§ Mr. Matthew Taylor (Truro and St. Austell)I am delighted to have won the opportunity to debate the water industry in the House today. I thank the Minister for her presence, especially as she has just responded to the previous debate.
This is not the first time that the House has debated the industry. Indeed, I have over the years secured several Adjournment debates on the matter. However, this is the first time that I have been able to do so under a Labour Government, and I believe that the huge concern that the issue throws up justifies the use of the Minister's time.
This is a critical moment for water policy. Water pricing is undergoing its periodic review, and the Government are consulting on water abstraction licences and charging for water. Moreover, the BBC is in the middle of a specially themed water week, on which I congratulate it—I have been interested in the wide range of programmes that have been shown.
The water industry has changed beyond recognition since privatisation. This is not the moment to debate whether the industry should have been privatised—suffice it to say that the Liberal Democrats would not have taken it out of public hands. However, we must now look to the future, not the past.
There is no doubt that issues relating to the water industry are extremely emotive. Problems are all too apparent, and scarcely a day passes without a water story featuring prominently in the national press: fat cat pay-outs; water shortages; huge profits for the water companies; huge increases in bills; and environmental destruction as the search for new water increasingly drains rivers, lakes, wetlands and underground reserves. It is no wonder that people are worried and angry.
Profits across the industry have increased by some 130 per cent. since privatisation—they have more than doubled. Share prices and dividends to shareholders have, unsurprisingly, shot up as a result, despite supposedly tough regulation. To pay for that, water prices for domestic customers in England and Wales have increased on average by 39 per cent. in real terms—in other words, prices have risen by almost half.
In my constituency, and in the rest of the region served by South West Water, the price increase has been much greater—since privatisation, average water bills there have more than doubled. That is because people in the area have been forced to pay an unfair share of the costs of maintaining what is a natural resource. In the south-west, 3 per cent. of the national population are being asked to pay to clean up a third of the national coastline. Local pensioners who rely on the state pension are on average paying more than 10 per cent. of that meagre state pension on bills for which no help is available. Again, it is no wonder that people are angry.
Investment has increased since privatisation. There is no dispute about the fact that there has been necessary investment in water supplies and in environmental protection. However, whereas customers have borne much of the cost of investment, company shareholders have received most of the financial benefits. The Consumers Association concluded that more than 80 per cent. of the water companies' investment has been funded by 471 increases in domestic consumer bills. That is despite the fact that we were told that privatisation was intended to allow greater access to private funds through borrowing and investment. Indeed, it was argued that privatisation would prevent big increases in customer bills, but that has clearly not happened.
As customers rather than shareholders have taken on most of the costs, it is little wonder that share prices and dividends have rocketed. Only a monopoly could get away with dipping into customers' pockets in such a way; in any other industry, customers would have left in droves. Water customers do not have that choice.
Water companies do not have an entirely positive record on investment either, and I hope that my earlier comments do not suggest otherwise. Perhaps most infamously, Yorkshire Water cut investment in preventing leakages, and left customers without water. Despite increased profits, water companies have largely failed to secure sustainable future water resources, and have not invested adequately in water conservation and distribution. Many of Britain's rivers, lakes, reservoirs and underground reserves have run dry through over-abstraction, which has caused major environmental problems and put at risk some of our best wildlife sites.
All too often, water companies present us with what they claim to be a stark choice—they say that they can stop increasing water bills, but only by scaling back investment in environmental protection. That is far too simplistic, and the water companies have got away with using that argument for far too long.
The regulator has struggled to get a hold on these slippery creatures; they have squealed against tough price regimes, but any so-called tough pricing formulas that have been agreed have led to further share and profit rises. Generally, as soon as the settlements have been announced, the share price has shot up, as the market has recognised that they are not tough at all.
The current review of water company prices will provide a key test. There is a danger that the review will turn into a debate about price cuts versus the environment. However, the review cannot be only about putting money into customers' pockets. It must be about setting water prices—and, perhaps more crucially, water company profits and share prices—at a level that will allow us to make good the environmental damage caused by the water companies in the first place at a cost that customers can afford. The regulator must in future consider a much broader range of issues.
Polling released by the Environment Agency shows that water consumers want environmental improvement to be funded from efficiency gains, and not necessarily price reductions. In fact, 95 per cent. of customers polled would prefer to receive the same water bill if that delivered improved environmental protection.
