Committee of Public Accounts House of Commons, London SW1A 0AA Tel 020 7219 5776 Email [email protected] Website www.parliament.uk/pac

Tamara Finkelstein Permanent Secretary Department for Environment, Food & Rural Affairs Seacole Building 2 Marsham Street London SW1P 4DF

29 July 2020

Dear Ms Finkelstein,

RE: Water supply and demand management

On 22 July, my committee held an evidence session with senior representatives from three water companies, , Water and . We challenged the companies on several important issues that affect the resilience of the water supply. A copy of the transcript is available on our website. This session built on our previous evidence session with you and colleagues from and the on 1 June and brought to light some further issues that we want to raise. As you know, our report following the previous session was published on 10 July.

I am writing to you now based on the evidence we heard to ask you to consider how you can best work together with Ofwat to address some of the fundamental barriers that exist to achieving water resilience. We recognise that water companies have a specific agenda but nevertheless we found our session with them enlightening on how to improve the system for managing water.

1. The balance between investment and price in the price review process

It is the Committee’s view that the regulatory regime does not adequately recognise the urgent need for long-term infrastructure investment to improve resilience and the emphasis on price is overplayed. In our recently-published report, we pointed out that water companies have had little help from government in how to resolve the tension they face in balancing their plans for investment with the need to keep bills affordable and recommended that you should give them more guidance. Water companies told us that the price review process takes three years and one water company estimated that the regulatory process adds £15 - £16 per year to each customer’s bill. And yet it is not clear to water companies what the regulatory framework is designed to achieve. One water company said that a 25-year investment horizon was needed to match the 25-year water resources planning process.

We heard from Thames Water that it had put forward proposals for an £11.7 billion investment programme which it claimed would keep prices flat over the price review period and had the support of 87% of its customers. Ofwat reduced Thames Water’s allowable investment programme by £1.6 billion. Thames Water told us that under- investment is potentially storing up long-term problems for future generations leading to inter-generational unfairness and we found this argument convincing.

We therefore reiterate our view that the government needs to shift the focus of the regulatory regime away from narrow compliance requirements and price (particularly where a company can show its customers are in favour of more investment) and towards encouraging more ambitious investment programmes by water companies. We will expect to see a robust response on this point in the Treasury Minute.

2. Leakage

As you know, we are deeply concerned at the lack of progress over recent decades in tackling leakage. We were encouraged to some extent by the progress that water companies report they have made in the last year. Thames told us that they had reduced their leakage by 15% in the last year taking their leakage to historic low levels and Yorkshire Water said that, across the industry, the biggest single-year reduction since privatisation had been achieved. But we also heard that Yorkshire Water had scaled back its ambition to reduce leakage over the next five years from 25% to 15%, as a result of Ofwat’s refusal to allow the necessary investment. This re-emphasises the need for a more open approach to allowing investment where water companies have ambitious and realistic plans.

In addition to publishing annual league tables, as recommended in our recent report, we would now like to see further action to recognise the high proportion (25% in the case of Yorkshire Water) of leakage that occurs from pipes on customers’ premises. There are different approaches to supporting customers in repairing their pipes. One company said that it paid for repairs in full, while the others did not. Given the contribution that repairing leaks on customer premises can make to tackling leakage overall, we would like the department to comment on proposal tha water companies bear responsibility for repairs on customer property in all cases.

Yorkshire Water also told us of a perverse incentive in the system whereby companies are penalised for carrying out mains repairs because the need for repairs is viewed as an indication of poor asset maintenance rather than as an important means of reducing leakage. Ofwat must review its range of penalties and incentives to rectify this position and ensure there are no other perverse incentives hindering progress in tackling leakage.

3. Metering

Water companies’ progress in installing meters varies a lot. and South Eastern Water had installed meters for 87% of their customers, whereas only 47% of Thames Water customers had meters.

All three water companies in our session acknowledged that they needed to push harder on meters as meters have an important part to play in encouraging consumers to reduce their consumption. Thames Water described meters as a Committee of Public Accounts House of Commons, London SW1A 0AA Tel 020 7219 5776 Email [email protected] Website www.parliament.uk/pac

“gamechanger” not only for reducing consumption but also for identifying leaks. Thames Water emphasised the benefits of smart meters that give real-time readings rather than meters that only provide a reading twice a year.

Given their impact on consumption and leakage, the Department and Ofwat must put greater pressure on the worst performing companies to accelerate the installation of smart meters.

