Members of the House of Lords Industry and Regulators Committee have asked Environment Agency bosses whether the water companies in England have made sufficient investment over the last decade, whether they should have been doing more over the last ten years and whether the Agency itself had lacked the necessary resources for its monItoring activities.

The Committee was pursuing this line of questioning with Environment Agency Chair, Alan Lovell and CEO Sir James Bevan in a recent evidence session as part of its current inquiry into the work of water sector regulator Ofwat.

British economist Lord Eatwell went into detailed questioning on the role of the water companies over the last decade and their investment levels, asking the EA Chair:

“Of course, in retrospect it is easy to say that investment has been severely inadequate, but will you reflect on the investment experience of the companies, which seems to have had a certain level of reluctance about it?”

EA Chair - “Should they have been doing more over the last 10 years?...some of them should have been doing it earlier"

Environment Agency Chair Alan Lovell

Alan Lovell replied:

“First, after privatisation, the level of investment generally in the water industry significantly increased. It is an open debate whether it should have increased more or whether some of the financial availability that was given to the water companies on privatisation was all put to the best possible use. …

“Should they have been doing more over the last 10 years? I would give very much the same answer that Sir James gave earlier: some of them should have been doing it earlier, and some did.”

“It is not a clear view from across the sector. There are instances where they should have been starting earlier; yes, I would agree with you.”

He explained that the historical picture is that bathing waters have become cleaner and cleaner over the last 20 years because of investments by the water companies to reduce spillage, regulation by the Environment Agency and collaboration with local authorities, describing this as “a really good news story.”

In contrast, he continued:

“This summer, because of the heightened public and media interest in sewage in rivers, which we understand, almost any spill on to a beach was reported as outrageous.”

“One spill is too many, but we have to recognise that the system is the system that the Victorians designed. In the short term, we want the companies to operate their facilities so that they minimise spillage. In the longer term, we need them to find alternative solutions.”

Since the Environment Agency was set up over 25 years ago, the Agency “already had, and will continue to maintain, a large and sophisticated monitoring network,” he added.

Referring to the question of EA resources, CEO Sir James Bevan said:

“There is an issue about modernising it, and we are constantly looking to make it better. There are issues about resourcing to fund up-to-date technology. How do you do better with less in a tight resource environment? You do it together. That is why we want to work with citizen scientists, water companies, which do their own monitoring, and others to give us the best possible picture we can get.”

Alan Lovell explained that the EA was continuing to enhance the monitoring it required with two relatively new monitoring systems being installed now, which would enhance both its own and the industry’s knowledge in two critical areas, as follows:

• flow to full treatment - the flow rate in litres per second that a wastewater treatment plant must treat before it can overflow
• event duration monitors, which give a view of when and for how long the overflows are made

Sir James Bevan went on to tell the Committee that the Agency welcomed the Government’s increase this year in the grant for the EA’s environmental work, "both to enhance the inspections and analysis that we do of water company performance and, critically, to do more inspections of farms."

Environment Agency CEO Sir James Bevan 

He commented:

“We are right to focus on CSOs, because the public care about them and we should be demanding better, but it is important as regards resource allocation and focus that we, the water companies and the other regulators do not focus simply on CSOs. We also need to focus on other aspects of water company performance and on helping farming farm in ways that are less polluting.”

EA CEO - " a few years ago we did not have the resources ....we did not have many boots on the ground"

Sir James said the further injection of government money would help, but a few years ago “we did not have the resources to put a lot of our people on to sewage treatment plants and sewage outfalls to check what was actually going on.

” The Agency was using its own monitoring, some of it remote, together with operator self-monitoring – a standard process whereby the water companies tell the EA what they are doing and the EA validates the data. However, he clarified:

“We did not have many boots on the ground, and that was a factor in it taking a while for us to recognise that there was a growing problem. As I said, that problem probably grew slowly; with another town, with another tweak of the climate, it gradually ratcheted up. There was not a moment when it suddenly became a much bigger issue, but it gradually became a much bigger issue.”

He emphasised that at the point when the data started to show much more frequent and much lengthier overflows, “that was the moment at which we started to investigate actively. It was also the moment at which, as we know, the media and the public began to take an interest.”

The actions of the Environment Agency were not driven by citizen scientists highlighting this in the media – the Agency was already doing it, he confirmed.