The water companies and the regulator should take note of that poll, as I am sure that water companies can afford to do much more for the environment. The Government must either make it clear that the regulator has a duty to consider environmental standards as well as prices—which could be effected in the current review of utilities regulation—or tighten environmental standards and make them part of the context in which the regulator has to work. He argues consistently that it is not for him to set standards, but he must recognise the standards that have been set. Let us ensure that the House and Ministers set the standards correctly.
472 English Nature has identified 80 sites of special scientific interest that need urgent action to protect them from the devastating effects of abstraction and sewage effluent. Almost half have been proposed as internationally important sites. Without action now, damage will be permanent.
The Royal Society for the Protection of Birds has released a list of what it believes are some of the most important of those sites, which I think it has made generally available. The sites range from the Yare broads and marshes in Norfolk to the River Avon in Hampshire and Wiltshire, where there is a decline in salmon stock, a general decline in the quality of the habitat and low flows, which are especially a problem on its tributaries. The list also includes Hewell park lake in Hereford and Worcester, highlighting serious concern about problems arising mainly from over-abstraction.
Other sites identified are the River Eden in Cumbria, Swanbourne lake in Arundel park in west Sussex, the River Kennet in Berkshire and Wiltshire, the River Wye in Gloucestershire, and the River Axe in Devon. The list is far too long to cite fully in the time available.
The status of an SSSI should in theory be enough to protect a site. The designation means that the Government have said that the site's preservation is vital to the UK's biodiversity. Indeed, the definition is that there should be no erosion of the sites—it is not that no erosion would be ideal, but that something less would be all right. In reality, though, an SSSI classification is simply not enough, as we know from the erosion that is taking place.
Worse still, in the most recent guidance to the water industry, the Environment Agency split the sites into two groups: core sites, which are of international importance and protected by European Union legislation—the so-called special areas of conservation—and non-core sites, which are protected by UK legislation. That division implies that the Office of Water Services and the water companies can give lower priority to protecting non-core sites. That split has never appeared in previous guidance, and is a backward step for environmental protection.
There is specific concern about the designation of SACs not being conterminous with SSSIs. I know from discussions with English Nature staff that, at one stage, it was suggested that all SSSIs should simply be nominated as SACs, but the previous Government were reluctant to allow that. In terms of protecting British biodiversity, there is no differentiation between the importance of sites.
The Minister must intervene to insist that money is spent to protect threatened sites. Thousands of millions of pounds are to be invested by the water companies in return for huge profits. The RSPB calculates that just £230 million more would be enough to protect all vital but threatened environments. That investment was always described as necessary—until the new guidelines came out. I hope that the Minister will find a way of getting the Environment Agency to withdraw the guidelines for water companies that differentiate between core and non-core sites. That would be a practical way of fulfilling the often-quoted Labour aim of putting the environment at the heart of Government.
The periodic price review will always be a necessary method of ensuring adequate funding for treating detrimental environmental impact, but that is really treating the symptoms, not the causes, of degradation.
473 Many environmental problems caused by the water industry involve abstraction in one form or another. A proper system of abstraction licensing would mean that many such problems would not occur in the first place. I know that the Government are undertaking a review of the issue.
The abstraction licensing system is inflexible and economically inefficient, and has resulted in huge environmental damage. It is clearly in need of reform. We must start managing water resources in such a way as to encourage more efficient use of water. That is the only way in which to reduce pressure on our rivers and wetlands. There is no point in spending a fortune putting right what is wrong, if we can avoid it being wrong in the first place.
One reason why the system is so bad is that it is based on what was considered important 30 years ago, when the environment was not under the same pressure, and overall demand for water was very much lower. Consequently, the Environment Agency inherited a backlog of abstraction permissions that have no proper place today.
The system operates on a "first come, first served" basis, and, in addition, many licences have been granted in perpetuity. Many were granted to allow more water to be taken than was required. In some cases, they allow more water to be taken than exists. The agency has to compensate abstractors if it revokes or varies a licence, which can be costly and time-consuming. The net effect is that many licences are effectively cast in stone, and as many as 200 wildlife sites are threatened with legal abstractions.
It is worth pointing out that the abstraction licences system is, furthermore, extremely inefficient economically. Charges are set at a level that recover only the administrative costs of regulating the system. Little attempt is therefore made to reflect the true costs of abstraction, which include enormous environmental damage.
In such circumstances, water is invariably undervalued. Without clear economic signals, those seeking to abstract have little or no incentive to use water effectively, and water is not efficiently allocated between users. Any new system must combine meeting essential water needs while ensuring sufficient water in the natural environment to protect and maintain biodiversity. I should like to suggest a few key elements that should be included in the Government's conclusions.
