Sir James Bevan and Alan Lovell.

Q92 The Chair: Good morning, gentlemen. Thank you for joining us this morning. This is our ninth session on Ofwat and the water industry, and we are delighted to have you both with us today. We are being broadcast. A full transcript is being taken and will be made available shortly after the meeting. If you want to offer suggested changes—if you could have put things more felicitously—you will have that opportunity.

Mr Lovell and Sir James are, respectively, the chairman and chief executive of the Environment Agency, which we have learned in the course of this inquiry is deeply involved in a partnership with Ofwat in water regulation and related matters. Today we would like to look at and understand the role of Ofwat, some of the challenges that you have had and how you have dealt with them in the past and, in particular, how you propose to address them in the future.

Perhaps I can start off with an opportunity for you to explain to us what you see as the Environment Agency’s role and main responsibilities in relation to water companies and the water environment. Do you have sufficient clarity from the Government on what that role is? Who would like to start?

Alan Lovell: I will start. It is a great pleasure for us to be here and we look forward to having a conversation with you. I, in particular, look forward to learning from your questions, because I am in my third week, and I have a lot to learn. I hope you will forgive me if I pass most of your questions to James, but I shall be happy to give a few words on that subject up front.

Water is certainly very high on my agenda. I had a spell as chair of the Consumer Council for Water, so I have a little awareness of some of the issues, but from a largely different point of view. Certainly, water quality and security are two of the vital issues affecting us, and it is excellent that the Government have put them high on their agenda.

To give the real basics, you are aware that we are the environmental regulator while Ofwat is the economic regulator. I might also mention the Drinking Water Inspectorate; there are three regulators within this field. Our responsibilities cover primarily the quality and quantity of water and the wider impact that the water companies have on nature, all within our overall brief of doing good for the environment, people and places.

We work closely with Ofwat, and we will cover some examples of where we do so. Inevitably, there are some differences: we have slightly different objectives, and it is proper that there should be different priorities in some cases.

Within that remit, monitoring plays a key role, on which we shall give some details. We spend a lot of money on it, which mostly comes from charges that we levy. We are not perfect at it, and we can and will do better with enhanced technology. On the other hand, we have concerns about the possibility of potential further cuts in this area, and we know that we have to make every good use of the resources that we have.

On clarity from Defra and from government, yes, we have that. We are an independent, arm’s-length body, but we take a steer from Defra on policy and legislation, and we certainly follow its priorities. Water quality and quantity, and growth—with this new Government—are clearly high on the agenda.

Sir James Bevan: Chair, I will add a bit about the regulatory work that we do in relation to water companies. As our chairman just said, that is partly about regulating water quality, ensuring that the companies do not damage it and, preferably, enhance it; it is partly about regulating water quantity, ensuring that the companies do not take too much out of the environment that is unsustainable; and it is partly about managing the companies’ wider impacts on nature.

We do that in various ways, but regulation is one of the key tools in our toolbox. In order to operate, every water company requires a whole range of licences and permits from the Environment Agency: abstraction licences to take water out of the ground, drought permits if they need to act in extremis, waste permits, flood-risk permits and so on. Those permits set out the conditions under which the companies have to operate their facilities, and the standards—water quality treatment, discharges, et cetera—that they have to meet. It is the companies’ responsibility under the law to meet those obligations, and it is our job to make sure that they do.

We do that in various ways, including by checking compliance. We look at water company abstraction data and EA monitoring data, which we can talk about later, we do announced and unannounced site-based inspections of their facilities, and we provide advice and guidance and are in constant dialogue with the water companies at pretty much every level.

We robustly enforce those rules when we think they need to be duly enforced, which we can talk about too if you would like, Chair. It is a pretty robust and effective framework. As our chairman just said, it can always be better, and we must always try to be better, but the overall state of our waters is significantly better than it was 20 years ago. One of the main reasons for that is investment by the water companies, and the other main reason is robust regulation by the Environment Agency.

The Chair: In the seven years that you have been chief executive, how has the relationship worked with Ofwat? How has it developed? Where are there points of potential friction or confusion, and what steps have been taken to overcome them? Certainly, the perception from some of the witnesses is that this is a creaking relationship—my word, not theirs—and that it works fitfully.

Sir James Bevan: My experience is that it is good and has got better over the seven years that I have been chief executive. As the chairman has just said, there are very clearly defined roles for the three water regulators—Ofwat, the Drinking Water Inspectorate and the Environment Agency—and they are complementary.

We work very closely with Ofwat; I regularly talk to the chief executives of Ofwat and the DWI. We share the same ambitions for a water environment that is cleaner, healthier and more resilient, and over the last seven years we have also brought into closer alignment our overall strategic goals. Ofwat no longer focuses solely, if it ever did, on price and the customer; it now factors the environment into the requirements that it puts on water companies. We no longer focus solely on the environment, although that will always be our primary concern; we are also engaged on issues with the water companies that complement what Ofwat is doing—for example, in supply and customer service. Every relationship can always get better, but it is a pretty effective one.

The Chair: How do you work together on spillage, which is obviously one of the major concerns, and pollution?

Sir James Bevan: For example, we share data with Ofwat. When we know about spills and we have data that is relevant to that, we share it with Ofwat. We share data and analysis. We collaborate in tackling poor behaviour from the water companies when we see it. A good example is the prosecution of Southern Water. Last year, we secured a record £90 million fine against Southern Water for very significant pollution of rivers and coastal waters, and we ran that investigation, which was a criminal investigation, in parallel with Ofwat’s own investigation, which was of a different nature but complemented what we were doing. Ofwat also imposed heavy penalties on Southern Water. That is a good example of practical collaboration to tackle spillage and poor behaviour.

Q93 Baroness Bowles of Berkhamsted: I would like to explore a little further the relative independence of the agency. We have heard that it is less independent of government than Ofwat is, and you have just said that you take a steer from and follow government priorities. Is that saying that you are really part of Defra? How does the relationship with government work? Are you independent enough that you can advocate for the environment even when that might be affected by government policy?

Alan Lovell: Yes, I am content that there is a reasonable balance between the two. As I said, we quite properly take the steer, but we have our own policies, and where it is appropriate to take a line and debate with Ministers in Defra we are certainly at liberty to do so—and we do. James will say a bit more about that.

