect you to have read it; I only received it yesterday. It basically says that ultimate control is a defined term under the licence. It is defined as an entity that is able to materially influence the policy or affairs of the company; in this case, Thames Water. Thames Water’s parent company stated in court in July that the Class A creditors are essentially the economic owners of Thames Water. The Class A creditors are clearly playing a very active role in the restructuring of the business; they have co-ordinated themselves through a committee to hire an investment bank, the law Akin Gump, barristers from South Square Chambers, and a senior adviser. They are clearly acting as a group and have huge influence. Despite all those facts, however, Ofwat refuses to acknowledge that the Class A creditors meet the test of being able to materially influence the policy or affairs of the company. What do you think?

The ultimate controller recommendation Sir Jon Cunliffe made is obviously not in existence at the moment with Ofwat. That recommendation, if we accepted it, would be one of the powers we would potentially give to a new regulator. Again, the fact that Ofwat does not currently have the ultimate control of power is another reason why this regulation failed. It is not in existence. Sir Jon has recommended that we look at it for the new regulator, but it is not currently there.

Sorry, but the ultimate controller is in fact defined and it is in Ofwat’s power to decide who is an ultimate controller or not. Thames Water’s parent company said in court that it is essentially the economic owner of the company, but Ofwat is currently saying that it does not believe it is able to materially influence Thames Water, which seems completely extraordinary.

Yes, it is. That is the current situation that we have, and that is why we want to change it. Ofwat does not currently have the ultimate controller powers that Sir Jon recommended.

Ignoring Sir Jon’s recommendations and dealing with the here and now, it says that if you materially influence the company, you are an ultimate controller. Clearly, the class A creditors, as de facto economic owners of the company, are able to materially influence it. So why is Ofwat not accepting this and saying that they should also be included as an ultimate controller?

I do not know if we are talking at cross-purposes; I am trying not to. But back to point one: regulation has failed. Ofwat has not had the powers, in my opinion, that it has needed. It does not currently have the powers, the ultimate controller powers. That is one of the issues we are looking at.

Charlie’s point is that it does have this power, but it is refusing to exercise it.

Right. Okay.

The nominal ultimate controller for Thames Water is a company that is defunct. It does not function anymore.

The nominal ultimate controllers right now are the shareholders who have taken their board directors off, which is fine; they can stay there because they still officially own those shares, even if those shares are worth nothing. I have no issue with that. What is extraordinary, though, is that in court, Thames’s parent company is saying it is essentially owned by the creditors who are the economic owners of the business, and yet Ofwat is saying they do not even materially influence the company. Ofwat is failing in its duties to enforce, and I just wanted to hear your thoughts about that.

I agree with everything that you have said there. You and I have talked; the situation is far from ideal, and I want to be in a situation where the new regulator is able to intervene and prevent a situation like this happening. But I am going to let David come back on the specifics.

To support what you have just said, it is an unusual situation. The only point I was going to add is that at the same time there is still an existing board and shareholders of this company that are controlling the company’s operations. I can understand why Ofwat has taken that view, although I also understand your point about how odd this is.

Could I let it rest and maybe you could dig into that and reply in writing, if that would be possible? It is really important to make this clear: I am not saying that it is instead; it is in addition that the Class A creditors clearly have material influence on Thames Water. If it is in addition to the existing shareholders, why is Ofwat not recognising that? That is the question we are looking into.

I am very happy to take that away. On the wider point and principle, a lot of what the Independent Water Commission was looking at is how we prevent a situation like this happening in the future.

Just taking a step back for a second, under what conditions would the Government put a water company into special administration?

That is a great question. The Government do not put companies into special administration, the courts put companies into special administration. This is how it works: we would apply by making a case to the court and writing to them to say, “We believe this company should go into special administration, this is our argument.” A judge would then look at that and say either, “We agree with you,” or, “We do not agree with you.” The alternative way of going into special administration would be where the company itself says, “We are unable to continue and we are going into special administration.” There is some mistaken belief that it is the Government’s decision or, the Secretary of State’s to write—

Well it is the Government’s decision to take it to court, is it not?

