Thames Water

My Lords, I thank the Minister for answering on this Statement in your Lordships’ House. Thames Water has scandalised our country while asking its customers to pay more for less. For the sake of customers and taxpayers, we now need stability, not uncertainty. This Statement has not announced any change to the situation of Thames Water. There is a recapitalisation proposal and Ofwat must evaluate it. All that the Statement has announced is that the Secretary of State has sent a letter to Ofwat’s chair outlining her own views, but she has made it clear that it does not count as direction from the Government. What, then, does this letter hope to achieve exactly? What specific changes to the proposal does the Secretary of State want? When do we expect Ofwat’s decision, and how long will the public consultation on it take? I want to correct the record on one point that was made in the other place. It was in 2006, under this governing party’s last Government, that Thames Water investors acquired and leveraged the company. Why was action not taken then to prevent this happening? During the passage of the Water (Special Measures) Act, we proposed strong action against those responsible for failings. Can the Minister confirm that the penalty regime will not be watered down as reforms to the water sector continue to be rolled out? In those debates, we sought assurances from the Government and attempted to amend the Bill such that, in the event of a special administration regime, consumers would be protected from any liability in a bailout and the Secretary of State could impose leverage limits on water companies to prevent a recurrence of this appalling situation. The Government did not accept these amendments. Does the Minister have any regrets or a change of view on these points? The Minister has herself stated: “Investors would not have the confidence to invest money if the special administration regime could be triggered without allowing a company to rectify any performance issues ”.—[Official Report, 4/11/24; col. 1373.] Can the House have the same assurance again, and will it still stand after the Makerfield by-election result and any future leadership change? A special administration of Thames Water risks making lenders to Thames Water whole. That could represent a 50% gain on the current traded value of Thames Water debt. Can the Minister clarify that, in the event there is a special administration, this would not be the case? It is important that this situation is clear so we can be confident that the creditors negotiating to recapitalise Thames Water do not stand to win if these negotiations are unsuccessful. There are still reckless calls for nationalisation. That could cost the taxpayer £20 billion and would drive away investors. It is money that could and should be spent on our nation’s defence, the first duty of any Government. Further to that, would a nationalisation process increase the risk that lenders were made whole and generated a profit out of the failure of Thames Water? We keenly await the upcoming water reform Bill to address the failings of regulators, not just companies. The Government hope to introduce a new single regulator, integrating the functions of Ofwat, the Environment Agency, Natural England and the Drinking Water Inspectorate. How can we be confident that Thames Water’s process will continue to operate smoothly with this organisational uncertainty? As we have seen this week in other areas of the Defra brief, we desperately need the Government to get a grip of arm’s-length bodies, and we will scrutinise the provisions in detail when the Bill comes to this House. In relation to this question, I declare an interest, as my daughter is an employee of one of the funds named in the press as a participant in the Thames Water recapitalisation. I have asked quite a few questions of the Minister, and I hope she is in a position to answer them and elaborate on the purpose of this Statement. I very much look forward to her response.

My Lords, I want to return to a point I raised in this House only last week when I asked whether the Government were delaying the clean water Bill pending resolution of the Thames Water situation. We were told then that the Government were ready to deploy a special administration regime, if required. Yesterday’s Statement raises a straightforward question: what has changed? We are told that the Secretary of State has set out early views in a letter to Ofwat, but the underlying facts have been evident for so long: specifically, a highly leveraged company, prolonged financial fragility and ongoing environmental failure. Can the Minister share what threshold the Government are applying for intervention? Given that Thames Water has been operating without an investment-grade credit rating for a long period, does the Minister consider that this constitutes a breach of financial resilience expectations and, if so, why has it not triggered special administration, particularly on performance? The Secretary of State has said she is not convinced by the latest recapitalisation proposal. That is significant. On what specific grounds has that conclusion been reached, and what tests are the Government applying to determine whether any proposal is credible, financeable and in the interests of the consumer? Sixteen million customers are trapped in this monopoly. Does the Minister accept that a substantial proportion of customer bills is already being directed towards servicing debt? Indeed, one-third of every Thames Water bill is already spent solely on servicing the company’s massive debt. In assessing the current proposal, what explicit protections are being put in place to ensure that customers are not required, either directly through higher charges or indirectly through weaker outcomes, to absorb the cost of that debt? Related to that, reports suggests that creditors are seeking adjustments to regulatory expectations. Can the Minister confirm whether any relaxation of performance or environmental standards has been proposed and share with us unequivocally whether the Government would permit such an approach? On environmental performance, Thames Water was responsible for over 100,000 hours of sewage discharges last year. How are the Government weighing that record when considering the suitability of the current ownership and the current financing model? Finally, the Government have repeatedly stated that special administration remains an available option. Can the Minister clarify what specific conditions would need to be met for that mechanism to be triggered, and over what timeframe? Since the Conservative privatisation over 35 years ago, some £85 billion of bill payers’ money has gone mostly to overseas shareholders and executives, through things such as bonuses. Is it not time to blow the final whistle on this failed experiment and put the interests of the public and our environment first?