Our aim is clear: to produce a place that is better for people to live and work in, and work for cleaner air, and the means by which we do that is in large part down to us. We try very hard to be both evidence-based and outcomes-focused, and that gives us the opportunity to determine the way in which we effect policy guidelines from Defra. We certainly take full advantage of our independence within that field.

Baroness Bowles of Berkhamsted: May I press you a bit more on that? You said that you are trying to influence government policy and that you take things to debate with the Minister, but if the Minister does not agree, does that mean that you cannot do them?

Alan Lovell: James, can you give some real examples?

Sir James Bevan: Like Ofwat, we operate as an independent regulator. Our regulatory decisions are completely impartial, taken by us, and we do not involve the Government in that at all. We operate within a legal framework set by Parliament and a policy framework set by the Government. For example, in their 25-year environment plan, the Government have a strategic objective of cleaner, plentiful water, and it is our job to help get the country towards that goal, which we support and helped devise, but we take independent regulatory decisions, and we have an independent voice. You will see us in public talking about things and giving our view on issues in ways that are not necessarily identical to the Government, and in private we give independent advice to the Government, including telling Ministers where we disagree.

Baroness Bowles of Berkhamsted: Does that mean that the Government would not influence, for instance, your relative expenditure in different areas? Could they influence how often you monitor discharges, or could they tell you, “No, don’t spend any more money on that. Go and spend it somewhere else”?

Sir James Bevan: Most of our money comes from the Government, in the form of grant income. Most of that is for the flood work that we do, building and maintaining flood defences. Quite a lot of the money that we use in our environment role comes not from the Government but from charges on those we regulate, including about £200 million from the water companies. The Government have the power of the purse, and they can and do earmark funding that we get in the form of grant income for particular functions, including, for example, increasing the number of inspections that we are doing of farms and water companies over the next two to three years, but we properly take independent regulatory decisions, some of which the Government of the day might not like.

Baroness Bowles of Berkhamsted: The purse strings could therefore limit the extent to which you could bring about regulatory actions, because if you cannot inspect you cannot find out wrongs.

Sir James Bevan: There is a broader issue, which we can come on to if you like, about the amount of resource that we have had over the last decade or so, which has affected our ability to regulate in certain ways, but once we get grant money from the Government, we use it in the way that the Government have identified. Successive Governments have always wanted us to regulate independently and impartially and to focus on the biggest threats to the environment.

The Chair: May I follow up? The Office for Environmental Protection was set up in 2021. What are its responsibilities, and how does it relate to you? It seems to be yet another regulator on the pitch.

Alan Lovell: We supported its creation. It is a regulator of us, Ofwat and indeed the Government. It is entirely appropriate that there should be some regulation. The first issue that it is investigating relates to monitoring. We are of course fully co-operating with its review of that. As I said at the start, there are one or two areas where that investigation will prove informative, and we shall be anxious to implement change.

The Chair: It is a performance review of your activities.

Alan Lovell: It is.

Q94 Lord Blackwell: Sir James, you said that the water environment has improved over the last decade or so, which I am sure is true, but, as you know, there has been concern about particular aspects, such as the storm overflow sewage discharge. If you went back 10 or 15 years, would it have been possible to make whatever investment was required to avoid that happening? If so, why did that not happen? Was it a regulatory failure, or was it to do with government policy?

Sir James Bevan: The first thing to say is that the state of our waters really is mixed. If there is one thing I would really welcome in what this committee is looking at is a bit more clarity and objectivity about the state of our waters. It is important to recognise where there have been improvements and why they have happened, and where there are still problems, and redouble our efforts to tackle them.

The Victorians designed the combined sewer overflow system, so it is more than 100 years old. We all know what it does. It was designed so that in times of high rainfall, rather than the rainfall all going into one channel, including the sewage channel, and backing up and blocking the sewage treatment plants or blowing sewage back into homes, it diverts that diluted sewage into either rivers or seas.

What has changed since the Victorian era is, first, population growth; we have more people and therefore more sewage. Secondly, there is climate change; we have more and more violent rainfall and that is causing more spillage. Thirdly, in the last five years or so, there has been much greater public awareness of combined sewer overflows and a demand, which we share, for improvement. Those things have led us to where we are.

It is important to recognise that combined sewage overflows are a part, but not the biggest part, of what is causing pollution in our waters. The main sources of pollution in our waters are either water company failures at their sewage treatment works or farming. We need to continue to focus on those as well as combined sewage overflows, but we also need to bear down on that.

What we did first, on the basis that sunshine is the best disinfectant, was require the water companies to put monitors on their 15,000 overflows, and all of them will have monitors by the end of next year. That produced data demonstrating that the overflows were spilling far more frequently and for longer than anyone, including the Environment Agency, had been aware of, and since that became apparent a couple of years ago, we have been working with Ofwat, the water companies and the Government to bear down on the problem.

It is a £100-billion or £200-billion problem. The cleanest and obvious solution is a modern system that separates sewage from rainwater. Those things exist, but the estimate of the cost of retrofitting the whole country to that system is in the region of £100 billion to £200 billion. There then has to be a debate about whether that is the best use of that amount of money, or whether you would want to put it into other things that would perhaps be better for water quality.

Lord Blackwell: You are saying, if I understand you, that, in part, this has arisen because you as the regulator were not aware early enough of the scale of the problem, until the monitors were fitted.

Sir James Bevan: I do not think anybody, not even the water companies, was aware of the scale of what was going on, because until a few years ago people had not really thought that it was an issue of particular importance. The fact that there has been greater public and media scrutiny of what is happening, which I welcome, has helped both us and the water companies to focus on the issue.

Lord Blackwell: No trade-off decision was explicitly taken that this was going to cost too much and push prices up too much.

Sir James Bevan: No, and there was always regulation, so if you want to operate a sewage treatment works and a combined sewage overflow you need various permits from the Environment Agency that stipulate the performance levels that those facilities have to meet. The challenge was effectively monitoring the thousands of sewage treatment works and overflows, and it was not until it became apparent that we had a real problem that we insisted on those monitors going on. They are now both at the end of the pipe; by the end of next year, 15,000 of those overflows will have monitors, and they are almost all done. We have also insisted on having monitors on the sewage treatment works themselves. By the end of 2024, all those sewage treatment works will be monitored.

