Baroness Hayman of Ullock

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That the Bill be now read a second time.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Baroness Hayman of Ullock) (Lab)

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My Lords, I am delighted to begin the Second Reading of the Water (Special Measures) Bill. Improving water quality is a priority for this Government, and we have taken rapid action to ensure that water companies put customers and the environment at the centre of what they do. The Water (Special Measures) Bill is being introduced to drive rapid and meaningful improvements in the performance and culture of the water industry. The Bill not only delivers on the Government’s commitment to put water companies under special measures but is an important first step in enabling wider, transformative change across the water sector.

I am sure noble Lords will agree that there is a lack of public trust in the water industry, and widespread concerns about underinvestment in infrastructure, levels of pollution and failures to address spills of sewage. Between 2020 and 2023, water company executives paid themselves more than £41 million in bonuses, benefits and incentives, despite poor performance in the water sector, and only one-quarter of water company customers think that companies act in the interests of people and the environment. At the same time, the number of serious pollution incidents remains unacceptably high.

That is why this Government are taking swift action to turn around the performance of the water industry as a first step towards enabling long-term change. In his first week in post, the Secretary of State announced a set of immediate steps to improve the performance of the water industry. They include ring-fencing vital funding for infrastructure investment, placing customers and the environment at the heart of water company objectives, and working with Ofwat to strengthen protection for households and businesses when their basic water services are affected. However, this Government know that this is not enough to address the fundamental changes needed to the water system and that targeted legislative action is needed. This brings us to our consideration today of the Water (Special Measures) Bill.

Concerns about the performance of the water industry have risen right to the top of the public and political agenda in recent years. The water industry was privatised under the Water Act 1989. That Act was followed by the Water Industry Act 1991, which largely sets out the regulatory regime for the industry. The industry is regulated principally by the Environment Agency in England and Natural Resources Wales in Wales, along with the Water Services Regulation Authority—Ofwat—and the Drinking Water Inspectorate. The Bill makes new provisions to improve the regulation of water and sewerage companies and gives new and extended powers to these regulators.

I turn to the detail of the provisions. As I have noted, the core provisions of the Bill serve to strengthen the powers of the regulators to hold water companies to account for poor performance. The measures it introduces are intended to complement each other in a way that will ensure that the regulators are better equipped to identify and respond to water company failings. It will encourage behaviour change to ensure that water companies are delivering for their customers and the environment, from the start of the next water industry investment period that is due to begin in April 2025. Accordingly, the Bill provides Ofwat with a new power to establish rules for the water industry relating to governance and remuneration. This power will allow Ofwat to make rules around performance-related pay and the introduction of a fit and proper person test to ensure that water company bosses are not rewarded where performance is not up to scratch.

The Bill also includes provision to make obstruction of the general investigatory powers of the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate punishable by imprisonment and allows for executives to be held personally liable for obstruction where the offence has been committed with their consent, connivance or neglect. This will help the water industry regulators to carry out effective investigations and will bring criminal charges against persistent lawbreakers.

To further ensure that non-compliance is tackled, the Bill includes provisions to enable the Environment Agency and Natural Resources Wales to issue automatic and severe penalties for certain offences, as well as provisions to strengthen environmental civil sanctioning powers so that regulators can impose a penalty on the civil standard of proof for water industry offences. This will ensure that water companies face rapid repercussions where it is immediately clear that they have acted unlawfully, and that rapid enforcement action is taken against minor to moderate offences before they can become a more serious matter.

To ensure that the regulators are able to make full use of their expanded and new powers, the Bill also provides for enhanced cost-recovery powers for the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate to ensure that water companies bear the cost of non-compliance, in line with the “polluter pays” principle. In addition, the Bill contains provisions to ensure the independent monitoring of all water company outlets. These provisions place a requirement on water companies to publish discharge data at 100% of emergency overflows and publish data on discharges from emergency overflows in near-real time. The Bill also places annual pollution incident reduction plans on a statutory footing, increasing transparency around water company operations. The Bill will also bring forward provision to modernise the existing special administration regime for the water industry, to bring it in line with special administration regimes for other regulated sectors and to ensure that taxpayer money is protected in the event of a water industry special administration regime.

Collectively, these measures represent the most significant increase in enforcement powers in a decade. This will help to ensure that water companies are delivering for customers and the environment as we move towards the largest-ever investment period for the water industry, with an £88 billion spending package proposed for the next price review period.

I turn to delegated powers and devolution. The Government are committed to working closely with the devolved Governments to tackle shared problems, including the issues facing the privatised water industry. My officials have worked closely with Welsh counterparts during the development of the Bill, and I am delighted that most provisions in the Bill are expected to apply to both England and, at the request of Welsh Ministers, Wales. Although the Bill does not apply to Scotland or Northern Ireland, my officials have also engaged with these devolved Governments during the Bill’s development.

With regard to the Bill’s powers, it contains provisions both to amend primary legislation and to confer a limited number of delegated powers on regulators and the Secretary of State. To reflect the evolving nature of the issues facing the water industry and the changing expectations of customers, the Bill contains eight legislative and three non-legislative delegated powers. These provisions contain a mix of powers conferred directly on regulators—for example, the power to set rules in relation to remuneration and governance—and powers that will be enacted via the affirmative resolution procedure, such as the power to amend relevant environmental regulations. These delegated powers will enable government to keep pace with and react to developments in the water industry. I assure noble Lords that these powers will be subject to all appropriate scrutiny and safeguards.

Since the Bill’s introduction there has been some inaccurate reporting on the effects of its provisions. I would like to take the opportunity to correct some of these misconceptions, to ensure that we can have a fully informed and helpful debate.

First, it has been reported that some of the Bill’s measures—for example, those that will enable the banning of bonus payments and those that enable imprisonment for obstruction offences—already exist in law. Let me explain why this is not the case. Although it is possible for Ofwat to set expectations with regards to executive remuneration, it does not have the power to set legally binding rules. The Bill introduces such a power, meaning that Ofwat will be able to stop the payment of bonuses to executives where performance has not been up to scratch—for example, in the areas of consumer matters, environmental performance, financial resilience and criminal liability. Similarly, although the obstruction of regulators can be punished by imprisonment, that is currently possible only in extremely limited, emergency circumstances. The Bill strengthens the maximum penalty for all cases of obstruction to imprisonment for up to two years. It also makes that offence triable in the Crown Court and, importantly, ensures that executives can be held liable for wrongdoing, which is not currently the case.

Secondly, there have been reports around the use of special administration regimes to nationalise water companies and on the impact of the special administration regime clauses on customer bills. I want to be clear. Special administration is not a form of renationalisation. It is a tool to ensure that vital public services continue to be provided after a company fails. The Government would take no ownership or management of the company during a special administration regime. It would cost billions of pounds and take years to unpick the current ownership model; it would slow down our reforms, leave sewage pollution to get only worse and stall much- needed investment. There is a very high bar for the imposition of a special administration regime. The Government and Ofwat will always act to protect consumers as a priority, and any intervention that would increase customer bills would be considered very seriously and as a last resort.

Having spoken about what the Bill will do, it is important to note as well what it does not cover. This Bill focuses specifically on measures relating to the regulation of water companies, taking immediate action in response to the poor performance of the water industry in recent years. However, the Government are clear that the Bill alone will not be enough to fix our water system. It is an immediate down payment on the wider reform that is needed after years of failure and environmental damage. It is for this reason that the Government have also announced a review to fundamentally transform how our water system works and clean up our rivers, lakes and seas for good.

Through this review, we will examine holistically the framework that underpins our water sector; we will invite views from a range of experts and stakeholders; and we will hold a public consultation to ensure the proposals are robust and radical enough to meet the public’s appetite to clean up our polluted waterways. I am sure that many noble Lords here today will take a keen interest in the work of this review, and I have already had discussions with many in this House about wider issues facing the water sector. I look forward to working with noble Lords closely as the review progresses, and further detail on this will come forward later this autumn.

To conclude, I know that there is considerable support, both within Parliament and among the public, for this Bill. I hope that Members of your Lordship’s House will agree on the importance of working together to reset and transform the water sector through these first crucial steps and the work to come. I look forward to what I am sure is going to be a passionate debate; I would expect nothing less for a Bill of this importance and I am greatly looking forward to hearing noble Lords’ contributions. I hope that your Lordships will support the Bill and ensure that we work together to strengthen our regulators and hold water companies to account.

Lord Blencathra (Con)

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My Lords, I declare my interest as set out in the register.

This is an interesting little Bill. Among the first bits of advice I had from my illustrious predecessor, the great Willie Whitelaw, when I became an MP in his place, was, “Remember, David, in Parliament always distinguish between activity and achievement because there are those who run around being highly active but achieve nothing”.

I understand where the Government are coming from with this Bill. There are problems in the water industry—that is not the fault of privatisation, which has been successful, but of inadequate regulation by Ofwat. Those problems were addressed by the previous Government in the extensive Plan for Water, and the new Secretary of State, in his speech to the water industry on 5 September, seemed to repeat most of the items in that plan. He ruled out nationalisation and said that water companies need to attract private investment. He said he wanted to address catchment-level water solutions, and to that end intends to run a full review and seek a reset of the industry and a new partnership. He also wanted nine more reservoirs built, along with pipelines and peatlands, to help store water. These are very important issues. If that could be delivered then that would be a major reset and a real achievement. We all want to see that review conducted as speedily as possible, especially since the Plan for Water, published by the previous Government in 2023, set out most of what seems to be on the Secretary of State’s agenda.

Then we come to the Bill and what it will achieve. In launching the Bill and the proposal to double compensation for water cut-offs, the Secretary of State used phrases such as “crack down” and “toughen up” as he outlined measures to send executives to prison, automatic fines by the regulator, changing the burden of proof and a whole new range of unspecified powers for the Secretary of State and the Environment Agency. To me, it sounded very much like a remake of Tony Blair’s

“Tough on crime, tough on the causes of crime”—


which did not work then, despite the rhetoric. That is a lot of activity, but where is the impact assessment by the Government to show what it will achieve? The Government hope that automatic fines and the changed burden of proof will free up the Environment Agency to pursue the larger and more complex cases. If that is the case then we should see the calculations leading to that belief.

Will the measures in this Bill improve water quality? Charles Watson, the chair of River Action, said that while it was a “relief” to see the new Government acknowledge problems in the water sector, only a “comprehensive and holistic review” of regulation would fix matters. James Wallace, the chief executive, said:

“Talking about CEO bonuses is not going to sort things out. What we really need to see is a regulator, the Environment Agency, with its teeth given back and its funding given back”.


The Chartered Institution of Water and Environmental Management, while welcoming the review, said it is of paramount importance

“that this review cuts right across the activities of all government departments. From Defra, through housing, transport, energy, health and more. It mustn’t be kept in a Defra-sized box, or it will fail to match Reed’s ambitious pitch”.

I hope the Minister will confirm that the review will cut across all those different government departments and agencies.

Those I have just quoted welcome the Bill as a little step forward, but the real achievement would be if the Government could deliver on the Secretary of State’s vision in the review. That is why I conclude that the Bill is good political talking tough, but it might achieve little; it is possibly activity over achievement. However, we shall examine it fairly and seek to improve it, while asking some key questions.

First, I want to look at new Section 35B of the Water Industry Act 1991, which introduces the concept of “specified standards”. The existing Section 35A already deals with remuneration. The company has to base it on meeting “standards of performance,” in the wording of Section 35A of the 1991 Act. The water services regulation authority, Ofwat, will be given the power to draft rules on what these specified standards are, including whether someone is a fit and proper person to be a senior officer,

“or in respect of other matters”.

That is quite a wide-ranging power. How will it interface with the Company Directors Disqualification Act 1986, which provides extensive powers to disqualify a director? The Financial Conduct Authority also has rules on what is a fit and proper person.