My Lords, I thank noble Lords for their questions on this Statement. There are quite a lot of questions, so I will do my best to cover them but, as always, if I have missed anything out, we will get back to noble Lords. First, it is important to point out that this letter is the Secretary of State simply offering her preliminary views. That is in line with the duties in Section 2 of the Water Industry Act 1991. She puts forward those preliminary views for Ofwat to consider when it is making its decision, because it is important to be clear that it is for Ofwat, not government, to decide whether it rejects or accepts the proposal. Of course, the Secretary of State’s preliminary view, which is why we are making the Statement, is that she is not convinced that the proposal in its current form delivers for customers or for the environment, as mentioned by the noble Baroness, Lady Grender. Also, while the company is considered to be stable at the moment, we stand ready for all eventualities. That includes being ready to apply for a special administration regime, if that becomes necessary. It is also important to clarify that there is a very high bar for the use of a special administration regime. The law states that special administration can be initiated only if the company becomes insolvent, or if it is in such serious breach of its principal statutory duties or an enforcement order that it is inappropriate for the company to retain its licence. Regarding creditors and shareholders and what they would recover upon an exit of a SAR, again, the purpose of a special administration regime is not to bail out water company shareholders or creditors; it is to ensure that water and wastewater services continue if a water company fails. When a water company exits from special administration, which could be either via rescue or through transfer, the special administrator, not the Government, determines the level of repayment to creditors by applying the relevant insolvency legislation. The level of recovery that creditors may expect will be in accordance with the relevant insolvency legislation, and it is very unlikely that all creditors’ debt would be repaid at the end of a special administration, because of the priority order of repayment. I hope that helps answer some of the questions from the noble Lord, Lord Roborough. The noble Baroness, Lady Grender, discussed the performance grounds. To apply successfully for a special administration on performance grounds, a strong evidence case must be made to the courts. In determining whether to apply to the court for a special administration regime, the Secretary of State must have regard to all the relevant facts and matters pertaining at the time and act in accordance with the applicable statutory duties. On the environmental obligations raised by the noble Baroness, all companies must continue to meet their statutory obligations to customers and the environment, and regulators will continue to have a range of enforcement tools at their disposal. It is not possible for creditors to ask for the debt to be repaid during a special administration regime because there is a moratorium on legal proceedings during a SAR that takes away a creditor’s ability to enforce debt repayments. However, employees have some protection in being able to recoup certain debts, such as unpaid wages, via the Redundancy Payments Service. On customer impact, we have always been absolutely clear that Thames Water must meet its statutory and regulatory obligations to its customers and the environment. The Secretary of State has set out her preliminary views on this to Ofwat in the letter. The next steps are of course for Ofwat to decide. However, many concerns have been raised about not just Thames Water but other water companies and their approach to the environment, which is one of the reasons why, as a Defra priority, we will bring in a new water Bill later this year. A key element will be looking at environmental impacts. People are obviously frustrated. One of the very first meetings I had when I became a Minister nearly two years ago was about Thames Water. It has been going on for a long time—it was going on before this Government. The business has been underperforming now for 15 years, which is a long time. It has regularly missed its performance targets and has racked up too much debt. It was right that the Secretary of State wrote to Ofwat to set out her preliminary thoughts on the next approach. Ofwat, with the support of government, has been in discussions with the London & Valley Water consortium—a group of Thames Water’s creditors—on the terms of the proposal being put forward. Clearly, a recapitalisation process of this size is complex and takes time. Although we will establish, through the forthcoming Bill to which I referred, a new, single, powerful regulator to replace Ofwat—so that we can work better when water companies fail in future—until the new regulator is established, Ofwat’s role remains. Therefore, it is still Ofwat’s decision on how we go forward. I want to be clear that the Government are working with all water sector regulators to monitor carefully the performance of all water companies, including Thames Water. As I said earlier, if there are ever any problems, we stand ready to intervene, should it be required, because it is important that the continued provision of a vital public service in water supply and wastewater is continued. We will always act to protect the public interest. We believe that any proposal has to be in the best interests of both consumers and the environment. It is important to note that the Secretary of State has written at this stage because we need time to understand the proposal and work it through. There are about 16 million Thames Water customers, so any decision that Ofwat makes must be done in the full understanding of various opinions, as well as on what is best for consumers and the environment. I hope that I have covered most of the questions raised; I will write if there are any further answers to give.