Q95 Lord Sharkey: May I continue with the question of storm overflows and monitoring? When we took evidence from Jonson Cox, he told us that the water companies did not necessarily need monitors to know that something was awry in relation to storm overflows. He suggested that companies volunteered data when it became clear that the rollout of the new monitors was likely to show significant non-compliance. Given, as you were saying, the responsibility of companies to meet their licences and permits, how do you respond to those comments? In particular, what do you think this says about the operating cultures of the water companies?

Sir James Bevan: The first thing to say is that different companies have different cultures and very different levels of performance. Overall, the water sector—the nine water and sewerage companies that we regulate—is pretty good at abiding by the terms of most of its Environment Agency permits, with some exceptions, including on sewage spillage.

We do an annual assessment of the environmental performance of those nine companies. In the last one we did, which was for 2021, three companies were industry-leading; they were pretty much ticking all the boxes that we wanted ticked to protect and enhance the environment by the measures that we impose. The majority of companies were at the other end of the scale; they were simply unacceptably underperforming pretty much across the board.

Point 1 is that we have to be careful about making judgments about the whole sector, because some parts of it are very well run, and other parts are very badly run. My experience is that organisations behave like their leaders, and that in an organisation—a regulator or a water company—where the leadership is clear that protecting the environment is just as important as providing public water supply, you get good behaviour. Where you do not get that clarity from leaders, you do not get that behaviour.

Lord Sharkey: Do you agree with Mr Cox that the water companies did not in fact necessarily need monitors to know that something was badly wrong?

Sir James Bevan: I hope you will understand that we have to be careful not to go into great detail about that question, because this is subject to the investigation that we are currently running, which might end up in court. What we can say is that we know the sequence. It was not until the Environment Agency insisted a few years ago that the water companies put monitors both on their combined sewage overflows and, critically, on what was happening at their sewage treatment plants, which was designed to identify whether those plants were treating the amount of sewage that they are required to treat by their permits before they spill, that some of the water companies came to us and said, “We think that when you see the data we will find that at least some of our sewage treatment works are not compliant”. At that point we decided that we needed a much broader investigation, which is now under way.

Lord Sharkey: I suppose the question partly resolves into why the water companies did not come to you earlier. The implication is that at least some of them had known for quite a long time that the situation was entirely unsatisfactory. Why do you think that was not reported to you earlier?

Sir James Bevan: Again, I would rather not go into detail, because that is obviously a question we are seeking to answer in the investigation. I think it is conceivable that at least some of the leaderships of those companies were not aware, because there is always a risk of gaps between leaderships and front-line workers. It is quite hard to believe that some of the people working on the ground at some of the sewage treatment plants did not know that those plants were failing to meet the terms of their permits, but that is something that we will have to establish through our investigation.

Lord Eatwell: I would like to follow up on the role of the water companies over the last decade. You said just now that retrofitting the whole country is obviously enormously expensive, but it would be less expensive now if it had been started 10 years ago. If the levels of investment had been slowly retrofitting parts of the country, we might by now have 20% or so retrofitted. 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?

Alan Lovell: 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. That is a fair comment. But there was significant investment and, particularly in the early days after privatisation, it was directed primarily at the availability of more fresh water, more drinking water. One can have some sympathy for them having initially directed their spending there rather than to the wastewater end.

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.

Sir James Bevan: If I may add to that, some of that investment has already happened. One of the reasons why our bathing waters are now in the best state they have ever been, at least since we started measuring them, is that the Environment Agency and Ofwat, working with the water sector, required the water sector to start making investments that would reduce spillages going on to beaches and coastal waters. We are seeing some of that investment already, and the benefits thereof, but there is a very real debate to be had about whether—

Lord Eatwell: That was not the impression this summer, was it?

Sir James Bevan: It is interesting. This is why I am very interested in an evidence-based debate. The historical picture—the trend—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. That is a really good news story. 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.

Q96 Lord Burns: We have heard that it was the NGOs and citizen scientists who began to spot parts of these problems rather earlier than the regulators. To what extent is that so? What we are after is the whole question of monitoring: whether you were slow off the mark in increasing monitoring and other people began their own monitoring ahead of you. How do you see the balance of that story? Is it that the technology has improved in later years, or was the money not there in order to do it soon enough? Is it only with greater public awareness that this has become a major issue?

Alan Lovell: Perhaps we can start with the fact that the percentage of storm overflows with permanent monitors has increased from 6% in 2016 to over 85% in 2021. A lot has been done over that period.

Lord Burns: What about pre-2016? What is the story that leads up to why they were not monitored up to that point? Why were there only 5% in 2016? Is that a technology issue, a resources issue or just history?

Sir James Bevan: It is probably a combination of all of those, and other factors. The first point I want to pick up is that, although we welcome citizen scientists and are building a network with them because they can help to improve our monitoring, they were not the first people to call this out. The Environment Agency were the people who identified that there was a problem at CSOs and required the companies to fit monitors. Having established what was going on there, the Environment Agency then required the companies to fit monitors on their sewage treatment works.

As I said, sunshine is the best disinfectant. Because we have made that data transparent deliberately, it has encouraged people to become citizen scientists and to report. 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.

Since the Environment Agency was set up over 25 years ago, we have had a series of systems that monitor the state of the environment, including water, both remotely and by literally dipping a bucket in a river or at the coast. We have spent over £180 million on environmental monitoring since 2016. We do about 90,000 water quality sampling visits every year, at about 13,000 different locations. The Environment Agency already had, and will continue to maintain, a large and sophisticated monitoring network.

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.

Lord Burns: I am sorry, Mr Lovell. I interrupted you when you were making a point.

Alan Lovell: I was going to say that we continue to enhance the monitoring that we require. Two relatively new monitoring systems are being installed now, which will enhance our knowledge and the industry’s knowledge. One is flow to full treatment, which is the flow rate in litres per second that a wastewater treatment plant must treat before it can overflow. The second is event duration monitors, which give a view of when and for how long the overflows are made. Those are the two critical areas that will enhance our knowledge. As Sir James said, we have been in the lead on this, as we should be, and we will continue to be.