In future, we could see water company executives who will have satisfied all the company law criteria to be a director, but their remuneration will be subject to new so-called “specified standards”. Those standards will include

“consumer matters, … the environment, … the financial resilience of undertakers, and … the criminal liability of undertakers”,

and

“any other matters that the Authority considers appropriate”.

Who on earth will ever want to be a director of any water company with those potentially onerous conditions? We have no idea yet what those conditions will be, and it is essential that we have some indication of that before we get to Report. The Secretary of State has to be consulted under new Section 35C. Since the Government have specifically made a big fuss about these new rules, the Government must have some idea of what they want in them and cannot say, “Oh it is not up to us; it is entirely up to the authority in due course to invent the rules”.

Punishing directors for carrying out the wishes of the shareholders is surely the wrong approach. When Macquarie had 48% of the shares in Thames Water, jacked up the debt by £2.8 billion and took out £1.1 billion in dividends, do we really think that the managing director and directors could have stopped that? The majority shareholder, I submit, was in the driving seat. Macquarie and other shareholders would have rapidly replaced those directors and executives if they tried to limit dividends and spend more of the profits on infra- structure. There is no question on these Benches of us seeking to let water companies off the hook. Where they have failed to deliver, they should suffer sanctions and penalties. However, penalising the management is targeting the wrong group; it is the shareholders who should lose out financially for company wrongdoing, however that may be defined. The description of a person in a “senior role” includes

“such other description of role with the undertaker as may be specified”.

We need to know a little more about who those people might be. That is something we shall need to explore in Committee.

I turn to Clause 4, which amends Section 110 of the Environment Act 1995 with a new imprisonment provision, of which the Government have made a big thing. Sections 110(1) and (2) of the Act sets out the offences of knowingly obstructing “an authorised person” from carrying out lawful duties, of failing

“to comply with any requirement”,

of preventing

“any other person from appearing before an authorised person”

or of failing to “provide facilities” for an investigation. That person shall be guilty of an offence. The penalty is a summary fine or imprisonment to the maximum of the magistrates’ court levels. On indictment, it could be a fine and/or up to two years in prison.

That is the current law, so how does Clause 4 change it? It makes not a single change to the offences in Sections 110(1) and (2). It makes not a single change to the fines and imprisonment. I am very happy to be corrected by the Minister, and I hear what she said about there being a difference. I am happy to be educated on that in Committee, but it seems that the Government here are dancing on the head of a pin—making a big thing about a tiny little change. I think these offences were included in the past. This clause seems to replicate existing provisions to let the Government boast that they are taking tough action against water undertakers, to make a political point.

I instinctively dislike civil penalties imposed by government or arm’s-length bodies or other organisations, whether it is the Inland Revenue or a parking fine company. It avoids due process. I leave it to the noble and learned Lords in this place to give their opinions on the dangers of changing the burden of proof from “beyond reasonable doubt” to just “the balance of probabilities”. I have no problems if a company has genuinely committed the offences and deserves the penalties, but changing the balance of proof could mean that some were unjustly penalised. That could result in large fines and damage to the company’s reputation.

I have similar concerns with Clause 6, on automatic penalties for specified offences that will be created by the Secretary of State. At least those have to be laid before Parliament under the affirmative procedure, and we will have a chance to debate them. As the noble Baroness pointed out on the delegated powers, the Bill gives enormous powers to government agencies. I look forward to reading the Delegated Powers Committee’s report to see what it says about the powers in the Bill and whether it agrees with the Government that the scrutiny they propose is adequate. I also want to see more of the Government’s thinking on the regulations they propose. They cannot say that it will be up to Ofwat and the Environment Agency to invent the rules, and that it is nothing to do with them. They have clear ideas about what they want in the regulations, and we need a steer.

We will also want to explore the Government’s thinking on the involvement of consumers in board decision-making. The Bill is exceptionally vague on that. Clause 1(3) requires a water company to involve consumers in any decisions

“likely to have a material impact”

on consumers. I suggest that any decision made is likely to have an impact on consumers, so what is the Government’s definition of “material”? Clause 1(3) also says that consumer views may be represented by someone being on a “board, committee or panel”. These are radically different concepts, from executive decision-making to an advisory panel. Again, we would like to hear more of the Government’s thinking.

The Secretary of State made a major speech to the water industry on 5 September, and committed the Government to building nine new reservoirs, multiple large-scale water transfer schemes and 8,000 kilometres of water mains pipes, and to upgrading 2,500 storm overflows. As the noble Baroness said, Ofwat costed that at £88 billion. The Secretary of State, in his interview last Sunday, was adamant that every penny of that money would be raised in the private sector and invested within the next five years. As the Secretary of State is clear that these things need to be done—a lot of them were set out in the Plan for Water of 2023 —and it would be a real achievement to do them, why are they being kicked into a long-term review? That is what we should be discussing in this House as soon as possible—the balance between investment and increasing water bills.

The Secretary of State’s endorsement of privatisation and bringing in private investment was interesting. He said that his plans would

“unlock the biggest ever investment in our water sector, and the second biggest private sector investment into any part of the economy for the entirety of this Parliament”.

In other words, he was saying that privatisation worked, but proper regulation was inadequate.

Those are the big issues that will actually deliver a better water industry, not the presentational matters in the Bill. Nevertheless, we will explore it constructively, support it where it is right, and seek to amend it where necessary to ensure due process and clarity. We look forward to addressing all that in Committee.

Earl Russell (LD)

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My Lords, I declare my interests as set out in the register. There is much to welcome in the Bill. There is much that we on these Benches will support. Equally, we call on Labour to be braver and bolder and to act with greater urgency. The environment cannot wait while Labour decides on the real systemic reforms that are the only solutions to this crisis.

The most positive thing in the Bill is the acknowledgment of the scale of the problem and the signal from Government that further, more fundamental measures, beyond this Bill, will be tabled in this Parliament. I give Labour my thanks for this. With this we finally have a potential starting point for change. The Bill is a welcome first step, but the Bill alone is far from a comprehensive solution. It is a list of useful measures, but if the Government think that simply blocking the payment of bonuses to poorly performing water company executives and a few other measures will resolve the sewerage crisis, there are real grounds for further thought.

Since privatisation 35 years ago, we have witnessed one of the worst environmental crises in the UK, with unabated and unprecedented pollution. Just 14% of England’s rivers and streams are in good ecological health. In 2023, there were some 3.6 million hours of untreated sewage discharges in England alone. Water, water everywhere, and not a drop of it unpolluted.

Meanwhile, water companies have paid at least £78 billion in dividends, while failing to invest adequately in the infrastructure required. At the same time, they have piled on £64 billion net in debt, when the water companies had been debt-free at the point of privatisation. The regulatory system is broken and has failed to hold companies to account. When researching this speech, I was astonished to find that Ofwat has to give 25 years’ notice to revoke a water licence.

Measures such as monitoring outflows, banning bonuses, automatic fines, lowering the burden of proof, and possible jail terms for obstruction of investigations are all welcome. The reality is that the Bill is just a list of useful, but ultimately nothing more than stopgap, measures. The real change needed is a radical and complete systematic overhaul of the whole system. Feargal Sharkey called the Bill inadequate. He rightly said:

“We want an end to pollution, clean rivers and seas. We wanted transformative action and these small steps do not satisfy that goal”.


Similarly, Charles Watson of River Action said:

“What we’ve got today is a long list of measures that will cost the government nothing and is really not going to fix anything because it’s the system that’s broken”.


The review of water health is welcome. Is the Minister able to confirm that the review will be independent of government, with an independent chair? When will it start work, and when is it expected to complete? Steve Reed has said that a “full review” of the water sector will take place over the course of this Parliament. I hope that Labour has the courage to be brave. It also needs to find its own policies and grasp the reform nettle. Why is more comprehensive legislation not yet ready, after some 100 days, on such a fundamental issue?

The broken system and the consequences of light-touch regulation were all issues at the general election. Our rivers, streams and lakes have been polluted to the point of ecosystem collapse in some cases. I am proud that my party has led the campaign on these issues, which cut through to people on all sides of the political spectrum. The broken system saw the polluter paid time and again, instead of the “polluter pays” principle ever being applied.

My warning to Labour is that the people who voted for it did so with an expectation that real action would be taken to resolve this mess, and that it would be undertaken at scale and pace. The Liberal Democrat position is clear: out-of-control water companies must be forced to put the interests of the environment before profits. They must be held to account for their corporate failings. Our policies include plans to abolish Ofwat and install a clean water authority—a regulator with real powers. We would turn private water firms into public benefit companies—the quickest and least costly method of resolving this mess. England remains the only country in the world to have privatised its entire water system, and for good reason.

The hard part about scrutinising the Bill is that the important parts of the puzzle are not in it at all. They are yet to come, and we do not know exactly when they will arrive and what they will say. I remain to be convinced that, even with further legislation, Labour can keep private water companies and the existing regulation architecture, including Ofwat, in place, and pull off the magic trick of protecting the environment, making regulation fit for purpose, securing the billions of investment and protecting bill payers in the midst of a cost of living crisis.

Can the Minister reaffirm that, where water companies systematically use overflows to dispose of untreated sewage in dry conditions, it is the Government’s intention to swiftly prosecute them? Enforcement powers exist already—water industry bosses can be sent to prison under certain circumstances—but these powers have hardly ever been used. Since 2001, the DWI has brought only three prosecutions and given two cautions. Are the Government clear that the regulators will have a firm touch and prosecute breaches?

It is welcome that the Environment Agency will be able to levy automatic fines and recover costs, but cost recovery is retrospective and does not pay for the enforcement today. The Environment Agency had its budget cut almost in half between 2009 and 2019. Will this Government properly fund enforcement? Laws cannot be enforced without effective regulators. We need fundamental regulatory reform. The Bill could be strengthened through the inclusion of environmental and clean-water duties on Ofwat. Companies that persistently breach obligations should face the prospect of special administration. We need much larger fines that are a real deterrent. We need legislation which ensures that funds from fines will be invested in environmental projects through the water restoration fund. Enforcement is still based solely on ecological impact, with no requirement to restore areas that have been severely polluted in the past. We need more investment in mechanisms and processes that work with nature—so-called nature-based solutions. All water companies should be required to implement pollution reduction plans. Ofwat should have a statutory duty applied to contribute to meeting our climate and nature targets.

The Bill has many measures coming in at different times and subject to different consultation processes by associated regulators and the need for many measures to be approved by statutory instruments. When does the Minister envisage that all the measures contained in the Bill will be enacted? Will the Minister agree to work with your Lordships’ House to ensure that measures in statutory instruments are able to be debated on the Floor of the Chamber as far as is possible? Finally, I worry that the villain of the piece is the lack of funding for enforcement measures. Only real reform, determination and hard cash will ever change this.

The Duke of Wellington (CB)

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My Lords, I welcome the Bill. It demonstrates a much greater determination by the new Government to tackle the continuing and barely reducing problem of pollution of our rivers, lakes and beaches. Since we debated these matters three years ago during the passage of the Environment Bill—now the Act—the position has hardly improved. It has needed new Ministers with greater focus to force the water companies to take the matter more seriously. It has been a national disgrace that water companies have in many cases become financial structures to provide investors with an above-average return, through not only dividends but high-yielding bonds and executive management rewards.

We should all remember, as any player of Monopoly knows, that water companies used to be boring utilities providing a secure but not very exciting return. Some 35 years after privatisation, the companies are, on the whole, not owned by the original retail investors, who in many cases had been the consumers of water services in a particular area, but are now owned largely by institutional investors through private equity structures with high leverage. Such structures are not suitable for a regional monopoly utility. Water is essential for all residential and business premises.