It is the Government’s decision to supply the evidence to the court. But if we were to do that with a really poor evidence base or not have the evidence there, a court would say, “Clearly you do not have the evidence to put this. We do not agree with you.” The Government presents its case to the court, the court decides whether it goes into special administration. That is how it works.

Do you have a good case for Thames Water?

It has not met the threshold for going into special administration. It is not currently—

From the Government’s perspective, what circumstances does a water company have to get to in order to meet the threshold for special administration?

There has to be either a serious breach of its principal statutory duties or an enforcement order so that is inappropriate for it to contain its licence. Those are the current rules. Obviously we are reforming things, but that is the situation as it is at the moment. A serious breach of principal statutory duties would mean that fundamentally water does not come out of the tap and your toilets do not flush and sewage does not go away. That is a serious breach of fundamental duties.

That is the threshold for a serious breach?

Yes. I have a whole list here. Other performance metrics that Ofwat tracks in terms of looking at what we would consider to be a performance SAR are: asset health; leakage reduction; water supply interruptions; customer satisfaction; pollution; internal sewage; and spending versus allowances. There is a whole range and all this is part of the Water Company Performance Report, which is published every October. It looks at the performance of all the companies and then determines how those companies are performing. The current situation is that under the current rules and legislation that we have, Thames Water has not met the threshold for going into special administration.

That is the formal advice you have been given as a Minister.

Yes.

Just taking this a bit further, in August you appointed FTI Consulting as the administrator in case of special administration. What progress have you made on your contingency planning?

That is totally right because we want to be ready for anything. It would be irresponsible if I was not ready for any eventuality. At the moment, as I say, the company remains stable. We are monitoring it very closely; we are looking at everything. It has not met the threshold for going into special administration, but I do not want to be one of those Ministers who is caught on the hop and has not been prepared properly. We have made sure that we have everything ready for any eventuality so that customers would still get fresh water and employees would still get paid. It is right and proper that we are prepared for everything, and that is what we are. Although I want to stress that the company has not met that threshold.

Are you confident that the creditors—stewards, should I say—are in the best position for Thames’ turnaround?

Ofwat is continuing to talk to the creditors. Because that is an independent process, I do not have conversations with the creditors. That is not how it works. But on your wider point, which I said—

It is all related: that is what I am getting at. Where is the threshold for when you are going to intervene? What is your contingency planning, and how are you assessing the people who are actually doing that at the moment? How prepared are they to actually turn this around as a company?

It is no underestimation to say that quite a large part of my time is spent on this current situation and making it work more effectively. This is why we need fundamental change within the regulation and the regulatory system; we are in a situation now where there are not as many tools available as would be helpful. But until we change the law, until we change the rules and change the system, we are in a system where Ofwat is talking to the company. We are monitoring the performance of the company very closely. Those conversations are ongoing, and the company is still solvent at the moment. It is still able to continue. It has not met the threshold because you meet the threshold either for insolvency or performance. It has not met the threshold for insolvency, and it has not met the threshold for performance. Anything you want to add, David?

I only want to add a couple of things. First, the creditors are a very diverse group and there are some that specialise in difficult situations like this. There are many who are investors across the UK infrastructure sectors, places like Hinkley Point and other major infrastructure. Secondly, whoever owns the company will have to meet the same criteria as any owners. They will still be held to account in the same way. That is exactly what Ofwat is in the process of doing in looking at its turnaround plan to see if it gets the company into a stable situation financially as well as in terms of performance.

In terms of your preparedness for the eventuality of potential Government action, what is your assessment of the cost to the taxpayer in that situation?