Lord Burns: You mentioned earlier that, in a sense, there are three sources of the pollution. One is wastewater treatment works themselves, one is the overflows and the third is farming. As a result of your monitoring, can you give any allocation between those three sources of pollution to help us to get a clearer picture of this story?

Sir James Bevan: First, on the proportionality, to give you some numbers, farming and associated rural land management impact about 40% of the water bodies in this country: rivers, lakes and coastal waters. That is mostly through diffuse pollution: run-off from whatever farmers are putting on fields getting into watercourses. The water companies impact 36% of our water bodies. That is mostly through point-source pollution: a hole somewhere that leaks sewage or something else into water. The other major contributor is run-off from roads and transport, which impacts 18% of our waters.

As regards resource allocation to those, we tend to focus on the water and sewerage companies because we have a statutory duty to regulate them and get resources, including from them, to do so. The regulatory framework for farming is less comprehensive. Although we have some resources for regulating farming, we do not have the same level of resources that we have for regulating water companies. Urban diffuse pollution is particularly hard to manage because it comes from many different sources.

What the Government have done, which we welcome, is increase this year the grant that they give us for our environmental work, both to enhance the inspections and analysis that we do of water company performance and, critically, to do more inspections of farms, which will give us a better sense of what is going on there. We want farming to thrive. Advice and guidance will be the first step, but that will give us greater insight into what is going on with farms.

Lord Burns: I was involved in the water industry between 2000 and 2010. At that stage, sewer flooding was the main issue with regard to water quality. To what extent did the emphasis on that mean that there was not as much emphasis on the storm overflows?

Sir James Bevan: As I said earlier, the storm overflows issue has come into focus only in the last five years. Unpleasant and unwelcome though those discharges are, overall they do less damage to the water and the broader environment than other sources of pollution, which can do more lasting, more serious damage. 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.

Lord Cromwell: Sir James, can I take you back to something you said to Lord Burns a few moments ago? You said that the Environment Agency was calling out these problems before the citizen scientists and NGOs. Obviously, that was not the story in the media, which brings us back to evidence versus hyperbole, perhaps. Can you confirm that what you said is accurate? Where was it being called out by the Environment Agency?

Sir James Bevan: This further injection of government money will 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. We were using our own monitoring, some of it remote, and what is called operator self-monitoring, which is a standard process where the water companies tell us what they are doing and we validate the data. 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.

As the chairman and I both said, once we started to recognise that we had a real problem with overflows and non-performance of some water company sewage treatment works, our response was first to say, “Let’s get the data”. When you think that you have a problem, the first thing you need to know is what kind of problem you have and the scale and source of it, hence the demand that the water companies fitted event duration monitors to their overflows. When that 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. We welcome that. We welcome the pressure on us, as well as the pressure it puts on the water companies.

Lord Cromwell: So the actions of the Environment Agency were not driven by citizen scientists highlighting this in the media. You were already doing it.

Sir James Bevan: Yes.

The Chair: Were you also highlighting these problems to the Government, to Defra?

Sir James Bevan: We talk to the Government. Obviously, we talk to Defra all the time. Again, 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. As our chairman was just saying, previous conversations with Defra and the broader Government were much more about water quantity—how we can manage drought and flood over the next few years—and other aspects of water quality, such as what we need to do to help farmers to improve and to help water companies to run their day-to-day business, than they were about CSOs.

Once it became apparent to us and to the Government that there was a big issue with combined sewage overflows, the Government moved with great alacrity, including by setting up a task force, in which we participate, to identify short and long-term solutions and by putting in place a policy that will require water companies to make significant changes over the next decade or so.

Q97 Lord Eatwell: As I understand it, the Environment Agency recently called 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. 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: That is one of my predecessor’s parting shots, and a very good one with which I am happy to associate myself. The record says that in 2021 fines amounting to £102.5 million were levied on water companies. That was considerably more than had been achieved before, largely because of the £90 million fine imposed on Southern Water for a long period of bad behaviour. We were very happy to see that.

We have the opportunity to take matters through the criminal courts. The trouble is that it takes an enormous amount of time and, of course, has to be proved to criminal standards. The current investigation into the use of the CSOs will also be a very long process.

The other mechanism that we have, so-called variable monetary penalties, enables us to impose a fine of up to £250,000. 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. It still requires the criminal standard of evidence, so it will not be a simple process, but it will certainly tip the balance in the discussions we have with the water companies, and should make a significant difference. We hope that he will rapidly be able to deliver on that commitment.

Sir James Bevan: We normally always prosecute when there is evidence of serious harm and/or culpability. When we do that, we always seek exemplary sentences, which are designed both to punish and to deter, and we usually win, but it takes a long time and a lot of effort to build the evidence base to win. We do not decide the fines or sentences in cases before the courts—those are based on the sentencing guidelines—but we ensure that the courts have all the information that we think they need to decide on an appropriate penalty. Over the last five years, we have seen a very welcome trend in the courts to more severe penalties for all forms of environmental crime, including water pollution.

On jail, we have sought and secured custodial sentences for environmental crime: 91 between 2018 and this year. Most of those are for low-level waste criminals. Directors can go to prison, as we know, but it is a high bar evidentially that so far the water companies have avoided. We have not yet seen custodial sentences for a water company employee, but we would not hesitate to press for them if we thought that the circumstances and the evidence warranted it. As I said, we have secured custodial sentences for waste criminals. I do not think that there is any particular reason why white-collar criminals should be treated any differently.

Lord Eatwell: Having been a regulator myself, I appreciate the fact that prosecutions are extremely expensive and lengthy and, one often feels, absorb an excessive amount of staff time. 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? Is it a case of saying, “Why not whop in some civil penalties to get the thing moving?”

Sir James Bevan: We have a range of sanctions that we can and do use in our enforcement policy, from advice and guidance at one end of the spectrum, through enforcement notices that require an operator to bring their operation rapidly into compliance, up to a formal caution and then prosecution. We use all of those as we think appropriate.