I commend the Government for increasing accountability and transparency for the water industry. Yesterday, I heard the chief executive of Ofwat say on the “Today” programme that there needs to be a cultural change in the water companies. I believe that the Bill is likely to help that process as directors of the different companies come to realise their personal accountability. However, I must again suggest to Ministers that they should set up, within the independent review that they have already announced, a review of the current regulatory structure. The Minister has said that there will be a review of the whole industry, and I quite understand that it cannot be part of this Bill, but I hope that when she replies to this debate, she will undertake that a review will definitely include a look at the structure of regulation.

I and other noble Lords have received a suggestion that the growth duty placed on the Environment Agency and Ofwat should be disapplied, but this was added only recently by a statutory instrument. I spoke against that statutory instrument—the then Minister was here a few moments ago but unfortunately is now not in his place—but, as there is no ability by either House of Parliament to amend a statutory instrument, it was passed. I cannot imagine that this new Government would wish to be seen to disapply a growth duty on any public body.

Throughout this Bill, there are frequent references—sometimes slightly confusingly—to new powers for the regulators. Dividing regulation between Ofwat as the financial regulator and the Environment Agency as the environmental regulator has, with hindsight, allowed the industry to evolve in a way that has damaged the aquatic environment and offended the public’s perception of our green and pleasant land. The state of our rivers, lakes and beaches is a national disgrace—we must surely all admit that. At last, this Government are trying to overcome this stain on our reputation and our sense of well-being. I have a concern, however, that unless we improve the way we regulate the polluters we will not in the long term arrive where we want and need to be in terms of the ecological state of our inland and coastal waterways.

A number of us yesterday received emails suggesting that Ofwat should be given an additional duty to protect the environment. Whereas this is a laudable intent and something that all businesses and indeed individuals should aspire to, I am not sure that, in the current regulatory structure, it would be sensible to add this statutory duty to the other regulator while it is principally the duty of the Environment Agency.

I turn now to some specific ways in which I think the Bill could be improved. I am very grateful to the Minister for a meeting that a number of us had with her on Monday. It is, I think, significant that the Bill has been tabled in this House, thus enabling it to be better scrutinised—and improved—before it goes to the other place where, as we know, very few amendments will ever be properly considered, let alone voted on.

I am a bit concerned at the idea of consumer representatives on boards. In my experience, such defined interests on a board are not likely to improve the effectiveness of the board. New Section 35B(6), inserted by Clause 1, on page 2 of the Bill, does refer to a “committee or panel”—as the Opposition spokesman has already said. I believe that one of these would be much more effective and appropriate, particularly if the chief executive was required to have regular meetings with such a panel. If consumer interests are to be represented, why not also environmental interests, which I would have thought are, in this circumstance, equally important?

In new Section 94EA, inserted by Clause 2, the requirement for water and sewerage undertakers to prepare and publish a pollution incident reduction plan should, I suggest to the Minister, be extended to include a legal requirement to implement the plan. There are too many cases of plans being announced and then not being delivered.

The Bill introduces the concept of “emergency overflows” in addition to the permitted combined sewage overflows, or CSOs. I understand the department’s wish to have another category of overflows, but it surely cannot be justified that the water companies can claim that an emergency overflow is legal if it is caused by an electrical power failure, as detailed in new Section 141G(2)(a), inserted by Clause 3. Any other public service provider, such as a hospital or a school, would be required to have in place sufficient electricity generator capacity to cope with power failures. I suggest to the Minister that this is too easy an escape clause for the water companies.

In conclusion, I support this Bill but I hope that, in Committee, we can help the Minister to make this an even better Bill before it goes to the other place.

Lord Lipsey (Lab)

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My Lords, my wife and I have had the privilege of living in the Wye valley in Wales for nearly 30 years. We go swimming at Glasbury most mornings in summer, some mornings in winter, and my wife even took the plunge once on Boxing Day, for which she should certainly have a medal. We still do this, but it is a deteriorating experience. Part of the river near us was closed this summer to wild swimmers such as us on the grounds of pollution.

I still think back to the days soon after we moved in when the noble Lord, Lord Birt, took us down to the local village of Erwood to a salmon leap to see those magnificent creatures, 20 pounds and more in weight, swimming up the stream to breed. I am afraid that there are no salmon leaping today—indeed, there are only about 2,000 salmon left in the Wye, and the species is officially regarded as on the verge of disappearing. If we were the generation that allowed the salmon to disappear, I think posterity would have some very nasty things to say about us.

Why has this happened? There are various causes, but overwhelmingly the most important is—I use the word, whatever the risk of offending your Lordships—chicken shit. Something like 80% of the pollution in the Wye is caused by chicken shit that is not moved off the farms, lies on the fields and is driven by water into the stream, where it does untold harm. Residents such as us complain about children who are sick after swimming, rotten egg odours, opaque green pea-soup blooms and brown slime on the bottom. It is not the Wye that we moved next to 30 years ago. This beautiful river is being turned into a sewage dump.

Whose fault is this? It would be nice to find a single person to blame, but there are quite a lot. For example, the Environment Agency was sued recently by Leigh Day, an admirable firm of solicitors acting on a no-win, no-fee basis. The judge said no, because the Environment Agency was getting its act together. That seemed to me to be progress.

As for other culprits, the previous Government produced a Wye action plan in April. It was quite ambitious and quite a good read; the only trouble was that the amount of money they were putting in was totally inadequate for what was needed. There is also a problem of governance, as the river flows through both Wales and England.

There is also a problem with local councils. First, if a council has an application for planning permission for a chicken farm, it cannot look at the total number of chicken farms in the area but has to look at the case for that individual farm—and that causes it, naturally, to have to say yes. That is especially so in areas such as ours, where small farming is so important for employment.

Should we blame the farmers, because after all this substance comes out of the backsides of their chickens? They should not cop the whole rap—small farming is a religion where we live, and quite rightly so. Farmers have been overwhelmed with advice from the Government and their agencies as to what they should be doing, but doing it can be costly, as there is a shortage of government funds and some advice is not taken, however wise it may be.

At the end of the day, the culprits that I prefer to finger are big agra—and in this case Avara in particular. It was formed in 2018 by a joint venture with Cargill, a UK company; it is one of the UK’s biggest food businesses, with £1.5 billion-worth of turkey and chicken. The heart rather misses a beat at the thought of all those chickens and turkeys. Its directors are paid on a scale that would make even water company directors envious, at £438,000 each per year for doing their job. It would do no harm if there was proper scrutiny of their pay, in the way that the water industry itself is to be controlled.

However, in fairness, Avara is not coining it in; it made an operating loss of some £11 million according to its latest annual report. It is certainly not indifferent to the damage that can be caused by its activities; it has to retain a social licence to operate and, if it goes on messing up the environment for everybody, it will not be allowed to stay in business. That means expensive shipping of the stuff to places where it is more used as a fertilizer and less harmful.

I imagine that some of those directors on £438,000 a year are shaking in their boots at the arrival on the scene of the noble Baroness, Lady Hayman. When she wants action, in my experience action is what she normally gets. If this Bill does not provide sufficient solution to the problems, she will find something that does—I promise you that. She repeated today the Government’s pledge of wider scrutiny of water, which could lead to some huge changes.

I also, in a House that is not an elected House, pay tribute to the local citizens who put their backs into campaigning against this stuff, including scientists who provided 200 samples a month of water from the Cambrian mountain source to where the Wye comes out in Monmouth. There is no doubt whatever that they have had had an effect. Natural Resources Wales at one stage claimed that chicken poo had nothing to do with what was going on, but even it has had to concede that now.

We can make some progress through amending this Bill. As noble Lords know, those possibilities are being explored. At the very least, the Bill and the debates on it present a matchless opportunity to promote the cause of this iconic river and stop it dying before our eyes.

Baroness Browning (Con)

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My Lords, it is a great pleasure to follow the noble Lord, Lord Lipsey, and I congratulate him on the work that he has undertaken to protect the beautiful River Wye. I declare that I am a member of the APPG on Water.

I welcome this short but focused Bill to address the water system, which we know is broken on many levels. The tests of its success will be if the measures outlined will be statutory standards rather than guidelines, the real power of regulators, and timely enforcement rather than missed targets.

Clause 1 requires regulators to be able to block payment of bonuses to executives of water companies that fail to protect the environment by allowing UK waterways to be polluted by sewage. Do those penalties include directors’ shares and dividends?

Ofwat’s Water Company Performance Report 2023-24 talks about there being a need for urgent action to drive lasting improvement within the sector, as it is disappointed that water companies have fallen

“further behind on key targets for pollution and internal sewer flooding”.

For a regulator, the choice of that word “disappointed” rather smacks of the benign schoolteacher writing an end-of-term report. I hope that the measures in this Bill will turn it into a real regulator and not just a group of disappointed people.

While we are talking of individual penalties, I ask the Minister what the Government’s position is on regulators not being stuffed with ex-water company employees. Do they have a view on this? Is it pertinent to what the Government are trying to achieve?

Clause 2, which has been mentioned already—on the pollution incident reduction plans to reduce the frequency, seriousness and causes of pollution—is particularly important for the shocking state of our rivers, from the Wye to the Thames, not forgetting those very important chalk streams. I notice here that the power of the Secretary of State, in consultation with the Environment Agency, will be subject to guidance under secondary legislation, which the Minister mentioned. The Minister will be aware that Members of both Houses have interests in particular water courses, as of course do the public. I hope that she will look again and confirm that this secondary legislation will be subject to the affirmative resolution of the House so that we have an opportunity to discuss it—not just some statutory instrument laid without proper scrutiny.

I notice that the document that appeared only late this morning—the memorandum from the Department for Environment, Food and Rural Affairs about delegated legislation—states that, in particular in this part of the Bill:

“This power is intended to be used exceptionally, and only in circumstances where the Secretary of State considers water companies to have failed to include material relevant to the function and purpose of a Pollution Incident Reduction Plan … There is no parliamentary procedure required for giving directions under the WIA 91”—


the original Act—

“and the Department does not consider that the nature of the direction proposed would require a departure from that position”.

I have to ask the Minister to look again at that because it is important in this section of the Bill that Parliament, in both Houses, is aware of it.

Clause 3, which of course is new Chapter 5 of the Water Industry Act 1991, requires water companies to report on discharges within very narrow timeframes. That is all well and good, but I am disappointed that the Government are not also seeking, even if it is in a different Bill coming forward, to reduce the volume of wastewater entering the sewerage system in the first place.

Something which I have raised several times on the Floor of the House is the use of grey water, from rainwater run-off and domestic appliances, which adds to the volume of the sewerage system. I have asked several questions about the need for both domestic and commercial changes to building regulations; I have always been told by the Front Bench that it is too expensive. Surely, with the Government’s ambitious housebuilding programme, now is the time to incorporate it in new builds, where the need for immediate connection to the existing system may end up being in conflict with the measures in this Bill. I hope that the Minister will, if necessary, discuss this with the appropriate department with those responsibilities.

There are a few other things that I would like to raise. Will there be a review of existing licences, some of which go back many years?

When I lived in Devon, my home was subject to three feet of flooding throughout the ground floor on two occasions, eight years apart. When a house floods like that, I know to my personal cost that it is not just a matter of waiting for the water to go down. We were out of our home for six months each time. I would have liked to have heard more about the need for flood prevention in critical areas. We all know this is going to get worse due to climate change.

Have the Government anticipated that higher corporate financial penalties, as promised in the Bill, may be scapegoated in future to explain the lack of infrastructure capital investment? How can this be avoided? I hope the Government have reflected on that.

I hope to participate in Committee, when we shall of course deal with the detail. Will the Minister publish an impact assessment before Committee? Can she confirm the timetable after Royal Assent and say when she anticipates the measures in the Bill will be enacted?

