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27 Jun 2006 : Column 37WH—continued

Gregory Barker: I am saying that the Government should be engaging with the regulator. I want them to say what they propose to tell the regulator to do to put
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teeth in the system. I understand that the Secretary of State for Environment, Food and Rural Affairs, in responding to Thames, said that he was dismayed, but he should not be surprised—he should be on top of the job.

Ultimately, DEFRA has responsibility for the regulation of the water industry, if it is not being regulated sufficiently or changes are required to the statutory terms of the regulator to encourage more investment. There is concern out there about a mono-focus on price that is to the detriment of long-term investment. The investment that water companies can make is tightly controlled and set by the regulator, but I hear nothing from the Government about their view on whether those bands of investment are adequate to deal with the problem.

Likewise, I am not sure that the fines that have been handed out to Thames are sufficient. Our system of regulation anticipates fines for poor performers, but I see nothing in the overall weighting of fines versus returns to shareholders to indicate that they are a sufficient penalty to encourage Thames to get a grip. The hon. Member for Leyton and Wanstead (Harry Cohen) is right: after a number of years of taking the money and getting off lightly from the Government, RWE is thinking that it will sell the assets, move on and leave the situation to somebody else, now that the Government are finally waking up from their slumber. That is totally unacceptable.

I would like to hear the Minister say something about metering. Historically, the Labour party has been implacably opposed to it. I understand those who have concerns about the impact of metering on the poorest in society, particularly in urban areas. We cannot allow a situation in which someone is unable to pay for water, the most basic commodity for human life. However, metering undoubtedly plays a key role in encouraging more sensible, sustainable consumer use of water. I would therefore like to hear from the Minister where the Government are now, after nine years, in their thinking on metering, particularly in London.

I would also like to hear from the Minister about reservoirs, which the hon. Member for Leyton and Wanstead sensibly mentioned. Surely the Government ought to have a view on the long-term strategic reservoir building plan, yet we do not hear a great deal about that. I would also like to hear what the Government think about overall water consumption in London. Although we have the driest region in terms of rainfall in the United Kingdom, we also have the highest water consumption.

Will the Minister also give us an update on what has been happening in Downing street? According to the Independent on Sunday, Downing street’s water wastage was revealed by official figures showing that the Cabinet Office uses 30.07 cu m of water per person every year. That is almost four times the official target of 7.7 cu m per person and the worst performance of any Department.

The Sustainable Development Commission said on Saturday that it wants an explanation for such continued poor performance and expects steps to address that. How can the Government berate Thames Water for its poor performance, bringing forward, with a straight face, drought orders, whereas at Downing
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street and the Cabinet Office there is the ridiculous farce of totally unsustainable use of water. What on earth is going on in Downing street? Does the Minister not think it incumbent on the Government to set an example?

In closing, I will raise two more points. First, with Thames Water applying for a drought order, I do not share the view of the hon. Member for Leyton and Wanstead that it should be resisted. The order is a necessary evil. It is very sad that we have got to this situation, but now we are there we have to look for strategic and long-term planning. However, in considering a drought order, has the Minister assessed the impact that this will have on small businesses?

The Federation of Small Businesses has sought legal advice and believes that about 250,000 workers in 25,000 businesses across the area could be affected by a drought order. What assessment has the Minister made of that impact and of the effect on London tourism, which is worth a huge amount of money to the country?

Finally, is the Minister still absolutely certain that building 120,000 new homes in the Thames Gateway is the right response to yet another summer of drought? Is it right to tell Londoners that they have to save more water, turn off their hosepipes and even face the threat of standpipes, but at the same time to increase overall demand for water by building more housing in the Thames Gateway? We want more housing, but we have to have housing that is sustainable. We have to prove to existing residents that there is enough water to go round.

The Minister has a lot on his plate and I look forward to hearing the response.

12.3 pm

The Minister for Climate Change and the Environment (Ian Pearson): It is a pleasure to serve under your chairmanship, Mr. Caton, and that of Mr. Taylor. I begin by congratulating my hon. Friend the Member for Leyton and Wanstead (Harry Cohen) on securing the Adjournment debate.