My Lords, the Minister will be aware that it is not necessarily just ownership of a water company that is the deciding factor, and there are other jurisdictions in which leakage and sewage going into rivers and the sea are problems. I think of Denmark, where the vast majority of water companies are in the public sector, and sewage spills and water pollution were serious issues in the recent election. I ask for an assurance from the Minister that, when the water Bill reaches this House, the cost of regulation will not increase for water companies, and that they will be able to use the resources they have to deliver wastewater, and clean water to consumers, and to ensure that they have the infrastructure in place.

Clearly, we need to see the water Bill to see the detail on that and many other issues that people have a particular interest in. The Government are clear that we do not want to have overburdensome regulation. That is important. The regulator is there to help support the industry and make sure that it works properly for customers and the environment. I am sure that the detail of that will be considered in the Bill, but it is not the Government’s approach to make regulation more difficult for consumers and organisations.

My Lords, the dire position of Thames Water is, above all, a regulatory failure. Does the Minister accept that Ofwat’s record as a regulator has been absolutely woeful? Above all, it failed to require water companies to invest over a long period of time in appropriate infrastructure of all kinds.

I suggest to the noble Lord that the fact that we are talking about removing Ofwat and bringing in a single, more powerful regulator in the water Bill answers his question. It is not just about who the regulator is but about what the regulator’s priorities are: what is it setting for water companies to achieve? There has not been enough investment in infrastructure, and that has been one of the failures of regulation over the past 20 years.

My Lords, when the water industry was privatised over 30 years ago, it was almost entirely debt-free. Since then, as the Minister said, debt has been racked up. The Minister said that there will be provisions in the new water Bill for creating a new regulator. Further to the previous question, because of Ofwat’s pathetically inadequate attempts to regulate the tide of corporate greed, will the new regulator be able to check racking up greater and greater debts, unless it is specifically for investment to serve its customers?

The detail of the regulator will be in the new Bill. The noble Lord has mentioned this to me a number of times. That companies have been allowed to generate debt to use the money has been a cause of many of the difficulties that we see today. The way that water companies have been able to increase the debt is not acceptable. That is one of the key things that we want to work on. If there was not as much debt, we would not have so many problems. That is one of the reasons why water companies are failing on all sides—whether investment or customer support.

My Lords, I declare my interest as set out in the register. Thames Water bills went up around 40% to pay for the current AMP cycle. However, the present company structure means that it will not be able to make the investment to meet the targets under the present AMP cycle. Indeed, investment is far below what is needed to meet the present AMP cycle’s objectives. Given that, is Thames Water not in breach of its licence conditions? Therefore, should Ofwat not remove the licence, put the company into special administration and look at a measure—through either nationalisation or mutualisation, or by bringing in other companies—to fill the gap and make sure that the money is spent on the environment?

My understanding is that that is not the assessment by Ofwat at the current time. However, the noble Lord makes some good points. I am sure that the Secretary of State and the Minister for Water meet regularly with Ofwat. We are watching very closely for when or if there is a considered view that it has tipped into that space.

My Lords, do the Government agree that Thames Water needs to put in a lot of new, larger waste pipes and an extra reservoir to cater for the extra population that we have experienced in the area? What is the Minister’s rough estimate of how much capital this new investment will take?

On the basis that I do not know how many pipes, what size reservoir and where it would be, it is difficult to assess a capital investment. The Government have a reservoir policy. We have committed to building new reservoirs. No Government have done that for many years now, which is partly why we have issues with supporting housing development and important infrastructure development in the south-east. We are working closely with the Ministry of Housing, Communities and Local Government because we must get this right to ensure that our economy is fit for the future.

I agree with the Minister that debt overburdening of the company was a major cause of its problems. She has heard me call many a time for the new regulator to have the proper understanding of financial engineering, which the current Ofwat team simply did not have. That enabled the companies to get away with this. I underline this again because it was a simple inadequacy of understanding of financial engineering that enabled this situation to occur.