Lord Burns pressed home the point that it was NGOs and citizen scientists who began to spot parts of the problems “rather earlier than the regulators” and the whole question of monitoring, asking:

“whether you were slow off the mark in increasing monitoring and other people began their own monitoring ahead of you…..Is it only with greater public awareness that this has become a major issue?”

EA has spent over £180 million on environmental monitoring since 2016

In response to Alan Lovell’s statement that the percentage of storm overflows with permanent monitors increased from 6% in 2016 to over 85% in 2021, Lord Burns asked why the majority of storm overflows were not monitored pre-2016 and whether it was a technology issue, a resources issue or “just history.”

Saying that it was “probably a combination of all of those, and other factors, Sir James Bevan emphasised that citizen scientists “were not the first people to call this out” and that the Environment Agency were the people who identified that there was a problem at CSOs and required the companies to fit monitors. The EA had also spent over £180 million on environmental monitoring since 2016 and carried out about 90,000 water quality sampling visits every year, at about 13,000 different locations.

According the EA chief, because the Agency had deliberately made the data transparent, this had in turn encouraged people to become citizen scientists and to report. However, he went on to warn:

“ We welcome that monitoring, but it is different and, in some cases, of a different quality or evidential standard from the monitoring that the Environment Agency has always done.”

In response to a question from the Committee Chair Lord Hollick as to whether the Agency was also highlighting the problems to the Government and to Defra, Sir James replied:

“It was not until the data started to show and, frankly, the media started to assert that there were problems that we began very substantive conversations with the Government. I do not think that is necessarily unreasonable.”

Lord Eatwell - "could you have been using your existing powers more forcefully, in retrospect?”

Referring to the EA’s recent call for much higher fines for pollution incidents, and even for chief executives and board members of companies that are responsible for serious or deliberate pollution to be given prison sentences and for company directors to be struck off, Lord Eatwell asked:

“To what extent is that really possible within the current framework? If it is possible in the current framework, could you have been using your existing powers more forcefully, in retrospect?”

Alan Lovell explained that the other mechanism available to the EA - variable monetary penalties enables the Agency to impose a fine of up to £250,000, commenting:

“ We are quite delighted that one of the early announcements of the new Secretary of State was an intention to raise that to £250 million, a 1,000-times increase, which will give us a much bigger stick with which to go after bad behaviour among water companies.”

Lord Eatwell replied that having been a regulator himself, he appreciated the fact that prosecutions are extremely expensive and lengthy and enquired:

“We have been told that your approach to enforcement, with the movement towards civil sanctions and the decline in prosecutions, has been affected by cuts to your grant. Is that accurate, or is it just your being pragmatic, knowing that criminal prosecutions will be tremendously expensive and take a lot of time?”

EA CEO “prosecution is one of the key weapons ... we are doing less of it... partly down to resource constraints"

Sir James Bevan responded:

“Prosecution is one of the key weapons in our armoury. We are doing less of it. That is partly down to resource constraints. It is also because we are broadening the palette of options open to us and because we are trying to make sure that we apply the 80/20 rule by focusing on the 20% of things that are making 80% of the difference.”

Lord Eatwell also asked the EA Chief whether he thought the Agency should have further powers or resources in this area and whether, basically, it was underfunded.

Sir James continued:

“We have most of the powers we need… The resourcing is an issue, but we will always do the best we can with the money we have. ..

“There has been an issue with the funding that we get from the Government to fund enforcement and prosecution because, for various reasons that the Treasury has imposed, we are not allowed to use the £200 million, on average, that we get every year from the water companies to fund the cost of regulating them, to prosecute them.”

Pointing out that the only money the Agency had to enforce and prosecute came in the form of grant, over the last 10 years, the overall grant that the Environment Agency has had from successive Governments for its environment work had diminished, he said, putting pressure on both numbers of people and resources for prosecution.

EA Chair – “do we need major capital expenditure? ….I think there is general recognition that more investment is required”

Lord Reay raised the question of challenges in ensuring future water supply due to climate change, asking whether this could addressed by greater transferring of existing water resources around the country or whether there was a need to invest in new water sources, including reservoirs.

Alan Lovell described this as a critical issue, saying:

“Do we need major capital expenditure? The NIC thinks that we do, and I am inclined to agree. It can be done partly by transferring water from one part of the country to another, but to me it feels surprising that we shall go from 1991 to at least 2029 without a major reservoir being built in this country. I think that that is leaving us exposed.”