Baroness Parminter (LD)

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My Lords, yesterday we learned that water companies failed, for the fourth year in a row, to meet critical pollution reduction targets and that last year over 3 million hours-worth of sewage was flowing through our waterways in England. And yet, like the noble Duke, the Duke of Westminster—

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Wellington.

Baroness Parminter (LD)

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I heard on Radio 4’s “Today” programme that the response from the regulator was that what was needed was a change in culture. Now, putting aside that it seemed strange that the regulator would say culture change was the answer, the issue is that these companies have had the chance over decades to show that they can change, and they have not. Now is the time for the Government to intervene.

Like others, I welcome the strong manifesto commitment by the new Labour Government to clean up our waters, rivers and beaches, and I welcome this first step. It is not going to do it on its own, as indeed the Minister said in her opening remarks, but it is a welcome first step which will do something to help regulate these failing companies and extend the remit of this sadly ineffective regulator. At the same time, it will hopefully allow the Government to undertake a broader review where they can identify a way forward for this broken model of managing our precious water resources.

The special measures Bill is welcome, but there are a number of areas I would like to see strengthened. I find it very concerning that there is not a public interest remit for the regulator Ofwat. I think the general public would find it very surprising that the regulator for our water companies does not have any need to look at issues of ensuring clean water or improving the environment. However, it does have binding, legal duties to improve the economic performance of companies. Over time, this has allowed them to sweat assets and put profit before public interest. That must change. Again, as the noble Duke, the Duke of Westminster—

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Wellington.

Baroness Parminter (LD)

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I am so sorry: the noble Duke, the Duke of Wellington—it is not easy to muddle the two, so apologies for that. He rightly made the point that this situation was actually made worse by the last Government when they introduced the legislation that made Ofwat have regard to the desirability of promoting economic growth when it was undertaking its duties. We have to redress that balance. Of course, water companies have to make a profit—we cannot have companies that do not make profits; they would not be in existence—but there is an imbalance between focusing on the bottom line and ensuring that public interest in our water is delivered by these companies. That must be redressed. The special measures Bill, by changing the remit of Ofwat remit to have a public interest duty, is a way to do that.

I very much welcome, in a spirit of hope rather than expectation, the pollution incident reduction plans that will do what they can to ensure that we see less pollution in our rivers and waters in the future. Like other colleagues, I feel very strongly that it should be a duty not just to produce and publish them; there must also be a duty to implement them. It must also be a duty on all water companies, both straight water companies and water sewerage companies. We would like to see some amendments on that.

We need to make sure that those pollution incident reduction plans do not just end up being stuffed full of the cheapest and quickest options to tackle combined sewer overflows. If we allow that, all we will end up with is downstream proposals for end-of-pipe storage, such as concrete storm tanks, at water recovery centres, rather than looking upstream to find sustainable—admittedly more expensive—options that will deliver sustainable drainage and other nature-based solutions. These will not only deal with the combined sewer overflows but will offer other benefits to society more broadly, in terms of flood alleviation and liveability for communities, if we are talking about sustainable urban drainage systems, for example.

So I hope that, in Committee, we will have the chance to ensure that those pollution incident reduction plans are not just stuffed with the quickest and the cheapest but actually move companies towards looking towards the sustainable and the best.

Like other noble Lords, including the noble Earl, Lord Russell, who spoke so well earlier, I want to add my voice to say that I hope that, in summing up, the Minister today will be able to say a bit more about the review on which we are all pinning such high hopes. Like others, I would very much like to see a very clear and firm look taken at the operating and financing models of companies. My party has long and strongly argued for social and environmental purposes to be incorporated in water company corporate articles of association. I very much hope to see that sort of aspect looked at.

We need to make sure that all areas across government are included, because there are so many areas which impinge on how we manage our water, including talking about planning rules for new homes and the right to connect for developers, or incentivising sustainable agriculture so that we help farmers to do what we need them to do and not contribute to some of the run-off that the noble Lord, Lord Lipsey spoke so powerfully about, and really starting to prioritise catchment-scale planning for water. We need to look at all the areas in that review and ensure that we have an enforcement regime that is worthy of the name. Without that, it is not worth the paper it is written on.

I will add one thing that no other Member has yet mentioned this afternoon. I hope that the review will look at the role of consumers, of us as individuals, in paying for all the new infrastructure that will be required to deliver the water services we want and need and also at our responsibility to save water, which for too long has not been articulated strongly enough. I remember that 10 years ago, during the passage of what became the Water Act 2014, I made the case for compulsory water metering and better standards for installations in homes. The case for compulsory water metering with social tariffs has not gone away; it is still here. However, I hope that the Government will at least look at the role of what consumers are expected to do and pay for in this whole review, because they must be an integral part.

I was very pleased to hear the Minister say that there will be public consultation on this, because it is our water system. It is a problem that all of us know about, wherever we live, whether it is on the Wye or me by the River Wey in Surrey. We have all had our water stopped and have all seen slurry in the rivers. All of us have a say in this and the public will want us to do the best we can to help the Government make this special measures Bill and the review what they need to be.

Baroness Jones of Moulsecoomb (GP)

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It is always a pleasure to follow the noble Baroness, Lady Parminter, but it is also daunting, because she can speak without notes for eight minutes. I cannot do that because I have so many complaints about the Bill, so excuse me for reading notes.

We have heard about the organisation River Action a couple of times; I am on its board and it will be playing a role in giving advice to the Government on how the Bill can be improved.

I know that the Minister knows how much I admire her and trust her as a Minister and in her role today. But, at the same time, the Bill is deeply disappointing. It is disappointing to the point of being almost a joke, because it does not do what the majority of people would like it to do. It is about the regulation of a capitalist monopoly and the good management of a privatised cash machine that water bill payers subsidise. The money just goes straight out and we do not get a benefit. The Bill tries to regulate by using the same people and organisations that have failed for the past 30 years. How can that change? I do not see that that is possible.

The Bill also tries to threaten the top people with jail time using the same tools that have been failing to work for 20 years. What it does not do is get back the billions of pounds that these company shareholders have pocketed for decades, or even stop those same shareholders from pocketing billions of pounds of our money in the future. Nor does it stop the water companies dumping sewage in the waterways. Instead, we hear about Ofwat making backroom deals that will keep the private companies in business by weakening the enforcement of regulations. I do not understand how that can be happening.

We should enforce the regulations—if the businesses fail, they fail—and let the companies know that this Government want the work done. Ofwat has made clear that the water companies have had the money they need, so they must either get the job done or give us a refund. What the Government should not do is allow these companies to run up more debts in order to pay out more dividends. Those debts and dividend payments have already cost us four months-worth of water bill payments. In what other area of life are consumers paying out four months-worth of bills each year but getting nothing back in return?

We are not even being offered a guarantee of clean water or that the leaks will be fixed. In fact, we have the insanity of a country soaked in record rainfall arranging a deal that would use tankers to import Norwegian water in the event of drought. That is so lunatic that I cannot even finish my sentence about it. As other noble Lords have said, water is a basic of life. We need water—all life needs water—so why is it in private hands and subject to profiteering?

Much of this Bill is about what happens when a water company fails and goes into a special administrative regime. Ministers have said on several occasions that they will not bring water companies into public ownership because of the cost. They have been quoting a six year-old Social Market Foundation report, but they ignore the very recent calculations by Moody’s and the S&P credit rating agency that these shares are junk. Their estimate of how much it would cost is very different.

Professor Ewan McGaughey of King’s College London said:

“Special administration would not cost the Treasury or taxpayers anything ... special administration enables the Minister to put a plan before”


the High Court to cancel a company’s debt

“if continued payments to banks would interfere with properly carrying out the water company’s sewage or clean water functions”.

So why does the Minister not just do that? Special administration sounds great and very cheap. As Professor McGaughey said:

“The best way to clean our water is with more investment. Forty percent more investment would be possible if we stop bailing out banks and shareholders with billpayer rises. It will cost us over £12.5 billion this Parliament to keep paying shareholders and banks. … The right way to close this black hole is to make failed companies lose their licences, cancel the debt and transition to public water … This is all possible under the existing law”.


As for the debt that was accumulated to pay shareholder dividends, I understand that the Thames Water debt is now being traded by hedge funds. They are buying this debt on the cheap because they think this Government are stupid enough, or corrupt enough, to compensate them at a higher level. As much as I hate the idea of rewarding the parasites in our water industry with compensation for worthless shares, I dislike even more the idea of hedge-fund managers making a profit from a Labour Government’s ideological rejection of public ownership, so will the Minister give me an assurance that minimal compensation will be paid to the creditors of failed water companies and that our water bills will not be used to line the pockets of the hedge funds?

The Minister mentioned in her opening statement that this Bill had public support. I knocked on a lot of doors during the general election—I spoke to a lot of people in their homes and on the streets—and I think that a huge number of people, if not the majority, would support the following criteria for a more radical water Bill: no compensation for shareholders, minimal compensation for creditors, and public ownership being one of the options for these failed companies.

I will bring forward amendments to ensure that this Bill does not simply allow these failed zombie companies to continue extracting bill payers’ cash while loading huge amounts of debt on to the balance sheet. The Government need a serious look at the opportunity to bring these companies into public ownership, and this Bill should give Ministers the option to nationalise these companies where it makes sense.

Lord Sikka (Lab)

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My Lords, it is always a great pleasure to follow the noble Baroness, Lady Jones of Moulsecoomb. This Bill has more holes than Swiss cheese. I shall give noble Lords some examples. It promises to ban bonuses for senior executives but is silent on how the ban is to be implemented. Water companies can bump up basic executive pay and thereby eliminate the need for any bonus at all. Most water companies are part of large groups of companies and can offer multiple directorships to individuals, so no bonuses are necessary whatever. I hope that in her reply the Minister will tell us how this bonus ban will operate in practice.

The Explanatory Notes refer to a bonus ban for degradation of “financial resilience”. I know a thing or two about financial resilience, but there is no definition in the Bill and I have no idea whatever of what the Government mean by that. Again, I hope that the Minister will give us some ideas. How is this assumed financial resilience to be secured? Shareholders are already reluctant to invest. More debt will not increase resilience. Currently some 28% of the gross revenue of water companies is used to service debt payments. With higher debt that percentage would rise, which would destabilise companies. That leaves higher customer bills as the only option. After 35 years of abuse, that is simply not viable. Again, I look forward to some clarity.

The Bill promises to bring criminal prosecutions against some water company bosses but provides absolutely no criteria. How much sewage and how often does it have to be dumped to trigger an event for prosecution? There is no clue in the Bill. In any case, there is a backlog of 60,000 Crown Court cases, so the chance of any timely prosecution is slim. Perhaps the Minister has in mind some additional investment in the legal system. It would be good to hear that.

The Bill does not curb the payment of dividends. In March 2023, Ofwat said that it would

“stop the payment of dividends if they would risk the company’s financial resilience”.

To date, there have been no restrictions on dividend payments. Not a single water company discloses its distributable reserves, so we have no idea of their dividend- paying capacity anyway.

The Government are pinning their hopes on Ofwat, but Ofwat is not really up to the job. It has presided over the entire mess. It has not curbed financial engineering. Water companies continue to inflate their level of investment by capitalising interest and repair and maintenance payments. That is permitted by Ofwat. Ofwat systematically favours companies over customers. Anyone has only to look at how the pricing formula PR24 operates. Ofwat uses fictitious gearing ratios to enable companies to receive real excess returns. That should really be a criminal offence.

Ofwat cannot be trusted. It is too cosy with the water industry. Two-thirds of England’s biggest water companies employ key executives who have previously worked at Ofwat. Executives of water companies and regulators regularly meet in hotels and expensive private clubs to discuss their common position and how to quell public anger about bill rises and sewage dumping. This Bill does absolutely nothing to check collusion with and the cognitive capture of the entire regulatory apparatus.