Increasingly, we are also using something called enforcement undertakings. If a company that has committed an offence comes to us and offers to make good the damage it has done, provided that it is not a particularly serious offence, on some occasions we will waive prosecution of that company in exchange for its funding the full remediation of the damage. The benefit of that is that the money goes straight back into repairing the environment, whereas if we get a fine in court the money goes to the Treasury.

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: Do you think that you should have further powers or resources in this area? Basically, are you underfunded? Do you have the right arms to hand to deal with these issues?

Sir James Bevan: We have most of the powers we need. As I said, one thing that I would really like is a more balanced, evidence-based debate. That would be helpful to us as a regulator because obviously we need to take account of public and media views.

The resourcing is an issue, but we will always do the best we can with the money we have. All public sector organisations are under resource pressure. Our budget for this year, most of which comes from the Government, has actually gone up, including the amount of money that we get for our environmental work.

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. That means that the only money we have to enforce and prosecute has to come in the form of grant. Over the last 10 years, the overall grant that the Environment Agency has had from successive Governments for our environment work has diminished. That has put pressure on our numbers of people and our resources for prosecution, but, as I said, there has been a very welcome reversal of that decline in the budget that we have been given this year by the Government.

Q98 Lord Reay: We have heard that there will be challenges in ensuring future water supply due to climate change. That has been highlighted to an extent this summer with the drought conditions in certain parts of the country. What sorts of strategic solutions are needed to ensure future water supply? Will greater transferring of existing water resources around the country be sufficient to ensure future water demand is met, or is there a need to invest in new water sources, including reservoirs?

Alan Lovell: This is a critical issue. As you suggest, a combination of climate change and population growth is going to increase pressure on our water supply. I think we can solve that only with a broad range of actions, which need to include demand management. We use too much water in this country. Personally, I am strongly in favour of smart metering, metering water supply to make people more aware of their usage. On the demand side, we need to seek to reduce our usage from the current 140 litres a day to a maximum of 110. That will be one important element.

A second important element is that the water companies need to reduce leakage. The challenge there is to halve it by 2050. Again, we are suffering from Victorian pipes. That will itself be an expensive operation, but it is essential.

Thirdly, 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 my opinion, the current price review that Ofwat is conducting will be critical to enable some investment by the water companies to take a step in that direction. That is where we must work very closely with Ofwat, which has properly been very focused on maintaining low water bills. In my previous role at the Consumer Council for Water, I was encouraging it to do that. 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 Reay: Sir James, do you want to add anything?

Sir James Bevan: Only that this is real. I have talked about this thing called the jaws of death. Rather tragically, I read every water company business plan. They all have the same graph somewhere. It is a graph that tracks the rise in demand in this country over the next 30 years and the diminishing supply, as climate change and other factors kick in. About 20 years from now, those lines cross in what I call the jaws of death, which is the point at which, unless we intervene, we do not have enough water for the country. It is a real thing.

I think we know what the answer is. As our chairman said, we need to reduce demand, by the various measures that we have, and to increase supply. I also think that it is not just for the regulators, the Government and the water companies, although we all have a key part to play in delivering those outcomes. Every member of the public also has a role. Changing behaviour and ensuring that we all cherish water and treat and use it wisely will be one of the most powerful interventions we can make.

Lord Reay: Do the net-zero obligations of the water companies and Ofwat make it problematic for reservoirs to be constructed or not really, given the carbon footprint?

Sir James Bevan: I do not think so. That is not the reason why, as the chairman said, we have not had a reservoir built for the last 30 years or so. The Environment Agency does a lot of infrastructure construction, because we pour a lot of concrete when we build flood defences, and we have a commitment to get to net zero in 2030. Several of the water companies have similar commitments. We think we can do our part by using low-carbon concrete or other techniques. There are ways in which, done right, you can both get your infrastructure, growth and water security and hit your net-zero target.

Lord Reay: How realistic is it that the water companies will work together on water transfers around the country? Do you think that the companies are prepared to co-operate in that way? Is it something that they will be proactive about, or will they require prompting from the Government or regulator?

Alan Lovell: Again, it will vary a bit. In general, I think they will be ready to do that. For example, the reservoir that is just about to start, in Havant, which is in the Portsmouth Water district, will be primarily for use by people within the Southern Water remit. They have come to an arrangement to make that work. There are also water transfer arrangements in place from north Wales into the Midlands that Severn Trent Water is looking after. There are some decent examples around. Generally, I think they will be on for that. I hope I am not disappointed.

Q99 Lord Cromwell: 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?

Alan Lovell: It varies. There are instances where they should clearly be making a contribution to it, but there are other ways in which we can hope to make a difference. The Thames Tideway is 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. I hope there will also be some means of alternative finance support, which could include some government back-up for some of the major schemes. A combination will be the right way to deal with it.

Lord Cromwell: Just to press you on this, although it may be a question that you cannot answer, is the majority of it raisable by the water companies, with the Government as a kind of guarantor in the background?

Alan Lovell: That is what I would hope. The Thames Tideway is an indication of a way in which it can be done that supports that.

Lord Cromwell: Sir James, do you want to add anything?

Sir James Bevan: 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: I have a second question, if I may. We have heard some criticism of the variety of funding sources and policies on water, and that they are not sufficiently co-ordinated. Do you think that is fair? If it is, do we need some sort of national water strategy to pull all the elements together, or is that just a behemoth?

Alan Lovell: There needs to be a national water strategy, in my opinion. We are on the case with that, in conjunction with Defra and Ofwat. It is very important that that remains high on the government agenda. Certainly, coming into this job, it is one of the things that I regard as the most important to see.

Lord Cromwell: Would you agree that it has not been terribly well co-ordinated up to now?

Alan Lovell: Work is going on at the moment. It perhaps needs a higher focus. If we can give that, we shall be happy to.

Sir James Bevan: I agree with all of that. The strategic goal is clear. The Government’s 25-year environment plan sets it: clean and plentiful water. There is a series of interventions that we helped to shape that will help deliver that. I think the direction of travel is agreed.

There are, as our chair says, a lot of good co-ordination mechanisms where we, the Government, the water companies and the other regulators are working together. For example, there is something called the National Drought Group, which I am chairing on Friday. That is about managing drought in the short, medium and long term, and it is an effective forum. The Environment Agency initiated the national framework for water resources a couple of years ago. It brings together all those players to plan and deliver the long-term water security that we are talking about.