First, licences of right should be phased out, and existing licences should be required to meet current environmental obligations. That would bring the abstraction licences scheme into line with the system of granting consents to discharge effluent into the water environment, which already builds in a periodic review of consent without compensation, precisely to avoid the problems to which I have referred.
Secondly, the regulatory regime should be expanded to take into consideration abstraction from any form of irrigation, historic abstraction, de-watering operations and abstraction for navigational purposes. Thirdly, applications for new abstractions should include consultation with all interested parties and an assessment of the environmental impact of the proposal and the need for water. All licences should be clearly time-limited.
474 Fourthly, I should like incentive charging in order to encourage efficiency in the use and allocation of water. Revenue from incentive charging should be directed into projects of environmental benefit.
All those measures would be fairly easy to introduce—if the political will is there. I believe that Ministers want to take action. That will is far more likely to be apparent if the Government also have the will to reform the way in which everything is paid for. Water bills are likely to fall under the price review; the regulator has already made that clear. However, huge regional differentials in domestic bills are likely to remain, because each region will face different challenges in coming years. Unreasonable costs should not be imposed on regions with high infrastructure costs and major environmental challenges. If that were so, people would simply increasingly rebel against necessary environmental measures.
I have already mentioned the problems faced by the people in the South West Water region—but problems do not occur there alone. Customers of North West Water, and those served by Wessex Water and Yorkshire Water, will face particularly high costs of meeting the urban waste water directive. Lead will be a major concern in the north-west, and nitrates will have an impact on areas such as that covered by Anglian water. As time goes by, differential environmental impacts will hit customers very unfairly in some parts of the country, under a bills system that does not allow them any help.
The cost of cleaning up such regional problems will fall almost exclusively on local consumers, so the first change I advocate is the establishment of a new independent water services trust, funded by a 2 per cent. levy on excessive continuing water company profits, which would help to reduce unfair differences in water charges. It should be used to subsidise water projects of national environmental importance, and to encourage more efficient use of water.
Secondly, all customer bills could be cut if the industry relied more on long-term financing and less on customer price rises. There must be a requirement to fund more investment from borrowing and equity raising, rather than by dipping into customers' pockets through endless price increases. I agree with the regulator that excessive profits must be returned more quickly to customers. None of that will help share prices, but we should not be worried about that: shareholders have made a fortune.
The water rates system is unfair and out of date. Valuations date back to the 1970s, and there is no help for those on low incomes and no discount for those living alone. As a first step, moving to the council tax banding system would be far fairer.
For too long, environmental concerns have been seen as expendable—something that we can put aside while we concentrate on bringing down water bills. That does not have to be so. The recent Environment Committee report on sewage treatment, which I hope the Minister has seen, reached exactly the conclusion that ever-rising share prices of water companies prove that more could be done without increasing bills. My proposals would ensure both fairer prices and a cleaner environment.
The Conservative privatisation of water has failed to deliver. People look to Labour to do better. I hope that the Minister can brighten the proceedings at the end of our Adjournment debates this morning with some good news.
§ The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Angela Eagle)I congratulate the hon. Member for Truro and St. Austell (Mr. Taylor) on securing this wide-ranging debate, even if we have only a short time for it; clearly, we cannot begin to do justice in the time available to the many complex issues that he has raised, but I welcome the opportunity to respond.
At the water summit last year, my right hon. Friend the Deputy Prime Minister made it clear that we want a world-class, water-efficient and environmentally sustainable water industry. We should recognise that water is a necessity of life, and that that marks it out from any other commodity. We must take into account the need to give special attention to vulnerable households and the less well-off in our policy making.
I note and agree with many of the hon. Gentleman's points about privatisation, but I hope that he recognises that, as a new Government, we must work with what we have inherited from the previous Administration.
In the 1990s, there has been a sustained improvement in river quality, with a net upgrading of more than 25 per cent. of the total monitored length of rivers and canals in England and Wales; but we want improvements in quality to continue. A regulatory approach to prevent pollution or to enforce controls will often be needed, but there is a mix of measures that may also be relevant. We must get the best mix to realise our aims, be they regulatory, voluntary or economic.
We said last year that we want to explore water pollution charging. We issued a consultation paper in November on economic instruments for water pollution that sought views on a range of possible instruments, and set out in some detail a series of issues relevant to whether instruments could in practice be designed and could operate successfully. As my right hon. Friend the Chancellor said in his Budget statement, we are continuing that exploratory work.
The potential advantages of economic instruments are considerable, in that they can encourage more cost-effective improvements in water quality objectives as well as giving greater effect to the "polluter pays" principle; but to judge whether those advantages can be realised in practice, and what the wider consequences of a change would be, requires consideration of a set of complex issues.