On 5 September, the Environment Secretary said that

“customers will have the power to summon board members and hold water executives to account through new customer panels with teeth”.

Without a statutory base, customer panels will achieve absolutely nothing. In my view, at least 50% of the board of directors of any regulatory body and the regulated entity need to be directly elected by customers. Customers must also vote on executive pay. If they think executives deserve higher pay and bonuses, then they can award them. Let there be a bit of democracy. At least give people the power to check abuses. If the Minister has any objections to the democratisation of the water industry, it would be good to hear them.

The main aim of the Bill seems to be to prevent public ownership of the industry. It enables Ministers to restructure water companies and return the monopoly to the private sector, with the cost borne by customers and the public purse. Clause 10 empowers the Government to provide financial assistance that they may or may not ultimately be able to recover. This strategy cannot address the cause of the crisis, which is profiteering and cash extraction by water companies.

If the water industry had been in public ownership for the last 35 years, £85 billion would have gone into infrastructure instead of dividends. Interest payments on debt would have been much lower as the cost of government-backed debt is always lower than that borne by companies; that would have freed billions more for investment. But the Government oppose public ownership.

In response to an Oral Question from me on 23 July 2024, the Minister said that public ownership

“would cost billions of pounds”.—[Official Report, 23/7/24; col. 364.]

That seemed to imply that the Government had actually done some calculation. So I quickly followed it up with a Written Question seeking details of that calculation. All I got in response was a reference to the Social Market Foundation report of 2018. If any of my master’s students had written that as a dissertation, they would have been guaranteed a fail. It is a dismal piece of work commissioned by water companies. A former government adviser has said that that report has “virtually no intellectual substance”. The £90 billion quoted in that report is utterly incorrect. When taking over an industry, one buys only the equity, not the debt—and that is what it included.

In 2019, Moody’s said that the equity value of water companies was only £14.5 billion. Since then, lots of changes have occurred: most water company shares are junk or worthless. Debt is junk: some of the Thames Water debt is trading at less than 6p in the pound. The Government should let the companies collapse and bring them into public ownership at low price. That is how capitalism operates: if a company collapses, it does not get bailed out. Only public ownership can provide long-term stability and it ought to be done through a not-for-profit organisation. The cost of this can be loaded on to the acquired companies, as the private equity model does, or it can be recouped by issuing public bonds, ensuring that people actually own essential industries.

The Bill is delaying the inevitable and, naturally, I will help the Minister by tabling some amendments.

Lord Remnant (Con)

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My Lords, I declare an interest as having been a non-executive director of Severn Trent, the largest of the listed water companies, for eight years between 2014 and 2022, chairing the board’s remuneration committee for that time.

Last month, the Secretary of State said that the Government planned to carry out a full review of the way in which the water industry is regulated and that this would shape future legislation. It is a shame, then, that this piecemeal Bill cannot be assessed in the context of more fundamental reforms to the way in which the water industry operates. Worthy of debate would be the plethora of sector regulators and the frequency of Ofwat’s periodic price reviews. Successive Governments and regulatory price reviews have prioritised lower customer bills over the industry’s investment needs. Now, however, in addition to greater accountability, we should be focusing on the need for more innovation, the recruitment of new talent and, above all else, greater investment to raise standards. My concern is that there are aspects of the Bill that run contrary to these objectives and where scrutiny of the rules set by Ofwat under the Bill’s general provisions, and of the powers exercisable by statutory instruments, will be limited.

I turn to the specific provisions of the Bill. Although I would normally view the stiffening of penalties in the form of automatic penalties, lowering the standard of proof and imposing custodial sentences as less of an effective deterrent than the consequence of a failure of the underlying regulations themselves and/or their oversight, it will be underperforming companies which have the most to fear from this. Clarification on the scope of offences to be covered and the potential value and proportionality of fines will be required, and I leave it to others to comment on whether imprisonment for impeding regulatory investigations is really the most effective utilisation of our apparently scarce prison capacity.

My principal area of concern relates to the rules for remuneration and governance. Clause 1 contains provisions giving Ofwat the power to block the payment of bonuses to the chief executives and directors of water companies. While sensible in principle, the devil will be in the detail, which may lead to unintended consequences. How best to remunerate senior individuals is complex. It involves alignment with the business’s strategic goals, balancing short- and long-term considerations, fixed versus variable pay, and attracting and motivating talent. Decisions are best made by the boards of companies, which take account of the views of all stakeholders, particularly shareholders and regulators, in assessing matters requiring fine judgments. This is not within the core competence of an economic regulator.

It is perhaps overoptimistic of me to expect the Minister to excise Clause 1 from the Bill in its entirety. There may, however, be areas of common ground on which I would welcome her thoughts. The Bill is too widely drawn. It states that the rules will apply only to pay which is linked to

“the meeting of any targets or performance standards”

by the water company or the individual. There is no clarity on how the relevant standards will be measured, which will fall to Ofwat to determine, nor on when the relevant trigger occurs and which remuneration will be affected. For example, will the relevant remuneration be that payable in respect of the year in which the failure occurs or when the penalty is imposed? Where remuneration is based on multi-year performance and there is a failure in only one of the years, would the whole award be impacted or only a proportion?

The key elements will be the metrics which Ofwat applies to determine whether the standards have been met. A properly constructed system of metrics linked to objective measures, which seeks to eliminate reward for failure but which aligns with the company’s own key performance indicators and does not penalise those in the industry who are meeting or outperforming stringent targets, should be the aim. Should the rules, however, be punitive and have the effect of discouraging the best people from working in the industry and restrict water companies from rewarding performance when appropriate, the consequence will be damaging.

Do we really want companies to move away from bonuses and long-term incentive schemes linked to performance to compensating increases in fixed pay? There is a precedent within the financial services industry when mandatory bonus caps were imposed—since removed by the last Government, a move endorsed by the current Government. The experience was not a happy one because it removed incentivisation and increased fixed costs, to the detriment of consumers.

In terms of employees within the scope of these rules, they apply to the chief executive and other directors of the regulated water company. The Bill provides that Ofwat may extend the rules to

“such other description of role”

as it specifies. Not only would such an extension be wider in scope than the current disclosure requirements of the Water Industry Act 1991, but it would be difficult to implement in practice as different water companies will have individuals described differently by title and role. This additional power conferred on Ofwat by the Bill should surely be removed if we wish to attract and support the next generation of leaders in this vital industry from middle management. This will not be achieved by extending these restrictive remuneration practices to them.

Clause 1 also includes provisions intended to establish consumer involvement in corporate decision-making. Clause 1(6) provides that this may include a requirement for persons representing the views of consumers to be

“members of a board, committee or panel”

of the water company. While I support the principle of strengthening the voice of consumers, this should not be through a highly prescriptive, one-size-fits-all approach.

We do not have different categories of director in this country. Non-executive directors may have particular specialisations, but they are chosen for their wider skills and ability to make a comprehensive contribution. Those representing consumer interests may not wish, or be equipped, to sit on corporate boards, with all the responsibilities and liabilities that entails. It should not be for Ofwat to require that such people sit on the boards of the water companies; it should be left to the companies to decide which forum best suits their own requirements, whether it be board, committee or panel. Providing such flexibility was effective when companies enacted the workforce engagement mechanism for the purposes of the UK Corporate Governance Code.

Finally, I turn to the section on special administration orders, which relates to the insolvency of water companies. Clause 10 gives the Secretary of State the power to modify a water company licence in order to recover any shortfall in costs for the Government from its consumers, and new Section 12J(4) extends this recourse to all other companies in the sector. Forcing good companies and their blameless customers to bail out failed companies cannot be justified. This unquantifiable potential liability will serve only to deter much-needed external investment in the sector.

There are provisions of this Bill which will deter the investment that the industry so badly needs, and experienced executives from working in it. Let us not return to a pre-privatisation environment. In particular, the discretion given to Ofwat is too broad, but I look forward to the next stages of the Bill, which will give us opportunities to improve it.

Baroness Pinnock (LD)

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My Lords, as many have said, this Bill makes the first tentative steps in the right direction toward reforming the water industry, and it was good to hear the Minister recognise that this is just a start. There are many challenges facing the water industry such as the impact of climate change, which is expected to result in serious water shortages in some parts of the country; the requirement to meet the needs of a growing population, and the consequences for our environment. One of the strategic questions facing the industry and the Government is whether those challenges are better met by requiring the 11 water and wastewater companies, along with the further five water-only companies, to work more closely together in the interests of all of us as customers.

So far in this debate there has been a danger of treating water companies as if they are all behaving in the same way—something we ought to resist. Some companies are efficient and effective both in their operations and in their wider concern for the environment, but some are far from fulfilling the needs of their customers, let alone the needs of the environment. The thrust of this Bill is to force significant improvement of those companies in the latter category. I support what the Government are attempting to do; I am not saying that it is perfect, but it is in the right direction.

Privatised water companies provide an essential public service, which means that there is a delicate balance of responsibilities for each of them to achieve. On the one hand are the shareholders and investors wanting a return, rightly, on their investment, and on the other are customers wanting affordable bills and the environment to be protected and enhanced. It is this balance that, in some cases, has got considerably out of control. As many noble Lords have remarked, the righteous national outrage at the flagrant breaches of the use of storm overflows is just one indicator of an industry that has lost sight of its fundamental purpose.

The rot for some, but not all, companies started with the financial models adopted in the years following privatisation, where owners were able to extract value from the assets but leave the water company with a significant debt ratio—the total debt of the water companies currently exceeds £68 billion. Latterly, Ofwat has recognised that water companies have been too debt-laden and has forced a reduction of the debt ratio at each price review. However, that has been at the margins and has left companies—notably Thames Water—forced to concentrate their business on paying debt interest, perhaps paying down debt, at the expense of the basic public service of the company. This fundamental failure of governance and regulation has resulted in the various unacceptable behaviours that many noble Lords have cited. Clause 1 seeks to address some of those issues.

At this point, I declare that I was a non-executive member of Yorkshire Water for 10 years, fulfilling the role which the Bill identifies as being a voice for communities and customers. That this is a role which all boards should include is welcome, although I accept the argument made by the noble Lord, Lord Remnant, that it is not one we should define as is indicated in the Bill—that will not work.

Aside from the financial models, the problem is Ofwat. As the prime regulator—though not the only regulator—it needs to be abolished and replaced with a body that has more powers. Some of those powers are set out in the Bill, but fundamentally there needs to be a different regulator. As was previously said, we have a revolving-door syndrome whereby executives of water companies become executives of Ofwat, and sometimes back again. That is a malaise that has to be stopped; it reinforces bad behaviours and no new thinking comes into the sector. Perhaps as a result, Ofwat has failed to regulate the sometimes overly high profits to shareholders and bonuses to executives. Furthermore, as other noble Lords have mentioned, Ofwat has no powers to force water companies to improve environmental water quality, which includes preventing storm overflows being used as a cost-saving measure.

One of the inherent challenges in reforming wastewater treatment is that the public sewer system also takes the flows of surface water from the road network—something that the noble Baroness, Lady Browning, spoke about. The Government in their drive for more housing need to ensure that sustainable urban drainage is a part of any new housing development, and that, if need be, surface water attenuation tanks or ponds are part of preventing water surge into the public sewer system.

Finally, I urge the Government to consider ownership as well as financial models of water companies in developing a better approach to this essential public service. As part of that thinking, I urge them to develop the concept of a national water grid. It is surprising that areas where there is perhaps too much water are not used to push water down the systems of various companies to help those who are increasingly going to be short of water.

The system, as it is, is not doing its best; some say it is failing the customers and failing the environment. Some companies, in the drive for profits and investment, have lost sight of their sole purpose, which is to provide an absolutely essential public service. This Bill makes small steps in the right direction, but fundamental changes in approach are still needed, and I look forward to the Minister solving all those problems.