The noble Lord is correct that how debt was leveraged was unsustainable. It has led us to a situation where companies—not just Thames Water—are saddled with a ridiculous amount of debt that the regulator should have had more of a grip on. I am happy to discuss further the noble Lord’s thoughts on this. We have had discussions before. When we come to the next water Bill, making sure that we get the regulator correct will be crucial.

My Lords, on 9 June the Minister said that “we consider the regulated capital value of the water sector to be the closest proximity for the total value of the sector’s debt and equity; it is currently £107 billion ”.—[Official Report, 9/6/26; col. 1241.] On that basis, Thames Water is worth £21.893 billion. The consortium London & Valley Water has offered £3.35 billion to take control. Can the Minister explain why the Government believe that regulated capital value is the closest proximity to total value?

It is because that is the generally understood figure. That is why we go with that figure.

My Lords, the action by the Secretary of State in her letter is good. I fully support what she wrote regarding this proposition. Without going back on all the leverage, the main leverage issue on Thames Water happened in 2006. For some reason Ofwat did not follow entirely the strategy policy statement that was set out by my noble friend Lord Gove when he was there, but only for Thames Water. There clearly is an issue in that regard. Would the Minister consider working with her fellow Ministers on changing the geographic reach of Thames Water? The risk is that it is too big to fail when it should not be. Meanwhile, it has shown that it can do projects well, on such things as the Thames Tideway tunnel, which it did in partnership with Bazalgette Tunnel Ltd.

That is an interesting point and it is being discussed. Thames Water is huge and has quite different catchment areas. I remember going on a boat to look at the successful tidal project in London that the noble Baroness talked about, in the early days. It was fantastic. However, you then have the much more rural, upstream part of Thames Water. It is very difficult. It is for whoever ends up owning it—what do they want to own? If you take away part of it, does it become less attractive? It is a complex issue but I know that it is being discussed.

Like many other people in this House, I am a Thames Water consumer, so I am particularly interested in this discussion. Will whoever takes over from Ofwat have the power to require Thames Water to invest?

As I said, we have the water Bill coming through. These issues are going to be put forward in a water Bill. They will be debated and discussed in a water Bill. We need to get it right. Thames Water has some particular and immediate problems, so it will be interesting to see where the company is by the time we reach the water Bill.

My Lords, surely if a company is highly profitable, no capitalist—or even trade unionist, for that matter—can object to shareholders receiving dividends or directors receiving bonuses. It is called sharing in the proceeds of success. But if a company is heavily indebted, surely it is completely unethical for it to borrow money to pay those dividends and bonuses. Is there not an argument for calling to account those former Thames Water CEOs who allowed this to happen?

I absolutely agree that it is unethical to raise money to pay yourself bonuses when you have not improved the company: all you have done is get it into more and more debt, and you have had to go into further debt to get the money out of it. I know that is one of the things that has outraged people the most, which is why we very quickly brought in the Bill that came in at the start of the last Session and why we are continuing to do everything we can to try to clean up the water industry.

My Lords, I share the Minister’s frustration and welcome the Government’s efforts to grip the issue. Does she agree that, whatever happens to the ownership of Thames Water, substantial investment will be required in water in the south-east? Does she also agree that a degree of realism is necessary about how much money can be recovered from private investors, given how thinly capitalised Thames Water is? Therefore, if consumers are to be protected, it will be the taxpayer who ultimately ends up footing the bill.

We do not want to put this on to consumers, because it just does not seem to be the right approach. The noble Lord is absolutely right that serious investment needs to take place in the water industry, not just in the south-east but right across the country. Every water company, whether it is United Utilities in the north or South East Water in the south, needs to get a grip on investment to ensure that its infrastructure is absolutely fit for the future. Where that investment comes from is something that will be discussed further, I am sure, with Ofwat.

My Lords, picking up on what the noble Baroness said about reservoirs, at the launch of the CCC adaptation report the other day, many people were saying that we were not going to get the next reservoir for another 10 years and that the schedule of reservoirs was extremely slow. Can the Minister update the House on where we are with building new reservoirs, especially as we are going into dramatically warmer temperatures in the world at the moment?

The Government are very keen to crack on with building new reservoirs, which are an absolutely critical part of the infrastructure we need for the future. One reason for bringing in the Planning and Infrastructure Act was to look at how we can speed up planning for nationally significant infrastructure projects, because one reason we do not have any new reservoirs is problems with major projects. The whole purpose of that Act was to speed this up. I do not know whether 10 years is an accurate figure: I would hope that we could crack on more quickly than that.