Indeed, an acceptance that this is a difficult area is one matter on which responses to our discussion paper were consistent across the board. To provide answers to those questions requires considerable detailed work, and that work is continuing.
The periodic review of water company price limits for the period 2000–05 is already well under way. Indeed, the hon. Gentleman referred to it several times. As I said, water is not only a commodity but an essential for life, and it raises issues of public health. Water charges should be fair and affordable, particularly for the most vulnerable.
I am aware that the variation in charges to customers by water companies is a long-established concern, especially in the south-west.
§ Mr. Paul Tyler (North Cornwall)The Minister will appreciate that there are five Liberal Democrat Members 476 from the south-west present, and that, although my hon. Friend the Member for Truro and St. Austell (Mr. Taylor) referred to the national situation, there is a marked discrepancy between areas in the impact on households of water charges.
Under the previous regime, we were constantly told that the privatisation of the water companies had restricted their possibilities of obtaining European Union funding for major infrastructure projects, including the clean-up of beaches in the south-west. Is there likely to be a renewed attempt under the Labour Government to obtain outside grant support to cushion the impact of major infrastructure improvements?
§ Angela EagleThat is a technical question, requiring a detailed knowledge of European Union funding regimes. As I had no notice of it, I shall write to the hon. Gentleman, so that I can give him an accurate answer.
The current water charges are largely shaped by the present system of economic regulatory control. We are reviewing the underlying system of utility regulation. The review has been considering the structure of utility regulation across all the main privatised utilities, with a view to establishing a system of regulation that is seen as fair by all, but particularly by the consumer. Consumers have long seen the regulatory system as favouring the companies, and we want to redress that balance.
In examining water prices, Ministers will consider the level not only nationally but in terms of differences between companies. The Director General of Water Services will seek guidance from the Secretary of State on broad priorities, in the form of an open letter to the Deputy Prime Minister at the end of April. We hope that the accompanying material will give an idea of how specific issues bear on individual companies, as well as the broad national picture.
In the south-west, for example, we might expect the protection of coastal waters to continue to be an important, perhaps the paramount, issue, even allowing for the major investments that are being made in the current price period.
In considering what guidance to give the director general about broad priorities at national level, we shall certainly consider the implications for individual companies, not least in terms of the effect on water bills. Some of the ideas of the hon. Member for Truro and St. Austell would have implications for bills, but I shall come to that later. Higher-quality water has to be paid for by somebody, and we must get the right balance of who should take the hit.
The process will be followed up in the autumn by more detailed work to assess the financial implications for individual companies. The Deputy Prime Minister's guidance will be drawn up after he has invited public consultation on the director general's letter. We hope that as many people as possible will make their views known, because water prices and the way in which the money is spent are clearly issues for lively debate. We want to know what people think.
The companies are consulting their customers, my Department has commissioned independent research into customer preferences for environmental improvements, and the Environment Agency is conducting its own research through its regional advisory committees. We hope that those processes will provide a valuable input to the debate, and let us judge where people's priorities lie.
477 In the current periodic review of water prices, we shall consider the prices not only at national level but as they differ between companies. I hope that that provides some reassurances to hon. Members.
As we get further into the review, I am conscious that the environmental agenda is uppermost in many people's minds. Last autumn, my Department was involved in the process of identifying possible future obligations on water companies for investment to improve environmental quality. Companies were asked to cost those obligations on the basis of detailed guidelines issued by the Environment Agency.
The hon. Gentleman asked whether I could get the Environment Agency to withdraw the core and non-core guidelines that he was worried about. I can reassure him that those are a device to help with data gathering, and have no implications for lesser or greater protection of special sites, be they identified under European legislation or under our own. There is no need to withdraw them, because they are not as meaningful as he seems to think.
§ Mr. Matthew TaylorThat comment is extremely helpful. I know that most of those concerned will read the debate and accept what the Minister says, but it would be helpful if she could write to me to clarify that position and put it formally on the record.
§ Angela EagleI am happy to do that, but I hope that my assurance is worth the same whether it is given in the House or in a letter.
There are very real concerns about the need to protect all sites of special scientific interest. The Environment Agency guidelines asked water companies to cost the protection of any site of special scientific interest that was on the priority lists drawn up by English Nature and the Countryside Council for Wales and was affected by discharges from sewage treatment works or by water abstraction in the vicinity. It was especially important to distinguish the sites that are also special areas of conservation or special protection areas.