There are mechanisms that already exist, but I agree with our chairman that an overall strategic plan led by government with support from everybody else would help us to get there.

Lord Blackwell: To go back to the issue of investment and funding, there is 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. That is not just up to the water companies. Obviously, it depends on the regulator and the asset base allowed, which feeds through to prices.

From the Environment Agency’s point of view, obviously you do not control investment either but you have an interest in the level of investment. Is there any credibility in the view that, from your perspective and in discussions you have had with Ofwat over the period, there may have been too much emphasis given to keeping prices low, and that that has restricted the level of investment that you would have liked?

Alan Lovell: I gave that as my personal opinion coming into the role. I think it is an issue that this price review should take account of. It is certainly a personal view, and one that I think the agency will back, that there needs to be more allowance for investment in this five-year period.

We might add that being on five-year periods is itself something of a challenge. These are clearly very long-term projects. In an ideal world we would have a longer timescale than that, but it is our job to work towards the goal that is so obvious. To the extent that we have influence over this price review, that will be the direction we take.

Sir James Bevan: We have that influence and we are seeking to exert more of it. For example, part of the Ofwat five-year price review mechanism is something called the national environment programme, which we agree with the water industry and Ofwat. It determines the interventions that each of the water companies will make to protect and enhance the environment during the five-year period.

It is big money. It is £5 billion of investment for this five-year period by the water companies, and there will be significantly more in five years’ time. Working with Ofwat, we can help ensure that that money goes into the best environmental outcomes.

Lord Burns: I would like to get a better feel of the relationship between you and Ofwat when it comes to the investment programmes with the water companies. If we go back to the last price review, which you lived through, where did the proposals come from? Did the proposals come from the water companies? Did they come from Ofwat? Did the investment programmes for the environment come from you? How is the process decided at the end, and what is the balancing process in prices to customers against the quantity of investment?

Sir James Bevan: It starts with the Government, with what is called the strategic policy statement. The Government of the day set out the strategic goal that they want Ofwat to seek to achieve in the coming five-year period. In February this year, the Government issued their latest strategic policy statement for the forthcoming five-year period. That sets four priorities for Ofwat, all of which we endorse: to protect and enhance the environment; to deliver a resilient water sector; to serve and protect customers; and to use markets to deliver for customers. It starts with that sort of policy framework set out by the Government.

We and Ofwat then work together to frame our asks of the water companies. Some of that will be about improving performance of the kinds of things that we have talked about today. Some of it will be about enhancing environmental engagement. We set out in a couple of documents that we write and work over with Ofwat what we expect the water companies to deliver on the environmental side during that PR process. Ofwat then works with the companies, and with us, ultimately to come out with its price review determination, which is designed to drive, among other things, the environmental outcomes that we have asked for.

Lord Burns: Is there some point in the process when you have to agree with Ofwat as to how far you are going to push it to get what you want?

Sir James Bevan: Yes.

Lord Burns: Do you always get what you want on investment, or do you get push-back on the things that you would like to see?

Sir James Bevan: There is a constructive dialogue with Ofwat. That is not a euphemism. There is a really constructive dialogue with Ofwat. It makes the decisions. It is the economic regulator. It decides on the economic framework and the investment programmes that the water companies propose, but we play a leading role in shaping the decisions that it and the water companies take by articulating what we think the water companies need to do over the five-year period to create better environmental outcomes.

As I said earlier today, over the history of the PR process we have seen more and more account taken by Ofwat of the environmental aspects of the price review process, which is very welcome. As I have just said, in this current price review period it agreed with us on a £5 billion programme to protect and enhance the environment. That is a very good outcome as far as we are concerned.

Lord Burns: You do not see your history as one whereby you have put forward demands for investment in the water industry that have then not been met by the overall—

Sir James Bevan: It is an iterative process. There is always a debate to be had, as our chairman has just said, about how much you want to require the water companies to invest in what, and the extent to which you are prepared to allow them to increase bills to fund it. Those are decisions for Ofwat, but it listens very attentively to us, and most of the decisions that end up embedded in the PR processes reflect the views of the Environment Agency.

Q100 Lord Sharkey: I want to ask about consumers in all this. We have been told that they have a role to play in helping to meet future water demand by simply reducing usage. What should regulators and the industry be doing to encourage consumers to engage in their own water usage? What about other related behaviours, which we have mentioned in passing, with particular things like wet wipes? What should consumers be doing about it? What role do the regulators have in persuading consumers to act in perhaps a different way? I would also like to know about RAPID. What role, if any, does RAPID play in all this?

Alan Lovell: I will take the first part. On consumers, it is primarily the role of the water companies to have dialogue with their customers, both on usage and on behaviour on issues such as wet wipes. They have done a fair bit of that, it is fair to say.

As I mentioned earlier, I think that metering should be made mandatory where it can be. That is not quite as simple as it sounds because in some apartment blocks it is difficult to do, but where it can be done I think it should be. The more publicity that water companies give to the importance of conserving water and trying to have accepted what a valued asset it is, the better. Of course, we can help with that. We can play a part but, to be clear, it is not our prime responsibility.

Sir James Bevan: As the chairman said, we support the water companies in their public information campaigns. Those can be quite effective. The companies also provide, if a customer wants them, various pieces of kit that will help customers reduce water usage. There are shower heads that produce less water and a brick you can stick in the toilet cistern to reduce the volume that goes when you flush.

The water companies are already doing a lot, with our support. There are other players who also have a role to play. The Government have recently launched a welcome consultation on water labelling that would label, for example, white goods in terms of water efficiency. When they know how much water their dishwasher uses, we hope that consumers will make informed choices that will help reduce water use.

Local authorities, working with developers, have a key role to make sure that the developments they approve and the housing they build are water efficient. Ultimately, it comes back to behaviour change by individuals. At the moment, each person in England is using an average of about 140 or 145 litres of water a day. In Denmark some places are using 80 litres a day. That shows that in a modern European country you can get down to much more sustainable levels.

Lord Sharkey: And RAPID?