Consecutive below-average monthly rainfall for a year and a half, including two dry winters, has brought about a drought situation in large parts of the south-east. May’s rainfall has helped to fill reservoirs, but has not and was not expected to affect groundwater levels significantly. Much of the south-east depends on groundwater. All droughts are different in terms of their duration, severity and extent, but when a drought affects the capital city it inevitably attracts a great deal of attention.

For the record, London’s water is supplied by four water companies—Thames Water, Sutton and East Surrey Water, Three Valleys Water and Essex and Suffolk Water. Sutton and East Surrey Water was granted drought order powers in May, enabling the company to limit or prohibit non-essential uses of water. The powers are being implemented in those London boroughs supplied by the company. In granting Sutton and East Surrey such powers, I emphasised that I expected the company to use them responsibly and proportionately. I said that I wanted to see the powers used in a way that maximised
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water savings while minimising the economic and social impacts on people and small businesses that relied on water for their livelihood.

Yesterday we received an application from Thames Water for a drought order to restrict non-essential uses of water in its London supply zone. That zone includes most London boroughs and parts of surrounding counties, including Hertfordshire, Essex, Kent and Surrey. I wanted to make those points, because the concept of a London drought order is not entirely accurate. Each company supplying London will take the steps that it needs to, according to its drought plan and its water resources position.

Clearly, we cannot stop droughts occurring, but we can and do plan for them. We ensure that water companies plan rigorously and thoroughly for drought, although not to the extent that they can meet all demands at all times. That would carry a formidable cost burden for customers and a high price for the environment. Water companies produce both water resources plans and drought plans. Water resources plans look ahead 25 years, with the aim of reconciling anticipated demand with supply. Drought plans balance a water company’s duty to maintain public water supplies with the need to avoid or minimise any potential damage to the environment. They contain various actions that the company can deploy, depending on the length and severity of the drought. Hosepipe bans are the first step to curb non-essential uses of water. When a drought intensifies, companies may seek powers to restrict further water use through drought orders, as we are seeing this year. The ratcheting up of drought measures is designed to avoid supply restrictions at a later date if rainfall continues to be deficient.

I should like to answer as fully as possible all the contributions made in what has been a very interesting debate, but let me tackle the issue of leakage generally before talking about Thames Water. Overall, water companies have made some good progress in reducing leakage from its peak in 1995-96. Leakage rates are down by about 20 per cent., and leakage levels from the pipe network are comparable to the lowest levels achieved in Europe and America. That has been achieved through a combination of mains repair and, where appropriate, mains renewal programmes.

I have said in a previous debate and on other occasions that Thames Water’s leakage levels are unacceptably high. That is still the case, and the Government are very disappointed by the company’s performance. In the first instance, that is a matter for Ofwat, the economic regulator. It has said that it views the matter as very serious and that it will scrutinise carefully the company’s annual return before deciding on regulatory action. As hon. Members know, Ofwat has responsibility for setting leakage targets and has powers to deal with poor performance. It would not be appropriate for me to pre-empt Ofwat’s response on that issue.

My hon. Friend referred to profit levels. I have to make the point back to him that, since privatisation, water companies have invested £55 billion in water and sewerage assets. The figure was £3.6 billion in 2004-05 alone. Capital investment on that scale has been possible only because of funds from shareholders and borrowing in the markets. The Government recognise that companies
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have to make a return on their capital—that profits are necessary—but it is for Ofwat, in setting the price limits, to strike a balance between the needs of customers and the needs of investors, and that is what Ofwat does under the statutory obligations imposed on it.

Gregory Barker: Without pre-empting Ofwat’s specific response to Thames, will the Minister tell us whether he believes that Ofwat, in the light of the challenges of climate change and the developments in the industry, is—I am trying to avoid saying it—“fit for purpose”? Does he believe that Ofwat has exactly the right terms of statutory obligation to allow it to regulate the water industry in a way that is appropriate, given the way in which we would like the industry to develop in the 21st century?

Ian Pearson: Ofwat has substantial statutory powers in this regard, and we expect it to give full and appropriate consideration to Thames missing its leakage targets and to come up with a balanced decision on what should be done. Those powers, including the power to fine a company up to 10 per cent. of turnover, were included in the Water Act 2003. We believe that that was an important measure. It was something that the Opposition party voted against.