As to the cost of the special administration, if any company were to enter special administration of course there would be a cost to the Government, but the Government would also be collecting customer bills at the same time so the level of cost would be difficult to calculate. It would depend on the company, and so on. Through the Water Special Measures Act, we have looked at cost recovery to Government; obviously in exiting the SAR when the company was sold, the Government would be classed as one of the creditors and would be repaid for any expenditure they made during the period of an SAR.

So at the end of an SAR it would be cost neutral to the taxpayer?

Yes.

It depends on how much it costs and how much is recouped, then the Government have a choice of whether to seek to recoup those costs from their payers.

Sorry, yes. In the event of an SAR, if you were to sell that company for less than, say, the Government spent on it, the Government have the power—following consultation—to recoup that money either from customers in the local area or customers in the whole country through the Water Special Measures Act. So yes, you could be in a situation where it does not cost the taxpayer any money but there might be a cost to bill payers in that area.

Going back to the national security issue and thinking about the concerns that we have about national security in the context of the position of investors and creditors, as we have touched on, the water sector is not listed as a sensitive industry under the National Security and Investment Act. Do you think it should be?

That is something that we are live discussing now. When we have reached a firm conclusion, I am happy to write and explain my reasoning either way.

Thanks very much. Can I say, as I have said to you privately and I have said on record, what a formidable campaigner you have been on this issue for your constituents, both before and since you came into Parliament? There are various recommendations in Sir Jon Cunliffe’s report which talk about giving the regulator a lot more powers. I know Charlie was talking about the ultimate controller power, for example. That is one of the ones we are discussing and having a look at right now. There are ones around materially changing the company as well. There is the supervisory model where the regulator would really fundamentally know the company and be able to account. David mentioned—and it is my opinion as well—that at the moment, we do not have sufficient capability to really look at engineering. When the water companies say, “This costs this much,” where is the interrogation of those costs? There are quite a lot of things in the Commission’s report that we are looking at right now to exactly address your point, which is how we make sure that the new regulator is a powerful regulator that can properly regulate this industry, get it out of the situation it is in, and prevent it ever returning to it in the future.

You are spot on. I am not naive enough to think we can do it tomorrow, but I want to be in a situation where we have a resilient water sector, and we do not have the instances that you have had to campaign on. I was just checking through where we are and there is a lot of alignment on that. The Independent Water Commission proposes strengthening the CCW and ombudsman routes and having clearer standards. So, there is a lot of alignment with your report and recommendations. The other issue I am concerned about, and I know you are too, is vulnerable customers and making sure that companies know where the vulnerable customers are. Companies should be looking at the priority services register, making sure that in the event of a water outage, as you have outlined, they know where to reach vulnerable people and deliver bottled water to them. Are they able to get it to them on time? I go back to my point about water companies being variable because there are some that are really good at this and there are some that are not. We need to make sure that they can get it to the people who really need it. That is something we can do now; we do not need primary legislation. With quite a lot of this stuff around consumers and customers and how they are treated, we can actually just get on with it. As I say, I have been looking at the priority services register. Does a company know where its vulnerable customers are? What is its plan to get the water to those vulnerable customers in an effective and timely manner? For exactly the reasons that you have outlined, it has a huge impact on people’s health if they are not able to wash and they are not able to access fresh water. It is something I am really passionate about and we have been working really hard on this at the Department. The only company I have not been to yet is Wessex, and that is just because of timetabling. I have gone round every other water board and company to talk to their boards. I have been talking to them about their customers and bills, but also what is the customer experience and how is the company treating customers? I do not want to be all doom and gloom; there are some companies that do things really well.

Yes.

That is something else I am keen to do. Another colleague raised sewage pouring into their back garden with me; it is just horrific that somebody would have to put up with that. We are looking at lots of things around consumers. I cannot give you a guarantee we are going to do this or that, but it is certainly one of the things we want to look at. Again, one of the frustrations I have is that the Government should not be required to say to a water company, “Treat your customers well, give them a good service, that’s how you should behave when they have a problem.” Again, some do but some do not. It is certainly something that I want to be able to tell them; in the event of this horrific situation you should be treating customers well. It should not require primary legislation to make them do it. It should just require a greater emphasis on the treatment of their customers.