The Earl of Devon (CB)

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My Lords, it is a pleasure to follow the noble Baroness. As explained, this is one step in a multistage water industry reform aimed at fixing, once and for all, the parlous state of our rivers and fresh water supply, which is damaging the environment and our well-being, and which acts as a significant drag on our national development ambitions, particularly for housing.

This step is aimed at giving teeth to the regulators to control water company conduct, enforce regulation and punish bad behaviour. It is to be followed by a full review of water industry regulation, which is yet to come, but by which the Minister promises transformative change. Let us hope so. I ask at the outset for the noble Baroness to provide more detail on the timing and the parameters of that full review. As the noble Earl, Lord Russell, noted, it is urgently needed.

I am concerned that the punishment and shackling of water companies inherent in this Bill will not provide the solutions that are required and may only encourage a talent and capital flight from the industry. We would all benefit from a better understanding of the long-term solutions to this decades-old problem. This Bill has an unfortunate hint of short-term tarring and feathering of the water industry management for past sins. Perhaps it is His Majesty’s Government proving that they are not chicken faeces.

I note my interest as a farmer and land manager in rural Devon, with fundus interests in the River Exe estuary, which is blighted by sewage leaks. Areas of the estuary are unsafe for commercial shellfish due to human faecal contamination, and a local swimmer in Exmouth has launched a civil lawsuit against the local water company for her inability to swim off the shore. I am, as we all are, a water company customer. I also work at a law firm that has a number of major water companies as clients, albeit that I do not work for them directly. I therefore see this issue from all sides.

I am minded that water companies have long been wrestling with ageing infrastructure, considerable increases in demand and the need to be competitive in the international marketplace for capital. Moreover, they serve one regulator, Ofwat, which is keen to control consumer prices, and another, the EA, which has suffered a rollercoaster of funding and target changes over the last 20 years. While they have indeed paid excessive bonuses and dividends, it is too simple a narrative to blame corporate greed for the state of our waters.

Given that this Bill is only part of a broader water industry reform, it is obviously not a panacea, and it will not address many of the egregious issues we face. It focuses mostly on the stick, without providing carrots to encourage and support the investment and good behaviour needed. For example, take the provisions regulating executive pay, which we have heard so much about, and sentencing and liability. The pay provisions take power from shareholders and put it in the hands of Ofwat, while the liability and sentencing provisions increase dramatically the jeopardy and peril associated with working for a water company.

To echo the noble Lord, Lord Blencathra, with these provisions in place, how on earth will water companies recruit the expertise needed to implement the fundamental changes that will be required once the full review is complete? Who on earth would want to become a water company director if they will become subject to punitive sanctions and strict limits on performance-related bonuses? Surely, as the noble Lord, Lord Sikka, noted, this will result in considerable increases in basic salaries to attract the necessary talent. This will impact profitability, increase prices paid by customers and limit the funds available to invest in essential infrastructure.

I am grateful for all the briefings we have received, which accept that the industry’s principal challenge is infrastructure investment. Since privatisation in 1989, and doubtless long before that, the water industry has simply not invested at the rate required to keep up with population growth. This Government are determined to put a rocket under housing development, with their promise of 1.5 million new homes, and yet I see no provisions within this Bill to improve long-term infra- structure investment. I understand that the Environment Agency is already rejecting substantial housing developments across the country on the basis that the provision of water and sewerage cannot be guaranteed. We are all aware of the impact of the nutrient neutrality rules blocking development in sensitive catchments. Could the Minister expand upon the Government’s plans to enable the much-needed increase in capital spending to free these constraints?

As for the provisions on special administration regimes, they are clearly designed with the perilous state of Thames Water in mind. I note that no impact assessment has been published. Is there any risk that the introduction of these provisions may encourage water companies to seek the solace of insolvency sooner than they might otherwise do and thus hasten their collapse?

With respect to environmental matters, I am grateful for the briefing on water industry impacts on national parks, including in the Lake District and Lake Windermere. These provide a good case study of the water industry’s travails. It is noticeable that some of the issues identified, including the heightened nutrient run-off in the summer months when fresh water is scarce, are the product of the popularity of the lakes for visitors and not necessarily due to inadequate provision of services to the resident population. Is this, therefore, not necessarily a problem of the water company’s making but rather due to the popularity and success of the national parks in encouraging the huge influx of visitors into these very sensitive ecosystems? Noble Lords who followed our debates on agriculture and the environment will know that I am passionate about access to the countryside. But that needs to be access that is funded and supported by investment in infrastructure, so as not to damage the vulnerable ecosystems that we so cherish.

I have heard similar issues raised in discussions regarding the River Exe, in which concerned communities bemoan the terrible state of the once abundant river, named “Isca” by the Romans due to its surfeit of fish, which is no longer. These communities blame the farmers for their run-off and the water companies for their sewage leaks, without ever truly reflecting upon the mass of population who consume the food that the farmers produce and then produce the waste that the water companies remove—while insisting on ever-lower prices for both services. Ultimately, it is we who are the polluters. We need to invest properly in both our agriculture and in our water companies if we are to care for ourselves, our land and rivers.

Finally, I note the considerable environmental investments that have been undertaken by various water companies over the years, such as the south-west peatlands project, which has re-established over 1,000 hectares of peat on Dartmoor since 2020. Could the Minister explain how the Government intend to build such upon excellent pilot projects to seek nature-based solutions to the infrastructure challenges that the water industry faces?

Lord Inglewood (Non-Afl)

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My Lords, I begin by declaring my interests in the register and by saying how much I enjoyed the preceding speech from the noble Earl, Lord Devon.

Nearly 40 years ago, I spent about a couple years as a non-executive director of North West Water, the pre-privatisation predecessor of the United Utilities water section. In my initial briefing, I was absolutely gobsmacked by the revelation of the extent of the problems thrown up by dirty water and its treatment. It was explained to me that, over possibly three or four previous generations, the dominant de facto control over these things had been in the hands of the local authority. In practice, vastly insufficient resources have been put into the underground infrastructure. The Alderman Foodbothams, to use Peter Simple’s graphic phrase, thought there were no votes in burying ratepayers’ money. Of course, they were right then.

Since those days, as we have heard from a number of speakers, there are now more people, more houses and more pollution, coupled with a genuine recognition that pollution really matters and needs addressing effectively. At the time I was involved, privatisation was in the wind. The rationale was that it would help deal with these issues. My experience suggests that the problems that I discovered then were, if anything, underestimated. They are turning out to be more difficult to deal with than was anticipated, not least because a certain amount of the low-hanging fruit has been plucked.

I believe that privatisation as taken forward has brought a number of benefits, but not universal benefits—we should remember that. The question we should ask ourselves is: what are water companies for? Their essential purpose is supplying clean water, then treating dirty water and returning it to the natural environment clean. The combination of corporate structures, with their extensive legal implications, and the regulatory framework was intended to provide a better vehicle for doing that—and, as I said, it has brought benefits. But—this is the important thing—while most directors of responsible companies are decent people who behave responsibly and are law-abiding by instinct, a certain number of people are dazzled by the financial services sector and become disciples of Gordon Gekko, in that “Greed is good”. Dazzled by the gold, they lose a proper sense of proportion. Some of the abuse that has taken place in the water sector is the result of that.

What matters is what is happening on the ground—or perhaps I ought to say what is happening in the water. The noble Earl, Lord Devon, referred to Lake Windermere, where, as we all know, there has been a well-publicised campaign about pollution problems. As he said, those are urban not rural in origin. It is true that the water in the lake is not up to the best target standards, but for years considerable sums have been spent, progress has been made and measures put in hand to improve matters.

The problem is that the way in which that campaign has been promoted has had a damaging impact on the tourist industry there. As your Lordships will know, the tourist industry was very badly hit by Covid and has not properly recovered. The message that has been received in many places is clearly—wearing my hat as the chairman of the Cumbria LEP, I have been told this by a number of angry people in the visitor economy —that, if you go on holiday to Windermere, you will be having your holiday on the Costa del Septic Tank. As can be imagined, that is not something that positively encourages people.

This is a very real and serious concern, which we must bear in mind in parallel with the overriding long-term objective of improving water standards. The scale of the problem is such that we cannot solve it all immediately—and if resources are transferred from one place to another place, somebody else is going to suffer. There has to be progress over time, which will inevitably involve a degree of political direction. We do not want to duck that.

Finally, I turn to a similar but much smaller-scale matter, which I hope I will be allowed—having been given my pass to the political tumbril—to illustrate from my own personal circumstances. It is a good graphic example of something that has a much wider application. The Minister, as a noble Cumbrian, knows that my home is too big, and is situated in the Petteril catchment area, which is part of the Eden catchment area—one of the problem catchments in this country. It has been designated as a place of national importance, which, both by statute and by contract, I am obliged to look after properly—and that is what I am trying to do.

Some of the adjacent cottages, which are an integral part of the whole, are served by a United Utilities septic tank subject to a grandfathered discharge licence dating back between 50 and 100 years. Nobody would get a discharge licence on those terms now, but it is valid. The result is that, from time to time, horrifyingly disgusting discharges go straight into a stream that is part of what I might describe as a water feature—part of the garden, which is of national significance. Visitors pay good money to see that and there is absolutely nothing I can do about it.

I have talked to United Utilities about this, and the people there they explain that there is a licence to discharge, albeit that it is below contemporary standards. It is not a priority for them. I can understand their point, and where their thinking is coming from. Across rural Britain, and England in particular, there are many similar arrangements, which for practical purposes are equivalent to the well-recognised and understood private small-scale systems that exist.

I suggest that the best way of dealing with the kinds of problems that such arrangements bring about is to transfer the responsibility for dealing with those discharges from the utility company to the private landowners affected, together with a dowry to enable them to carry out the work. The companies would be relinquishing their responsibilities and taking them off their balance sheet. Speaking for myself—and, I dare say, for a lot of other people—I would much rather be subject directly to the rules and the law, and be able to take responsibility and gain control over my own immediate environment, than have no choice but passively to endure the noxious consequence of the inactivity of the utility.

I raise that as a thought, and in conclusion I simply join others in saying that I am looking forward to considering the Bill, and also the promised review in due course. This manifesto Bill is targeted at a real abuse, but we need to examine it and ensure that it meets its purpose well and avoids collateral damage. After all, that is what the House of Lords is for.

Lord Whitty (Lab)

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My Lords, I do not wish to repeat the statements that have been made on various sides so far, so I will start again and review some of the history. I do so from a number of different perspectives. First, I was once an official of the trade union that organises most of the workers in the water industry, which would strongly prefer a return to public ownership. I have to tell my noble friend the Minister that we are in a strange week. We are reviewing the two most unpopular privatisations, rail and water—unpopular, that is, with their individual consumers. With one it is clear what the second stage will bring—a return to public ownership, in a form that still requires some determination and definition. However, here we are unclear about what the second stage will be.

Having said that, I strongly support what is in this Bill. To those who represent, directly or indirectly, the interests of the directors of water companies, I say that the more stringent measures to be taken against directors and boards of water companies will be triggered where they have broken the regulations, broken the law, and failed to run their company in line with the commitments given at the previous price review and the strategic plan agreed with Ofwat.

Those are egregious offences and they require those draconian powers—as some see them—to ensure that the behaviour of the management of the companies complies with the intention of the law both on the regulation of the industry and on the environmental regulations. When the regulatory restructuring was first established, it was assumed that water was like any other natural monopoly, which required strong regulation as there was no pressure of competition. Indeed, the only competition in this industry has been through takeovers and consolidation, and that has not benefited consumers of water.