Harry Cohen: I note my hon. Friend’s point about shareholders and companies investing those billions. However, they would not be able to do that if not for the price rises. Therefore, I would make the case that, to a large extent, it is Londoners who have put that money in. I want to ask him about the fines—the concern that I expressed in my speech; it must be a matter that will colour Ofwat’s opinion. Will they go directly to the Treasury for general use and not for sorting out the water problems in London? If that is the case, is change envisaged?

Ian Pearson: I was coming on to that very point. Before I do, let me complete my train of thought on leaks. Ofwat has set targets that require Thames further to reduce its leakage rates by 7.6 per cent. by 2010. It is important to mention that Thames continues to be set demanding leakage targets by the regulator.

As for the powers that Ofwat has in respect of leakage, it can initiate enforcement action under section 18 and progress an enforcement order requiring that specific steps be taken. As my hon. Friend is aware, since 1 April 2005, under the powers of the 2003 Act, it has the power to impose financial penalties of up to 10 per cent. of company turnover. If in future Ofwat wishes to impose financial penalties based on leakage targets, it would have to undertake consultation on the proposal to set leakage targets as standards of performance. As I said, it has the power to initiate enforcement action and progress an enforcement order which would require a company to take specific steps.

In the first instance, Ofwat has to make a choice of action. My hon. Friend is right to say that the proceeds of fines are surrendered to the Treasury. However, Ofwat does have that other enforcement action option. For example, it could direct a company to carry out a specified programme of leakage repair or pipe replacement, if necessary, backed by fines. I do not want to pre-empt the decisions that Ofwat, as regulator, will want to take.

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Gregory Barker: The Minister has spoken comprehensively about the powers of Ofwat. My question was not only about its powers but about its remit. Does he believe that the remit is appropriate and fit for the challenges going forward? Can he tell us something about the remit? The 2003 Act was a gigantic piece of legislation. I cannot recall the detail, but I do not think that we had a particular problem with this aspect of the Bill. The Minister will recall that fluoridation was the most controversial element and the reason why we were unable to support the Bill on Third Reading.

Ian Pearson: I shall talk about the remit in a moment. First, let me say a few words about climate change and some of the comments made by hon. Members during the debate about that. I emphasise that all companies have to make an assessment of the impact of climate change as part of their 25-year water resources plans. They will continue regularly to update those plans on the basis of different views on climate change.

Let me just correct my hon. Friend the Member for Leyton and Wanstead in one of the comments that he made about Thames applying for a drought order that could allow for standpipes. That is not the case. A drought order restricts non-essential usage, and it is an emergency drought order application that would allow the use of standpipes. In a modern age, I would not expect any water company to move down the route of standpipes.

My hon. Friend also talked about supply pipe leakage. Water companies already operate schemes to assist with the repair and replacement of consumers’ own supply pipes that leak. This makes up a significant proportion—around 30 per cent.—of the total amount of leakage in all water companies. They are already carrying out work in this area. My hon. Friend and the hon. Member for Richmond Park (Susan Kramer) mentioned the prospect of drought orders in the run-up to the Olympics. I emphasise that water companies, including Thames Water, are preparing a 25-year water resources plan. These aim to balance supply and demand and to improve security of supply ready for 2012.

The hon. Member for Bexhill and Battle (Gregory Barker) made a point about tourism, but I see no reason why tourists who want to come to London for the summer should be worried about water supplies. The drought order that Thames is currently applying for should not affect the tourist industry and a clear message should go out to tourists, “Please come to London, have a great summer here and do not worry about the water.”

My hon. Friend referred to Thames’s desalination proposal and the issue of effluent re-use. He will be aware that an appeal is currently under way on the desalination proposal, so it would not be appropriate for me to comment. Effluent re-use is a method already used by other water companies, particularly by Essex and Suffolk. The Government are supporting water re-use technologies such as rainwater harvesting, grey water use and the recovery of effluent in appropriate circumstances. The code for sustainable homes will promote the use of alternative water sources. The hon. Member for Cheltenham (Martin Horwood) referred
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to that and to tax breaks. The Government’s scheme of enhanced capital allowances providing tax relief for businesses investing in sustainable water technologies including rainwater harvesting is, I believe, an important initiative.