Yes, of course. That was also in a recommendation from Sir Jon Cunliffe and there are actually the powers for the single social tariff within the Water Special Measures Act. But there are two issues. We can go around all the water boards talking to them about their offer for customers, and some are doing really good things. You have some companies where genuinely their money is being given from shareholders directly to boost up what the customers on lower incomes are getting in that area. Some are working with different organisations and agencies to look at automatic enrolment so that people do not have to apply for it. They are able to write to the customers and say, “Would you like to be on this tariff,” through work that they are doing with the Jobcentre and various other organisations. As I say, it is variable, but there is some really good practice. In looking at this recommendation, I want to make sure that we do not get in a situation where you introduce a national social tariff and some people in one area who had a really good service find it is not as good as the one they had previously. I want to look at levelling up. But as I say, without getting into the weeds of this, a national social tariff means that you would not have that additional money coming in from shareholders in that area as you have with some water companies. I do not want there to be unintended consequences of trying to do a good thing.

I just want to say that our frontline staff are doing an incredible job and they have faced a horrific amount of abuse. I was speaking to the unions about this; the unions were saying that some people working for certain water companies are trying to cover up the company they work for because of the abuse they are getting in the street. That is absolutely outrageous. Workers are not responsible for the actions of the owners of a company, they are the people going out there and cleaning up. Your point is maybe wider; there are many industries where people at the bottom are not getting paid enough. Chair, if you do not mind me pivoting away from DEFRA for a moment, that is why I am so hugely supportive of the Workers’ Rights Bill that is currently going through Parliament. It is a key piece of legislation, and I am very proud to be part of a Government that is introducing it. I will pivot back.

I am sure we are all alive to the wider significance of that.

Fundamentally, there is a question here about how people on the frontline are being treated. As I say, I chat to the unions about this; nobody should be worrying about covering up where they work because they think they are going to face abuse.

We created a system through Ofwat and through the Water Special Measures Act which is clear and transparent when it comes to awarding bonuses. I believe in being clear and transparent with you, and with the wider industry; this is the criteria for achieving a bonus or not. They should not try to circumnavigate the criteria or find a way around it. We have made it clear, we have made it honest, we have made it transparent. That is the role of Government. Obviously, I am not going to get into saying whether someone in a private company, whatever that private company might be, should get paid this, that or whatever. What we are saying is that we are setting out clear and transparent rules for bonuses. But I would also say, as a Labour Member of Parliament, that I am very pleased we are also looking at changing the rules around workers’ rights.

Just to be right on this, though, Ofwat said that it was only the CFO and the CEO who were blocked in terms of bonuses. It that not a bit of a token effort?

No; respectfully, I do not agree.

You are happy with that?

I think it is the right thing to do because they are the people who are ultimately in charge. I would not want to be in a situation where somebody would be held responsible for the actions of their superior. I actually think it is right to make it the person in charge of the company.

Okay, we will move on. We have been tackling pollution; Tim, you are going to lead us on this.

Minister, you mentioned that you would look at some previous sessions where we have heard about horrendous pollution issues in which the water industry have been involved. Many of our constituents are really concerned about the ongoing issues of pollution in our waterways and in our rivers. The Commission called for reform to streamline all the different regulations—the 1994 regulations and the 2017 regulations—and to have a single target for surface-body water, which at the moment is in a really bad place. The target is for 77% to be in good ecological condition. It is currently 21%. Are you minded to accept those proposals to streamline regulations—one of your earlier answers suggested that you might be—and will you adopt that target?

As I say, we went through your report then Sir Jon Cunliffe’s report and literally created a table to look at where we align. We are hugely aligned on them all. I cannot give you an answer on whether we will adopt this specific target at the moment because truthfully we are working through the weeds of this right now to see exactly where we need to get to. I know we are talking about the water companies here, but the bigger point is that we also have a problem with agricultural pollution. We have a problem with pollution that comes from the water industry and pollution that comes from agriculture, and we need a plan to tackle both. As I mentioned earlier, we are looking to upgrade 3,000 storm overflows and we have said that they need to be focusing on looking at areas that impact human health and areas that impact the environment as well: bathing waters and places like that.