In his opinion, the current PR24 price review that Ofwat is conducting will be critical to enable some investment by the water companies to take a step in that direction. He continued:

“I think there is general recognition that more investment is required. Striking that balance in PR24 will be a very important task for Ofwat. It will be very important for us to be fully engaged with it in that debate.”

Lord Cromwell - widely accepted that environmental issues and water supply issues will need very substantial investment?

Lord Cromwell commented:

“I think you would both agree that it is widely accepted that the environmental issues and water supply issues we look at will need very substantial investment. Is it possible for the water companies to finance that, and is it right that they should? What about agriculture? What about housing? What about, indeed, a need to call on public money to enable the scale of investment we are talking about? Can they do it? Should it be asked of them?”

Thames Tideway - an interesting model that could be rolled out for other major investment programmes

Thames Tideway Tunnel - completion of final section

In response, Alan Lovell flagged Thames Tideway as an interesting model that could be rolled out for other major investment programmes “because of the way in which it spreads the cost on a large number of people so that the individual impact is manageable.”

Sir James Bevan commented:

“Who should finance it? Ultimately, we all will, either through bills that we pay to water companies or through general taxation, which turns into government funding. What we are debating is the balance. Is it worth it? Of course it is, because the cost of not investing is far higher than the cost of investing. Done right, these investments will also drive growth, so we should definitely go ahead with them.

Lord Cromwell said the Committee had heard some criticism of the variety of funding sources and policies on water, and that they are not sufficiently co-ordinated. If that was the case, “do we need some sort of national water strategy to pull all the elements together, or is that just a behemoth?” he enquired.

Alan Lovell said that in his opinion a national water strategy was needed and that the EA was on the case with that, in conjunction with Defra and Ofwat, emphasising that it was “very important that this remains high on the government agenda” and that it was one of the things he regarded “as the most important to see.”

Returning to the issue of investment and funding, Lord Blackwell said there was “a perception, and a number of people have commented, that investment by the water companies across the board has not been as high over the last decade as maybe it could or should have been.”

He asked the regulators whether there may have been “too much emphasis given to keeping prices low” which had restricted the level of investment that the Agency would have liked.

Lord Reay told the EA Chair and chief that the Committee had heard that water companies had become “increasingly leveraged in order to pay dividends to shareholders, despite poor environmental performance” and questioned whether the high levels of dividends and excessive pay of some of the companies could be justified when the environmental performance of the sector had been so poor.

According to Alan Lovell, the worst mistakes on the dividends were made relatively early in the period after privatisation, after the water companies were financed with the “very liberal, strong balance sheet.”

“The idea was that the borrowing should be for investment in infrastructure, and it did not always happen,” he said.

Sir James Bevan -  I am not "alone in thinking that chairs and chief executives should be paid by results"

Sir James Bevan added that he would only underline that the financial position, the investment plans and the leveraging of companies was a matter for Ofwat, while dividends and executive pay were matters for the water company boards and their shareholders.

“That said, I do not think I am alone in thinking that chairs and chief executives should be paid by results, including the extent to which their companies provide the water that this country needs, and in thinking that there should be some consequences in pay packets, in dividends or in the courts when companies fail to deliver”, he added.

According to Lord Agnew of Oulton, given the performance of the water companies over the last few years, the elephant in the room was whether the companies could really be trusted with a greater role in protecting the environment.

Referring to the cost of upgrading the infrastructure and the potential figure of a couple of hundred billion pounds, he commented:

“Nobody really knows, but, of course, as long as numbers like that are floating around, that is their excuse for not doing anything.”

Sir James Bevan suggested that smart chief executives and chairs of water companies know that they have to be serious about this, saying:

“ It is in their own commercial interest to invest both in water security and in water quality for the long-term health of their own business.”

Alan Lovell - "personal view water bills should increase, but this would require “a very good backstop of social tariff”

The evidence session finished with a discussion around how to bring about public behavioural change, with Lord Cromwell saying it is very hard to do and asking:

“Does that mean that our water has to get a lot more expensive in future to encourage people to use it more wisely?”

Alan Lovell said that in his personal view water bills should increase, but this would require “a very good backstop of social tariff” to make sure that those who cannot afford it are not hurt by it and that awareness of the value of water was something that should be enhanced.

Sir James Bevan agreed that we should be looking at water pricing and that a signal that it was a valuable commodity, including in price, was likely to drive some consumer behaviour change.

However, in his view, it was mostly about changing culture:

“If you have a message, and if enough people understand why you have that message, and you keep repeating it, you will eventually get the behaviour change you want”, he explained.