My Lords, given that Thames Water was saddled with unsustainable debts and a very poor level of investment, does the Minister accept that, however justified, continuing to levy massive fines on a company for underperformance will simply and inevitably worsen its financial situation, and therefore that the suggestion of a cap that is being made by the potential buyers and funders does have a degree of good sense to it?

I can see where the noble Baroness is coming from. The difficulty is that if a company continues to pollute regularly and other water companies are being fined, where is the fairness and logic in letting one company off the hook because it has got itself into a worse mess? These are difficult, complex areas to get right. It is very much Ofwat’s decision, and I am sure the Government will continue to discuss such matters with it.

Pursuant to the Minister’s kind reply to me, I welcome the Government’s wish to have more reservoirs. She might like to ask about the Abingdon reservoir plan for the Thames area, which has long been around. It was much needed when I was MP for my local area and is even more so now.

I know the Abingdon area applications very well. In a previous life I worked in communications on major infrastructure, and I remember it crossing my path probably 20 years ago now.

My Lords, part of the reason why there have not been quite so many new reservoirs in such a long time is that the water industry has got more efficient in its distribution of water. I am conscious that there is still leakage. The capacity of the Hanningfield reservoir in Essex was expanded by 50%. There is no doubt that some of the challenges in housing are to do with nutrient regulations. But bearing in mind what other noble Lords have said, would it be worth while for the Government to accelerate the creation of a special purpose vehicle to get on with the Abingdon reservoir? Anglian Water is getting on with its two planned reservoirs and is going through the planning process as we speak.

That is an interesting suggestion by the noble Baroness and one that I am happy to take back to the department.

My Lords, if Thames Water was a school, it would already have been put under special measures. You would not wait. As the noble Lord, Lord Birt, said, the regulation by Ofwat has been woeful. Is it still involved? Is it going to wake up to the fact that under its watch Thames Water has got to where it has? Something more drastic needs to be done. I do not trust those who have been doing the regulation to continue doing it, because it has been absolutely woeful. I lived in the Thames area for nearly 27 years, so I knew a little bit of what was going on. Now that I am in Berwick-upon-Tweed, I am very grateful that our water is doing much better.

I am sure the noble and right reverend Lord will be pleased to hear that something drastic is about to happen. Ofwat is the regulator currently, which is why it is its decision as to whether to accept the proposal referred to in the Statement. But the water Bill, which we will bring to Parliament shortly, removes Ofwat and brings in a new regulator, which we are determined to make manage the water industry in a much better and more effective way.

My Lords, I must apologise to the House. Apparently, Members have to be more specific about their interests. I am a senior shareholder in the Water Retail Company. Are Defra and Ofwat looking at the implications for the non-household sector if Thames Water goes bust?

The simple answer is that we are considering all possibilities and eventualities. We want to have everything on the table, because the most important thing is that we continue to maintain this absolutely vital public service.

My Lords, when we eventually get to the point where we have a new regulator, what will be done to make sure it is not staffed by the people who already run Ofwat? One of the problems we have had in this whole debacle is that there is a very chummy relationship between people who are very senior in the same industry. How will the Government navigate that to make sure we do not just go back to the same old problems under a different management design?

I am not in a position to comment on chumminess, because I do not know the people involved. The whole point of bringing in a new regulator is to improve things and get the right focus, so that we can really shake up the water industry and make sure that it is fit for the future. There is no point in bringing in a new regulator if you are just tagging the old one with a new name.

One of the problems in regulation is that those who are regulated are able to pay substantially greater salaries and employ better experts. Are the Government going to look at properly funding the new regulator so that the ability of those employed by the regulator is greater than that available to those who are regulated? The financial engineering that occurred did so because those who were regulated were able to devise very clever plans which, no doubt, Ofwat did not have people able to spot. It is a common problem in regulation and one that the Government have to face up to, unpalatable though it may be.

One of the key reasons why we are in such a mess in the water industry is because the amount of debt has meant a lack of the correct investment, and that has led to so many problems regarding pollution, customer bills, and so on. If we are to make sure that the regulator operates in a way that is right for the country, we have to get a grip about what happened and why it has all gone so wrong; otherwise, we cannot make it right. Getting a proper understanding of those financial issues is going to be a critical part of that. Getting the regulator into a position from which it is able to manage and challenge such issues is going to be an important part of moving forward.