I suppose the public will want reassurance that, in the process of streamlining and making those regulations coherent in the way the Commission recommends, we do not have any slippage in targets, they do not become less ambitious, and that the OEP is involved as well in helping to frame them.

I can commit to you that there will be no slippage in ambition. On the group I mentioned that were looking at the farming rules for water and agriculture pollution, I should have also mentioned the OEP was represented in that meeting as well.

Moving on, the Commission’s reports also called for a form of self-monitoring by water companies, which we found particularly worrying. Our report specifically called for clearer standards, clearer monitoring, and better links with citizen scientists; some amazing scientists among the public in Windermere, Bournemouth and other places have provided us with incredible data that has helped us hold the water companies to account. Will you consider these measures as part of future reforms? The Commission did not comment on these. We also talked about making sure that regulators had automatic access to company data, which we thought was important.

Citizen scientists have done an amazing job, absolutely incredible. I would like to pay credit to them all, in constituencies up and down the country. You are right, we wanted open-source monitoring so that everyone can act. Again, it is about my general drive to create an industry that is more transparent in every way possible. One way is through open-source monitoring to make sure that that information is available for an environmental group but also for a family who might want to go down and wander by a river, lake or sea and see what is happening. We are trying to drive towards that openness and transparency. We have 100% now being monitored and we want to make that information available to everybody; that is the drive. It will not just be available for a group or a regulator. We want that information to be available for anybody who has an interest in it and that is the best, honest and most transparent thing to do.

When you done that comparative analysis between our report and the Cunliffe report, and where Cunliffe was silent on this and we were not, you were minded to look at what we have proposed in a positive light?

Yes, but I should stress that the White Paper, for example, will respond to the Jon Cunliffe report, absolutely, but it is going to be wider than that. We are going to be taking in other things that we want to think about in terms of the water industry as well. I will give you an example: agriculture pollution was not really in the remit of the terms of reference of Sir Jon’s report, but that is something that we want to be looking at in the white paper. There are other things that we want to be looking at also. As Helena mentioned, one is customers and the experience for customers. The reason we are all here is because of the outrage the public have felt around pollution and how angry and furious they have been. So that is a huge part: how do we drive down levels of pollution? We have an ambitious target to reduce it by half, but we are always looking for other things we can do.

Just to add, if I may, that on the day the report was published back in July, the Government committed to move to open monitoring, which is supporting the direction of travel that you are already setting out.

Thank you, that will reassure people. On that final point, it is a great target to halve pollution by 2030, and we have seen plans involving nearly £10 billion worth of investment which will help us get there. I do not mean to be negative, but I suppose there is a degree of cynicism from us here because getting to that target depends on the very water companies who have had such a poor track record of achieving anything in this area. How do you feel you are going to get to that target with the tools that you have?

That is a great question. There is the Water Delivery Taskforce, but we are looking at the bigger projects and upgrades and making sure we are holding companies to account in delivering them on time and on budget. As I say, I have been to see the water boards; it is about going to see those water companies and making the priorities that we have as a Government really clear to them. The previous Secretary of State wrote to the water companies only last week, setting out that dealing with pollution has to be at the forefront of all their minds in everything they do because, quite rightly, there is such outrage in the general public about what has happened. They are prioritising the ones that impact bathing waters and impact ecological sites including chalk streams, which have to be a priority, and also abstraction. We are also looking at sewage pollution, but as I say, if we really want to clean up the water we need to address both sewage and agriculture.