Sir James Bevan: RAPID is the regulators’ alliance for progressing infrastructural development or delivery, an initiative that Ofwat and we launched, with the support of the Government, to identify and remove blockages to investment by water companies in infrastructure. The water companies have made various proposals that they think they could bring forward. We are looking at those with Ofwat and are very keen to make progress, not least for the obvious reason that they will also drive growth in jobs as well as enhanced water security.

Lord Sharkey: I want to ask again about meters. You agree with John Armitt that they should be compulsory. How would we go about doing that? Does it require legislation? Do we already have the powers?

Alan Lovell: I think we have the power; the water companies have the powers.

Sir James Bevan: The short answer is that it is complicated, but I think you would have to have legislation in order to have universal, mandatory metering. At the moment, you are not obliged to have a water meter in your house except in certain circumstances—for example, if you live in a particularly water-stressed area. Ultimately, I think there would need to be legislation if they were to be made compulsory. We are also supporting the water companies in encouraging people to invite the companies to fit a meter, which they will do free of charge, because there is very clear evidence that if you have a meter you use less water and use it more efficiently.

Q101 Lord Reay: We have heard that water companies have become increasingly leveraged in order to pay dividends to shareholders, despite poor environmental performance. Do you believe that the high levels of dividends and excessive pay of some of the companies can be justified when the environmental performance of the sector has been so poor?

Alan Lovell: I think 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.

The level of dividends at the moment is relatively under control. To be fair, I think I am right in saying that Thames has not paid a dividend for six years, for example. Some of the owners, even the private owners, of water companies are actually taking a very responsible view to the cash that they are taking out now. I think it is primarily an historical problem rather than a current one.

Ofwat is very much on the case with this, though, and will impose suitable restrictions on dividends where it needs to. This is not specifically one for us, but you asked me for a view and that is what I would say on that.

Lord Reay: James, would you like to add anything?

Sir James Bevan: I would only underline, as our chairman said, that the financial position, the investment plans and the leveraging of companies is a matter for Ofwat. Dividends and executive pay are 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.

Lord Reay: Is this something that you talk about with Ofwat in the price review and ongoing business?

Sir James Bevan: Yes, both how we shape future price reviews at the strategic level and specific failings by companies. We have had detailed dialogue with Ofwat about particular companies, in particular their environmental performance, where, as I said, we have collaborated on separate but complementary investigations.

Lord Reay: Ofwat set out some proposals this summer on dividends, whereby companies would need to demonstrate how dividends take account of services to customers and of the environment, investment needs and the companies’ financial resilience, with the regulator able to step in and take action if necessary. Do you agree with the proposals that were put forward?

Alan Lovell: Yes, we can be clear about that.

Q102 Lord Agnew of Oulton: Sir James, I have a couple of questions. First, you have probably heard the debate about whether you and Ofwat should move from a rather output-based approach to solutions, to improvements to infrastructure and something that is more outcome-based.

Certainly, as a farmer, I found it almost impossible to engage with the Environment Agency on innovative solutions. I would be interested to hear what you think about that.

Sir James Bevan: I agree with you that as a modern regulator we try to be outcome-focused, risk-based and proportionate. The best regulation does not prescribe in great detail how the end is to be achieved. It describes what the aim is, and then it relies on the ingenuity of either the farmer or the water company to give effect to that outcome. In some instances we have developed some pretty innovative schemes where, instead of resorting to a traditional regulatory solution, we worked with farmers and with water companies to help farmers manage down the amount of nutrient that they are putting on their land, which has reduced the pollution to water and in turn reduced the costs for the water companies.

That is the goal. We are, however, constrained by a pretty large thicket of regulation, some of which is very descriptive of how things are to be achieved as well as what is to be achieved. That is why we think that the Government’s current review of regulation, now that we have left the European Union, is an opportunity to devise regulations that are more outcome-focused, less onerous for farmers and business and more effective in protecting the environment.

Lord Agnew of Oulton: As someone who knows his way through the thicket better than probably anybody else, are you showing the Government where some of these regulations could be simplified to enable you to have a more flexible and innovative approach?

Sir James Bevan: Yes. We have identified various EU legacy regulations where we think we could either reform them or repeal them or, in some cases, where we think they should remain because they have been very effective.

Lord Agnew of Oulton: Linked to a comment you made in an earlier question, and for me the elephant that hangs in the room over all of this, given the performance of the water companies over the last few years, can we really trust them to have a greater role in protecting the environment?

I take one particular point you made about the cost of upgrading the infrastructure. You threw out a figure of a couple of hundred billion. Nobody really knows, but, of course, as long as numbers like that are floating around, that is their excuse for not doing anything. Are they really serious? If they are, why are they not doing more to come forward with other ways of dealing with it? Again, with my farming background, a huge amount of water could be held up on farms very cheaply at times of flood and unseasonal rainfall that would not need hard infrastructure, but we see very little of that going on.

Sir James Bevan: My answer would be that some are serious, and some are not. There is a big difference in the performance and the attitude of the water companies. The best are serious and acting to deliver better water security and better water quality, and in quite innovative ways to protect the countryside. For example, some water companies that we work with lower the levels of their reservoirs, provided they have enough water, to make space so that when it rains those reservoirs can be part of the storage that reduces flood risk further down the catchment. There are some very good examples.

Smart chief executives and chairs of water companies know that they have to be serious about this. I remember one of them saying to me, “If I don’t have enough water, I don’t have a business”. 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: Perhaps I could add to that. The first point is that we are highly motivated to do it in an outcomes-based approach. There is some frustration at the amount of funding that is still restricted, and the way in which it is used is very closely prescribed. We think that we could do better on that. We shall certainly try to loosen those shackles to make better use of the money provided.

On the second point, by chance yesterday I visited a scheme in Enfield that has been carried out by Enfield Council with the Rivers Trust—Thames21 in particular—which is just the sort of project you described. In a valley with a small stream running through it, for 30 metres on either side they have effectively put it back to the wild and planted trees in it. I have every confidence that that will reduce the risk of flooding downstream, which has been a threat previously, at the same time as opening it up to people in an enormously friendly way environmentally. The more schemes of that sort that we can encourage, the better.