I speak from various perspectives. I was a Minister in Defra at a time when water regulation did not seem too bad. Indeed, I acknowledge that, in the first 10 years or so of water privatisation, there was an increase in investment—certainly over and above what the state had done previously—and there were some major improvements. These were financed both by investment within the industry and the sell off by water companies of their non-water assets, including substantial amounts of land, which has made the environmental benefits of the previous water companies and the environmental regulations we have sought from them less easy to deliver. I was subsequently briefly a member of the board of Ofwat and, for quite a long time—mainly under the tutelage of the noble Baroness, Lady Young—a member of the board of the Environment Agency.

My experience in Ofwat was terrible. It was the weakest possible regulator. I remember one major company failed to meet its commitments on leakage, for example. The tariff would have enabled us to fine it £250,000 for its breach of its commitments, but we actually fined it £12,000. It has always been a weak operator.

I then moved across to the Environment Agency. At the time, I consulted with the Ministers of the then Labour Government on whether I could sit on two boards. I subsequently found that that would have been a good idea—naturally, I would have taken only one fee. That is why, if I cannot have the outcome for the longer term—as the noble Baroness, Lady Jones of Moulsecoomb, was advocating—my second choice would be that of the noble Duke, the Duke of Wellington. That is, to have a single regulator that covers a lot, or all, of the three major regulators—four if you include the Welsh board—in one place, with one strategic plan and one strategic outcome at the price review, whose timing and scope need to be reviewed as well. That would make it a much more powerful regulator than it currently is. That is my second choice, and I hope that the review the Minister promised us comes up with that solution fairly fast.

Another problem with the present situation is that Ofwat and the Environment Agency do not properly talk to one another. This has improved a bit, but the coincidence of their objectives, on both timescale and the way they deal with the companies, is not the best example of co-operation I have found in state bodies. Again, that is a reason I support the noble Duke, the Duke of Wellington.

When I stopped being a regulator, I became a consumer champion. I agree with the doubts people have expressed about putting consumers on the board—that may or may not suit a particular company—but the Consumer Council for Water, which has managed to sustain its lack of resources and still perform a useful role, needs to be seriously strengthened. I ask my noble friend the Minister whether, even in this short-term Bill, we could give extra powers and resources to the Consumer Council for Water. It can represent the interests of both household consumers and small companies, which are crucial users of the water industry’s output. Like farmers and others, they are affected by the environmental regulations that are required to clean up our waterways. The role of regulation of the water sector is not simply about the price and cleanliness of the water that comes through our taps—which has, for the first time in my lifetime, been questioned in one or two areas; it is about the environmental effects on our streams, rivers, seas and beaches. Consumers come in many forms, and the consumer role in this sector needs to be strengthened, not weakened.

I hope my noble friend the Minister can take that point on board and that all these considerations are taken into account in the second stage of this and the review. I also hope that that review is concluded fairly fast, because the companies, consumers and the environment need to know. The rivers, lakes and seas mentioned in this debate need a future different from the one that faces them at the moment.

Lord Douglas-Miller (Con)

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My Lords, it is a great pleasure to follow the noble Lord, Lord Whitty. I congratulate the Government and the Minister on making such a prompt start in addressing some of the long-standing issues associated with pollution emanating from the water sector. However, for a sector that is in dire need of significant long-term investment, strong management and increased financial stability, the overall impression the Bill gives is that the Government are anti-business, with far too much stick and not nearly enough carrot.

I completely agree that the water companies collectively need to improve both their performance and their financial resilience—areas in which they have let themselves down over the last years. The level of financial gymnastics that has so exercised the noble Lord, Lord Sikka, and the noble Baroness, Lady Jones, over the years has left the industry in a poor state to invest in the necessary infrastructure improvements and to reduce pollution incidents. Regrettably, the vast majority of those associated with this have long since departed the scene, and this Government’s desire to punish the sector through increased regulation and interference with market forces risks pushing the water companies further down the wrong road and making them less able to respond to the investment that is so desperately required.

It is not, as is often portrayed, a universally poor picture across all fronts in the water sector. In fact, on value, what customers get at the moment is really pretty good. Most get all the clean water that they can consume, and all their wastewater taken away, for little over £1 a day. What they do not get, and what they want to see, is their wastewater being managed responsibly and not illegally poured into our rivers and seas without due process. Crucially, customers do not want to see—although I fear the Bill will deliver it—increased costs and volatility in the sector.

One of the great challenges in this space is that the illegal dumping of sewage is often conflated with the legal process of sewage being released in high-rainfall events, which has been a feature of our system since it was designed by our Victorian forebears. Of course, both these outcomes are highly undesirable. Illegal dumping of sewage should rightly be penalised by strong measures, such as significant fines and bonus reductions, to prevent this happening. However, the reality is that the infrastructure requirements needed to reduce the legal release of sewage in high-rainfall events will take significant investment of time and resources.

Care should be taken by this Government to ensure that we do not create an environment where no good, top-quality executives want to go near this industry because of the draconian penalties and the random way in which government and its agencies run roughshod over the sector. Moving from where we are now to where we want to get to is a far from simple task. It will require capable and hard-working individuals to drive change through. In essence, I am saying: do not frighten the horses in a mad rush to punish an industry where those who have created the problems have long gone and those who are needed to sort it out are in short supply.

This begs the question: how was it allowed to get into this state? The answer, I am afraid, comes back to the inadequacies of the regulators. This is a serious cause for concern, as the Bill gives a whole range of new powers to the regulators, which have not shown a high level of competence to date. I ask the Minister to reflect on whether it is appropriate to give the regulators additional powers that interfere with the running of a large-scale business that they clearly do not understand.

In conclusion—to avoid repetition and in the interests of time—I support the comments made by my noble friends Lord Blencathra and Lord Remnant. In particular, I question the fit-and-proper-person test and the need to have consumer representation on water company boards. This, in my experience, will lead to conflict and paralysis in the boardroom, the inevitable slowing-down of decision-making, increased volatility and, worst of all, increased costs for the consumer.

Lord Cromwell (CB)

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My Lords, I support the intention of this Bill in its pre-Committee stage. I know that the Minister will be looking forward to the flow—possibly even the flood—of useful and constructive amendments that will be coming her way from all across the House and beyond.

Water is our most precious resource, yet we have allowed it to be managed for short-term financial gain and with inadequate regulatory intervention. The saying goes, “Don’t excrete where you eat”—or words to that effect—and yet mixing sewage and water, initially excused as an occasional force majeure, is now standard practice. Turning around the decades of infrastructural neglect and creating a resilient water and sewerage system will take a generation and need consistency through multiple electoral cycles. The last Government talked about 25 years and more than £50 billion. Taking water companies into public ownership, as some advocate, would apparently—and I look toward the noble Lord, Lord Sikka, on this—cost an estimated £90 billion and take a long time to implement. Either way, the investment cost is going to be enormous, but not meeting it in the past is how we have got into this mess in the first place.

Meanwhile, climate change, rising population—to which the noble Baroness, Lady Pinnock, referred—and new types of high demand for water, such as data centres, are adding further challenges to the existing infrastructure. I therefore welcome, as others have, the full review of the water system announced by this Government. I hope that the Minister will be able today, to some extent, to share with us what the scope, the format, the timetable and the level of independence are going to be of that review.

The Bill sets out a range of punitive measures for water companies, both personal and corporate, including imprisonment, which many others have spoken about, so I will not detain the House further on those. It also includes consumer representation at board level, and I am with the noble Lord, Lord Whitty, on this. I welcome that challenge being brought to board level rather than being ghettoised in some panel on the second floor. I would much rather it was a board-level issuing challenge. However, while these things may reflect the public mood, the fact is that, as the last speaker mentioned, many of the guilty horses have long ago bolted, heading for the hills with their saddlebags full of treasure. Debt-free companies have been loaded with debt, now at 70% to 80% debt to equity. Despite the failure to invest sufficiently in the infrastructure, substantial transfers of value have been made by water companies to their parent companies across the globe while, in some cases, piously claiming that they had not paid shareholders a dividend for years. This is something that the regulator repeated to us when giving evidence to the committee I was on.

While some water companies—and here again I agree with the noble Baroness, Lady Pinnock—have performed better than others, it is going to be a long, hard and expensive slog to put things right. It will be a thankless task of trying not to succeed but just to make things less bad for a long time, while at the same time under personal risk of financial and/or criminal penalties, compounded by public resentment that the cost will ultimately fall on the consumer. This makes me ponder, as others have: who would now want to take on such a role, with such possible outcomes and high levels of public hostility?

My two questions to the Minister, therefore, are as follows. First, do the Government accept that a very attractive—but no doubt therefore criticised—employment package will be needed to secure, retain and hold to account managers of water companies and of regulators with the necessary skills and robustness? Secondly, do the Government also recognise that, for earlier investors, the party is largely over? They are decreasingly willing to provide capital to UK water companies, and that is a very big challenge for a Government who are seeking private finance to right the wrongs of the past.

Turning now to the regulators tasked with enforcing this Bill, Ofwat has been, so long as water was plentiful and cheap to the consumer, light-touch—and, frankly, outsmarted by private equity financial engineering. The Environment Agency, which will have a vital role in monitoring performance against the stipulations in the Bill, has been drained of resources and morale. I agree again with the noble Lord, Lord Whitty, on the disconnect from Ofwat. Defra, as a supervising department, was found by a committee of this House—of which I had the privilege to be a member—to have been overly complacent about both the water companies and the regulators.

Will the Minister explain how all these issues— the lack of skills, of resources and, above all, of incisiveness—will now change as part of achieving the purpose of this Bill? Simply putting up water bills, as the companies propose, will not create enough money. Hedge funds know this and are reportedly buying up discounted Thames Water paper, to which other speakers referred. Financial restructuring and swapping debt for equity are likely to follow. Will the Minister therefore explain on what grounds the Government think that the regulators—or, indeed, government departments—will be any better at understanding and supervising hedge fund strategies than they were with private equity financial engineering?

Finally, there have been significant issues around the lack of monitoring data and I am glad to see that the Bill starts to address this. Let us remember that it was civil society, not the regulators, that persistently highlighted the sewage pollution issues and it will be an important monitoring ally in keeping both the water companies and the regulators up to the mark. Otherwise, there a risk here of the regulators marking their own homework and blame-shifting between organisations. New Section 141F set out in the Bill is helpful on this, and this is reflected in the positive comments of the Information Commissioner’s Office. Nevertheless, an amendment is going to be needed that expands it to include requirements that monitoring data must be automatically available, online and in real time, including the volume and type of discharge and an explanation of why it happened and what is being done to mitigate and prevent a recurrence.

To conclude, I support the Bill as far as it goes. It is a first and belated step to address one aspect of the problems of the UK water and sewerage system. The systems we inherited from the Victorians reached their capacity in 1960. To build a resilient water and sewerage system fit for the future, we will need a long-term strategy, cross-party co-operation and consistent long-term resourcing. All of these are very, very substantial challenges.

Baroness McIntosh of Pickering (Con)

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I am delighted to follow the noble Lord. I congratulate the Government on bringing forward this Bill so early in the Session and on the ongoing work that the noble Baroness set out in the water sector. I welcome her to her place as she guides her first Bill through this House. I declare my interests as an officer of the APPG on water, as co-author of Bricks and Water reports on various aspects of flooding and water management and as having worked with WICS, the Water Industry Commission for Scotland, for some four or five years to 2015.

The Bill examines the role and powers of the water industry regulators and the responsibility of water companies. The Explanatory Memorandum sets out the legal background to the Bill and refers to a number of previous Acts that are referenced or amended by the Bill. However, there was one glaring omission, that of the Flood and Water Management Act 2010, which set out many of the standards referred to in the Bill—for example, on page 2 of the Bill, standards that relate to the environment.

There are clearly, as my noble friend Lady Browning set out, related issues between the flooding and pollution aspects of the Bill. Others—the noble Baroness, Lady Parminter, in particular—have referenced the need for natural and sustainable solutions and to involve farmers in a constructive way to prevent flooding.