That leads into what I am going to talk about, which are other types of pollution such as agriculture and pesticides. Agricultural pollution affects 45% of water bodies, so it is a big issue. The ELM targets were 65% to 80% of landowners and farmers adopting nature-friendly farming on 10% to 15% of their land by 2030. Now the OEP wanted that to be more ambitious; Sir Jon has made recommendations about tightening the rules for sludge and fertiliser, but the rules are quite complex. From talking to farmers in my area, I know that they struggle to comply; it is expensive to store their slurry to comply with the rules and of course we are looking at a new round of SSFIs. So I am wondering how you intend to achieve the goals on tightening those rules and how you will help farmers to do that?

Thanks for that question. I am obviously not the Farming Minister, but I know from the farmers I have spoken to in relation to water that everyone wants to do the right thing. The Environment Agency has increased visits to farms, and provided advice led support. It will go in there and give farmers advice and try to work with them to make sure that they are doing things in the most effective way. As you mentioned, there is the environmental land management scheme, there is also catchment sensitive farming, and in July we announced an update to the farming rules for water, but that group which comprises farmers, the water industry, the OEP and the Environment Agency, is continuing to work together to try to deal with this holistically. That is the best way to do it. I am also obviously updating the Environmental Improvement Plan as well. So we are working with the industry, and I have to say that actually the NFU has shown a real willingness to look at how it can address this, so it feels like there is a lot of goodwill in trying to do something. On pesticides, there is the NAP as well which is something we have been looking at and I know you were very pleased about the emergency authorisation last year. David, is there anything you want to add on farming?

No, other than to emphasise the point that the programme of work is exactly what you are asking for, which is to simplify the regulations so people can apply them.

Herds are bigger, so the amount of slurry is larger and farmers have been struggling to cope. I wanted to make the point that they do not have the money or the infrastructure because it has not been built up over time. Coming back to the pesticides; I have some constituents who are very concerned about this, particularly with flea treatments. I have looked at it and we now have a road map but that does not have clear timelines, so I wanted to ask a few things about that. The road map talks about the warnings on packaging, usage guidance and the point-of-sale advice on some pet treatments. Switzerland, I think, is looking at making them prescription only; is that something we would be considering? When the road map comes into being, will there be a full consultation with those environmental groups that have great concerns about this and feel that maybe they have not been involved in the process?

I am just remembering that before I came here, I signed off a written question with someone asking exactly about this.

It was probably me.

There seems to be a growing concern about this: I am starting to see a few more letters in my post bag and some more questions around it; we are looking at doing some research into it. I would not want to jump to saying we are going to do this or that or whatever; I have three cats myself, and because they wander in and out, being able to treat them for fleas is quite valuable. There are various things we need to consider here. It is right we consider it in a careful way, but we are looking at it.

I suppose the other point was agricultural pollution, pesticide pollution, but of course there is runoff as well from roads and all sorts. Again, that means working across Departments so it is a bit more difficult. What plans do you have to deal with that as well?

You are right, and again it is another source of pollution that Sir Jon did not have in his terms of reference but it is something we are looking at. You will know yourself that it gets quite complicated when you are looking at trying to reduce pollution that comes from many different sources. Much of our time and attention, understandably, has been on sewage, but there are other sources as well and if we are serious about cleaning it up, we need to look at them all. My focus right now is on getting the regulation right around the water industry and looking at agricultural pollution and what is the right way in which we can handle that, but you are quite right to point out that there are other sources too.

Am I right in thinking that you would control the planned pilot study in the River Wye for soil research?

We are doing a joint study on the River Wye with Wales. That is a £1 million research study, but it is more looking at agricultural pollution and what is happening with the River Wye in order to come up with the best answer and solution for what we can—

So, it is £1 million.

Yes.

When are we going to see that start to be released?

They started it last year. It is going to be a year’s programme; farmers, environmental groups, non-government organisations, and citizen scientists will be gathering data and testing solutions. I will check in with you and let you know exactly when they expect to complete it.

Will you write to us and let us know when that money will come onstream?

They are doing the research work right now; I will let you know when they are expected to complete it.