Q103 The Chair: Alan, as you said at the start, you are a new boy to this industry. Did you know what you were letting yourself in for? This is a very problematic industry with a very poor reputation.

Alan Lovell: I had some idea of it. I am passionate about the issues that I am engaged with and I am enjoying learning. I shall be very keen to try to make a difference. It is a huge privilege to be given this job in a world that really does make a difference to the country and to humanity as a whole. I am highly motivated to have a go.

The Chair: Good luck. We heard earlier about the sorts of sanctions that regulators can impose on companies. Back in the day—I am not quite sure when the day was, but in about 2000—you could lose your licence. Now it appears that you cannot lose your licence. Is there not a case for reviewing that so that companies that have a very bad record, do not do much to improve it and persistently mislead or deny information that should be made public, should actually lose their licence?

Sir James Bevan: We should have that debate. The more stick and carrot there is, the better. That is an obvious stick. We have had some of those conversations with Ofwat in relation to particular companies. There is an obvious issue. If they lose their licence, how are you going to sustain the public water supply? There are ways round that.

At a lower level, we can and do suspend permits or licences when particular water company facilities or other facilities are not performing consistently in the way we want. There is already a bit of stick. This proposition is obviously much bigger, but definitely one worth discussing.

The Chair: You have laid great emphasis, quite properly, on evidence-based decision-making and evidence-based evaluation of performance. Are you satisfied that the Environment Agency and Ofwat have imposed sufficient information requirements, performance requirements and forward-looking requirements on the water companies to ensure that you have a database that gives you a picture of the current position, whether it is going off the rails or not or whether there are too many overflows or not, so that you have a running record of the performance of companies, which you can then use with all the powers you have to get improvement?

Sir James Bevan: Am I satisfied? No, because we can always do better. Do we have very good, consistent, high-quality data going back years on performance of water companies and what is happening to rivers? Yes. Yesterday, we published a dataset that goes back 30 or so years, which is actually showing an improvement in many of the indicators in water quality in those rivers.

Are we clear with the water companies what standards they need to meet? Very. The permits that govern the use of their sewage treatment works, for example, are very detailed and specific about the technical standards that they need to meet. We measure and monitor whether they do. Do we track the record of each company? Yes, we do. I mentioned the annual environmental performance assessment of all of the nine big companies. That goes back several years.

The way we respond to a failing by a company that we know has a good track record, and that we are clear wants to do the right thing, will be different from the way we respond to a company that has a bad track record and that we do not believe wants to do the right thing. That is a good thing for a regulator.

Let us say there is a leak at a sewage treatment plant. A good company will tell us straightaway. A good company will fix it immediately. A good company will look at what more it can do to reduce the risk of it happening again. In those circumstances we are less likely to want to impose anything at the hard end of our enforcement spectrum because we want to encourage good behaviour. A company that has consistently had leakages from its sewage works, consistently fails to tell us when something happens and consistently does not think about how it can reduce that happening in future will get a much tougher regulatory response from the Environment Agency.

Lord Burns: My memory is that Ofwat has certain step-in rights with regard to water companies. Does that only occur when there are financial failings, or are you implying that it does not apply to other kinds of failings? My memory is rather vague on this, but I certainly remember the issue of step-in rights with regard to financial performance.

Alan Lovell: I do not think it is on environmental failings.

Sir James Bevan: I think you are right. I do not know enough about those rights, but Ofwat has step-in rights and we have had conversations with Ofwat from time to time about whether those should be exercised. They are real rights.

Lord Burns: But you are suggesting that, if they do not apply to some of these wider issues, maybe they should.

Sir James Bevan: We have a strong regulatory framework for regulating water companies effectively, to ensure that they do not damage, and that they preferably enhance, the environment. As long as we have the resources to deliver that regulatory framework, I do not think we need Ofwat to, as it were, step in at the maximum end of the scale. We need Ofwat, and I think this happens, to stand shoulder to shoulder with us in saying to the water companies, “This isn’t good enough and there will be consequences if you do not improve”.

Lord Cromwell: Let me take you back to public behavioural change, which is inevitably part of the equation. It is very hard to do. I always cite the example of seat belts; we were encouraged for years to wear one, but nobody did until a fine came in for not wearing one, and then everybody did. Does that mean that our water has to get a lot more expensive in future to encourage people to use it more wisely? Also, what can we learn from those like Denmark, which you cited earlier, where they have a much lower per head use? Why is that?

Alan Lovell: My personal view is that water bills should increase, but of course it requires a very good backstop of social tariff to make sure that those who cannot afford it are not hurt by it. I think awareness of the value of water is something that we should be enhancing, yes.

Sir James Bevan: I agree that we should be looking at water pricing. The evidence is quite complicated. There are arguments on various sides. A signal that this is a valuable commodity, including in price, is likely to drive some consumer behaviour change. Most of it, though, is about changing culture. I remember seat belts. I also remember smoking. Nobody would think of smoking in a building like this now, but I am sure it was normal 20 years ago. That gives me confidence that 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.

I see that behaviour change in the younger generation, including the younger generation of people who work for the Environment Agency, who are already acting in different ways, including in the way they treat water, from maybe people of our generation, so it can be done.

Lord Cromwell: I hope you are right. Can you say what other countries are doing right that we are not doing, if their consumption is much lower?

Sir James Bevan: Denmark is a good example. In some places it is 80 litres per capita per day. Some of that is about culture. The Danes are very socially minded. Some of it is about history. They may well have invested later in rather more modern drainage and water supply systems than we have in this country, for historical reasons. Some of it is about planning. Setting the kind of expectations for what Danish houses need to do in terms of water usage will be an important part of that.

There is a whole bunch of interventions and we can learn from those. As I said, I am sure that consumer choice—telling people how much water their washing machine uses—will also help influence the behaviour that we want.

Alan Lovell: Things like hosepipe bans are not too misfortunate from this point of view; they bring it home to people. Frankly, their earlier application in some instances would be a good step.

The Chair: Thank you very much for your appearance today. It has been very interesting. Thank you for your candour. I think we share many of the same aspirations. All I can do is thank you and hope that the robot that is appearing before one of our committees this afternoon was watching. If it learns by listening and watching, it will have had a very good lesson this morning. Thank you very much.