There is an important role for the conservation agencies in advising the regulators and the companies themselves on what needs to be done to protect the sites. It is vital that conservation objectives are properly established. Those objectives need to identify the habitats, plants and animals whose favourable conservation status is significantly influenced by water quality.
The conservation agencies will also need to identify the nature of the link between the water quality of the site and the conservation objectives. That is important because, if we are to ask water companies to make substantial investments to provide extra treatment, or to pay for it, we need to be as sure as we can that the treatment provided will be effective in providing the protection that such sites need.
There has been some debate about the nature of the legal responsibility placed on water companies, the Director General of Water Services and Ministers in relation to the protection of sites of special scientific interest. My officials are considering that. We are considering particularly the points made by English Nature and the Royal Society for the Protection of Birds. 478 In a sense, however, that is not the real issue. Protection of SSSIs is a key matter to which we must give serious consideration as part of the environmental agenda in the periodic review. However, it is only fair to point out that the Government are likely to have to make some difficult decisions to balance legitimate aspirations for environmental improvements against acceptable water bills for customers. Coming from the south-west, the Liberal Members who are here know that only too well. We must take a sensible view of how much can be done now, and how much we can plan for the future. To do that, we need clear objectives and a demonstrable expectation that the action we contemplate will prove beneficial in protecting these precious environments.
Protecting SSSIs and the environment in general is a continuing task. The pressures and responses do not come and go with each periodic review. Moreover, they change in nature over time. In future, a major pressure is likely to come from climate change and its impacts on water resources and water environment. Just as pressures on the water environment have changed and are likely to change further, it is necessary that the legal and administrative arrangements governing abstraction from it are sufficiently flexible to allow an appropriate response.
That is why we launched, as part of our water summit 10-point plan, a review of the water abstraction licensing system. The hon. Member for Truro and St. Austell had much to say about abstraction. The system was put in place in the early 1960s. Although it placed a framework of controls on abstraction, it was fettered from the start by what was perceived as the need to give all the abstractions that then existed what was called a licence of right, regardless of the effect that they were having on the environment. Much as we might wish that that had not been done, the fact is that it was.
Not only those licences but most licences for new abstractions granted since, right up to the present, were granted until revoked. Granting an abstraction licence without a time limit allows no account to be taken of our improved understanding of how the water environment works or of climate change effects on the availability of water for abstraction. It hampers redistribution of that resource among other abstractors who may be able use it more wisely, and encourages the notion that the water belongs to the abstractor, even though that has never been the legal position.
We are having to consider that aspect of the licensing system very carefully. The solutions of the hon. Member for Truro and St. Austell sounded simple and logical. If they were legally possible, I would be much happier. We are trying to be as creative as we can, but we are having to take careful legal advice about the implications of changing the abstraction system. We will produce the result of the review when in a position to do so. His seemingly logical solutions are not always deliverable without considerable costs in compensation, which are likely to be legally unavoidable.
We recognise that abstractions under a small proportion of existing licences are damaging sites specifically protected under the European Union habitats and birds directive or by designation as an SSSI. We have found that voluntary variation or revocation by the licence holder cannot be negotiated. If there is no negotiation, the Environment Agency should use its existing powers, on a clearly prioritised basis and on grounds that will stand the scrutiny of public inquiry, to vary or revoke the 479 offending licences. Unfortunately, in those circumstances, the agency must be prepared to pay compensation where necessary. That is the legal position.
We are addressing compensation arrangements in the short and longer term as part of the review. We expect abstractors to behave responsibly towards the environment, and to seek voluntary solutions wherever possible. We expect such proposals to come forward in the water companies' periodic review submissions.
Since taking office, we have encouraged a new spirit of co-operation between the Government and the water companies, based on firm regulation and the changing nature of regulation. My right hon. Friend the Deputy Prime Minister's water summit marked the beginning of that. We recognise the positive way in which the companies have responded to the challenges set them.
480 They have not just opposed us all down the line: they have co-operated, for which we are grateful. We recognise, as do they, that there is further to go. I hope that the hon. Member for Truro and St. Austell also recognises it, given the number of reviews and the system that we inherited.
With the Government's firm encouragement, we are confident that the water companies will achieve the level of care for all their customers and for the environment that is our vision, taking into account the elements of social justice and fairness that are so important in considering what, after all, is a necessity of life, not simply a commodity.
It being before Two o'clock, the motion for the Adjournment of the House lapsed, without Question put.
Sitting suspended, pursuant to Standing Order No. 10 (Wednesday sittings), till half-past Two o'clock.