4. Sewage

We heard from the water companies that they were making some progress on reducing the amount of sewage being discharged from combined sewage outflows and introducing event duration monitors. In the Thames Water area, there was recent reporting of discharge into the River Lea 91 times, lasting more than 1,000 hours, and in High Wycombe, there were 295 discharges, lasting for a total of 6,398 hours. In the Yorkshire Water area, discharges lasting about 100,000 hours were reported in the last year. Thames Water agreed with the Committee that such levels of discharges were not acceptable.

These events should only be occurring in “exceptional circumstances”. We are concerned by the frequency and volume of discharges and felt that water companies were complacent about their slow progress in tackling this. The government must raise the bar in its expectations of water companies for reducing the huge volumes of sewage that they are discharging into our water courses.

5. Chalk stream abstractions

We returned to the issue of abstraction from chalk streams, a focus of our earlier session, and the Chief Executive of the Environment Agency told us that “there remains a clear and present danger to chalk streams”. The water companies described the actions they are taking. Thames Water, for example, told us that they had reduced their abstraction from Chiltern chalk streams by two thirds and believed it is acting rapidly enough to protect and preserve chalk streams.

Wessex Water told the Committee that it is working with various chalk stream organisations to reduce its impact on chalk streams. However, it was highlighted that the problem will get worse with climate change. Although it said it had made progress, Wessex acknowledged that it needs to do more to reduce water consumption and water abstraction in future.

Again, the Committee felt that the water companies’ approach to this issue lacked urgency. In response to our recent report, we expect to see challenging timescales set by the Environment Agency for eliminating environmental damage from over-abstraction and sewage outflow from chalk streams.

6. Reducing water consumption The water companies made it very clear to the Committee that the “Love Water” campaign has failed and was a waste of time and effort. Yorkshire Water said that it failed because it had no resources and there were too many people involved. Meanwhile, Water UK and Waterwise have joined forces in a new campaign to help the public save water this summer, known as “Water’s worth saving”. This was an initiative that we were not made aware of at our evidence session with the Department, the Environment Agency and Ofwat in June.

All the water companies emphasised the efforts they were making to promote water saving. Thames Water said it had spent £160k on local communications on water consumption and had a further £300k allocated to its own campaign. Wessex Water emphasised the importance of social media in this regard and said there was a need for much harder hitting messages.

Demand for water has soared as people stay at home more during the pandemic. An expected surge in ’staycations’ this year means water usage is likely to be even higher over summer months. Water UK report that high temperatures in May saw demand for water go up 25% on average compared to normal. In some areas, peak demand was 40% above the norm. Despite local efforts, we continue to believe that there is a need for a coherent national campaign, particularly as the COVID-19 campaign has put so much extra pressure on water resources. In our recent report we asked the Department to develop a plan urgently, with adequate funding, to increase public awareness of the need to save water and to write to us by December 2020 to update us on progress.

Given the increased urgency of this matter, we now ask you to bring forward the development of this plan and report back to us on progress with specific proposals by the end of September.

7. Achieving net zero

In our previous session, we were not convinced that achieving the net zero target was sufficiently embedded in the oversight and regulation of the . We were told that both water companies and the Environment Agency have committed to net zero by 2030 but it was not clear to us how this would be achieved. We heard a lot more from water companies about their plans to achieve net zero, including the fitting of variable-speed pumps, bringing in more electric and hydrogen-powered vehicles and the use of new technologies such as pyrolysis and biochar to generate a higher proportion of energy from sewage sludge.

We agree with Wessex Water that resilience and carbon neutrality need to be at the heart of the regulatory framework. In our recent report, we asked Ofwat to set out how it will ensure water companies take full account of carbon emissions in appraising the investment options available to them. In addition, we ask the Department and Ofwat to demonstrate to the Committee that the incentives and penalties currently in place are sufficiently strong to drive the pace of progress needed towards achieving net zero.

I would be grateful for a reply by Wednesday 30 September. We will also publish your reply on our website. Committee of Public Accounts House of Commons, London SW1A 0AA Tel 020 7219 5776 Email [email protected] Website www.parliament.uk/pac

I am copying this letter to the Treasury Officer of Accounts, the Comptroller and Auditor General, Ofwat, the Environment Agency and the three water companies that gave evidence.

Yours sincerely,

MEG HILLIER MP CHAIR OF THE COMMITTEE OF PUBLIC ACCOUNTS