Martin Horwood: Will the Minister put any pressure on the Department for Communities and Local Government to make the case for sustainable building compulsory rather than voluntary?

Ian Pearson: We are currently considering that issue. The hon. Gentleman also raised a general point about what he seems to see as the failure of water management and the overall regime. This is a point also alluded to by the hon. Member for Bexhill and Battle. I want to assure everyone that the Government are not complacent in this matter, but we do believe that we have a well-defined regulatory regime with clear responsibilities. We have an economic regulator in Ofwat and an environmental regulator in the Environment Agency. We do not have a command and control structure. My hon. Friend the Member for Leyton and Wanstead would perhaps prefer that we did and that we had direct control of the water industry, but that has not been the case since privatisation. That is why the concept of turnaround teams is not appropriate. Thames Water or another water company are independent water companies in a different position from a school or hospital. I hope that the hon. Member for Cheltenham appreciates that difference.

Martin Horwood: I thought that the Minister was in favour of the independence of schools and hospitals. On the regulatory regime, I asked a specific question about whether the concept of economic levels of leakage had reached the end of its useful life as an indicator that was driving the area of target setting. Will he comment on that?

Ian Pearson: Economic levels of leakage is a concept that has stood the test of time and is currently adopted by Ofwat. We discussed leakage rates and targets at the water meeting that the Secretary of State and I had with water companies, Ofwat, the Environment Agency, CCWater and others on 1 June. We agreed then that we want to review leakage rates and the leakage process. It is right that we have a look at that given the overall level of public concern, but I would not want the hon. Member to think that we do not think that there is utility in the current system. We believe that looking at costs and benefits to consumers is important and Ofwat has statutory responsibilities to ensure that the consumer receives a fair deal from the water industry.

I was also questioned on the overall regime more broadly by the hon. Member for Bexhill and Battle. I emphasise again that under a Labour Government we have moved away from what was an ad hoc planning regime prior to 1997 to a regime whereby companies produce drought plans and 25-year water resource management plans that will be placed on a statutory basis from 1 April 2007. That will give greater opportunities for the Secretary of State and DEFRA to be able to influence plans and it will ensure greater public accountability of the planning system.

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Gregory Barker: Will the Minister give way?

Ian Pearson: It would be helpful to move on and answer some of the hon. Gentleman’s questions before we run out of time. The hon. Member for Richmond Park referred to discharges of sewage into the Thames. There is an issue with storm water discharges including sewage overflows into the Thames. As she will be aware, a major study by a joint group including Thames Water, the regulators and the Government has looked at solutions including their cost to customers. We are working towards an early decision on the matter.

I will move on to the comments directly raised by the hon. Member for Bexhill and Battle. First, I will address metering. Recent suggestions in the press that national compulsory water metering is being considered are completely unfounded. As my right hon. Friend the Secretary of State and I said at the meeting with the water industry on 1 June, the water savings group is looking at accelerating metering in areas of water stress. Retaining regional variation is essential to any proposals, as are the need for proper public scrutiny and the protection of vulnerable groups.

The water savings group, which I chair and which includes representatives of the environmental and economic regulators—the water industry and the Consumer Council for Water—will report further in the summer on its metering proposals for water-stressed areas, and it will do so fully and publicly.

The hon. Member for Bexhill and Battle on one hand criticises the Government for having a lack of vision and, on the other, says that on balance the overall framework is right. He acknowledged in his quote from the article in the Financial Times that £17 billion of investment is going into the water industry in the period 2005 to 2010. He also said that fines are not sufficient, but I must point out that he voted against the Water Act 2003, which introduced the system of fines to give that option.

The hon. Gentleman said that there are no incentives in the system for Thames Water or others to run their businesses efficiently, but I cannot see how he can say that and then say that on balance the overall framework is right. The price cap regime provides strong incentives to companies to improve their efficiency, as does shareholder pressure. As I said to him when we last debated the issue, if expertise from other sectors can usefully be applied to the water industry we are certainly prepared to examine it and encourage the dissemination of new technologies to the industry.

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