The Pitt review, following the severe floods of 2007, set out a number of recommendations, many of which were included in the 2010 Act, following on from the recognition—for the first time ever—of surface water flooding. Yet two of Pitt’s most consequential amendments were never adopted: first, the mandatory construction of sustainable drainage systems in major developments so as to contain flood water and prevent it mixing with sewage through overflows into the combined sewers; and, secondly, ending the automatic right to connect, which has never happened. This simple measure in and of itself would prevent misconnections, whereby the existing infrastructure simply cannot take the volume of sewage from major new developments, often of four- or five-bedroom homes, with four or five times the amount of sewage coming out of them into inadequate Victorian pipes. The developers and local authorities therefore deem the connections to be safe and refuse to put in appropriate infrastructure to ensure that a safe connection can be made. Were water companies also to have the status of statutory consultees in the planning application process, these misconnections could also be averted.

I therefore urge the Minister to use the passage of this Bill to complete the unfinished business from the Pitt review of 2007 by ending the automatic right to connect, ensuring that developers pay for new connections and mandating developers to construct sustainable drainage systems at the time that a development is built. I shall seek to press the Minister to implement Schedule 3 to the Flood and Water Management Act 2010 without delay, to end the automatic right to connect and to insist on mandatory use of SUDS; otherwise, as the noble Baroness, Lady Parminter, so eloquently pointed out, we will just load more sewage into the watercourses, rivers and seas for the foreseeable future, which is not acceptable.

I would also like the Bill to reflect the impact that the housebuilding programme is having on the ability of water companies to perform their duties under the Bill. The Bill gives the House the opportunity to end the gap in responsibilities between planners, investors and housebuilders and to recognise the responsibility of others, such as highways authorities, which contribute to road surface water run-off entering the combined sewers and storm drains without currently having any responsibility to prevent this form of pollution. That is very costly indeed and is a gap that must be plugged—to coin a phrase.

On Clause 2 and the pollution incident reduction plans, can the Minister say how onerous she expects it will be, in terms of both time and resources, for the water companies to implement them? Will allowance be made through either the existing price review or, more likely, subsequent price reviews for this time and resource factor to be taken into account?

During the passage of the Bill, I hope that we will have the opportunity to consider the role of regulators and comparisons between Ofwat and others such as WICS—the Water Industry Commission for Scotland—particularly as regards customer engagement. I also take note of the fact that Ofwat has only comparatively recently allowed prices to be fixed as part of the quin- quennial review to take account of innovation. Actually, innovation lies at the heart of what the Government are proposing to do in this Bill and the future work that they have set out this afternoon.

Two of the areas in which I believe WICS is very strong in the statutory duties that it performs are promoting the interests of Scottish Water’s customers, including having regard to the interests of current and future customers, and ensuring that customer charges reflect the lowest reasonable overall cost for Scottish Water to deliver Scottish Ministers’ objectives for the water sector. That has in no way compromised the independence of WICS in the way that it operates.

In looking at the level of penalties, I urge the Government to make them proportionate to the offence and the scope and means by which it is actually within the power of the water companies to prevent pollution in the manner in which the Government intend them to be held to account.

Regarding the proposal from the noble Duke, the Duke of Wellington, and others, such as the noble Lord, Lord Cromwell, in support of the idea of establishing one regulator, I remember, in a previous life as a shadow Minister, under the good offices of my noble friend Lord Blencathra, looking at this matter prior to one of the elections—probably the 2005 election. We were going to have “blue water thinking” on scrapping the existing regulators and coming up with one new regulator. So that is the challenge that lies at the door of the current Minister and I wish her extremely well in that regard. We stepped back from that commitment at that time.

There is plenty more to say, and I look forward to saying it in Committee.

Baroness Young of Old Scone (Lab)

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My Lords, I declare my interests as a former chief executive of the Environment Agency and, briefly, a non-executive director of Anglian Water—I did not gallop over the horizon with bags full of money.

Before I turn to the particulars of the Bill, I will comment on the importance of the wider review of water issues that the Government have promised, because the poor state of our water bodies and rivers is not just about how water companies and others have dealt with sewage. There are other major sources of pollution in agriculture—including, indeed, chicken shit, which the noble Lord, Lord Lipsey, promoted with vigour. There are also other pressures that have caused diminution in the quality of our rivers and water bodies. Surface water run-off is a major aspect, particularly from roads but also from other surfaces, including all urban surfaces, and there are pressures from novel and persistent chemicals.

The state of our water bodies is therefore not just about the sewerage issue, so we need to put the Bill in a much wider context. The state of our water bodies is also about the record and effectiveness of the regulators, Ofwat and the Environment Agency, as many noble Lords have pointed out. It is also about the ineffectiveness of the current arrangements for water pricing. I therefore urge the Minister to publish for consultation the framework for the review and ask that it includes the following four issues.

The first is what action would be needed to reduce overall pollution of the water environment from the whole range of sources, particularly agriculture, and not just sewage pollution. The second is what is needed to get both regulators back to the point where they can regulate effectively. In the case of the Environment Agency, this means resources to enable effective, real-time monitoring; reduce reliance on self-monitoring by operators, particularly the dodgier operators; and fund effective enforcement.

In the case of Ofwat. I believe that it seriously lost the plot from around 2010. It was focusing very much at that stage on the promotion of rather spurious competition in a business which is naturally monopolistic. It was not helped by strong direction from the Government that keeping bills flat was more important than environmental programmes. For those reasons and many others, I would be very cautious about giving more powers to Ofwat until we can be assured that it will operate more effectively in the public interest. After all, Ofwat has been responsible for overseeing the financial shambles that the current water companies have become.

The review should therefore cover the appropriate powers and approaches of the regulators. I do not support the creation of a single regulator for the water industry. I think it would be disastrous to combine economic and environmental interests in one regulator. It would hide the environmental and economic trade-offs. As long as there are two regulators, both robustly defending their part of the equation, either economic or environmental, it is a very transparent system.

In addition, if you think about it, regulating the water companies because of their impact on rivers is a rather crazy thing to do when what we should be doing is regulating rivers and water bodies in an integrated way to take account of all the pressures on them. After all, farmers, planners, builders, water companies, fisheries, forestry and a whole range of other economic activities impact on rivers. If we have one regulator which is talking simply about water company impacts and another regulator which is talking about all other impacts—or if, even worse, the regulators are fragmented even further—I think that we would lose sight completely of integrated management of our water environment. I am surprised that the noble Lord, Lord Whitty, was keen on the single regulator solution. I thought that we had trained him rather better at the Environment Agency—he is off my Christmas card list.

The third thing I would like is a review of the culture in water companies. There is a totally different culture in the parts of water companies that deal with drinking water. There is an absolute prohibition on falling from grace in that part of the water industry because drinking water standards are regarded as inviolable, and it is not good for business to poison people. There is not that culture on the other side of the water industry, which deals with sewage. That is very visible considering the prosecutions against and fines on water companies in the recent past. Many of them are not just negligent, but also carried on for far too long and caused even more damage than was necessary, had they been dealt with promptly. We need a radical look to make sure that the high-quality culture in the drinking water supply is merged in the case of pollution reduction measures. That culture really has to change.

The fourth thing I would like in the review is the need, at long last, for an open public debate about the options, trade-offs and costs of cleaning up the water environment. It is not as simple as punishing the water companies and controlling them, and the water environment then recovering. It will not, and it is unfair to wind the public up to expect that, which is what much of the public debate is about at the moment. People think: “It’s all these rotten water companies and if we sort them out we will have a clean environment”. That is simply not the case. There needs to be a properly informed, understandable public debate about how much the public can pay, what they think it is most important for them to pay for and over what period of time. At the moment we have more heat and steam than illumination.

Can my noble friend the Minister tell the House more about the timescale of this review and whether the scope will be consulted on? I have gone on rather long about the review and have very little to say about the Bill itself. It is a bit performative—kicking the water companies, which have lost the confidence of the public and the Government. It is not a substitute for more fundamental action on water policy and the water environment. However, as the Bill is here, I would like to support several of the amendments to it that have already been mentioned, and raise a few of my own. It is important to give an environmental duty to Ofwat to ensure that it cannot be guided, or by default, soft-pedal the environment, as has happened since 2010. I would like the earmarking of all water company fines to an environmental fund such as the Water Restoration Fund. I would like measures to ensure the commencement of Schedule 3 to the Flood and Water Management Act, as the noble Baroness, Lady McIntosh, mentioned. It is outrageous that 14 years have passed since Parliament endorsed SUDS and soft drainage measures to try to reduce the amount of run-off into the sewerage system and therefore the cause of more overflows. Why on earth are we here creating legislation if it is never commenced? I would also like measures to strengthen the examination and sign-off of the pollution incident reduction plans by regulators and by Ministers to make sure that they are fit for purpose and can be properly implemented and monitored.

There are other amendments to come forward, but I make one last plea to the Minister. It is a more general point about legislation, but this is a good place to make it. She very kindly summarised the number of delegated powers in the Bill. I remember the days when I first came into this House when it was regarded as outrageous if we did not have, in draft, guidance and secondary legislation that flowed from a piece of primary legislation before we finally pressed the button on it at Report and Third Reading. I would like to think that a new Labour Government would bring back a commitment to making sure that this House sees in draft form what the contents of guidance and secondary legislation will look like, so that when we debate the Bill we are not debating a pig in a poke.

Lord Sandhurst (Con)

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My Lords, I welcome the Minister to her place.

It is interesting that this Bill should have its Second Reading just the day after we debated the Product Regulation and Metrology Bill. This Bill is not so remarkable as was that Bill for the unbridled power given to Ministers, but it is still noteworthy. As my noble friend Lord Blencathra explained in his important and dispassionate analysis, it has a number of problems. Like other noble Lords, I agree that the water industry needs sorting out. We need increased investment as well as straightforward and conscientious management, but I am anxious about aspects of the methodology embodied in the Bill. I am also anxious that we have no draft guidance and secondary legislation, as the noble Baroness, Lady Young of Old Scone, has just pointed out. We do not know where exactly the Bill is going. We have a general direction of travel, but we really need more detail, and that was my complaint yesterday. We cannot have more Bills like this coming forward, please.

If we are to take this draconian approach, which is embodied, as my noble friend Lord Blencathra said, in the proposal to change the burden of proof and the powers to impose automatic fines, it should be only because there is plain evidence that this should be effective. Why is there no impact assessment? Others have asked for that too. We do not have one; we did not have one yesterday either. These are big Bills in practice, on big topics, where there is so much unknown. A lot of people know a lot about the topic, but it is the detail that matters when drafting legislation.

Why should we take it on trust that what is proposed will have the intended outcome? Has any assessment been carried out? If it has, why has it not been transformed into a proper measured impact assessment to assist all those with an interest in getting things right? Long experience—I have been a lawyer of far too long experience—has shown that this is the wrong way to make legislation, because it results in unintended and unhelpful consequences. I agree with other noble Lords that we should look at this carefully. As my noble friend Lord Blencathra and others have pointed out, we have the proposed powers to set rules about fit and proper persons, we have their interaction with the Company Directors Disqualification Act, and there will also be the Financial Conduct Authority’s rules. This risks a minefield in which the only winners will be the lawyers.

I turn to two or three specific points, the first being the modification of the standard of proof in Clause 5. I acknowledge that this lower standard of proof is used elsewhere, but it is important to note that the original intention of the legislation that we are amending in this clause was to deliver a more consistent penalty regime across sectors. That was following recommendation 8 of the Hampton report. This change, on the face of things, undermines the original function of the 2008 Act. Again, we lack an impact assessment. We do not know the rationale so, before we debate the Bill in Committee, the Government should set out a proper detailed case showing why specifically the standard of proof needs changing in this sector but not in other sectors. How many times is it anticipated that this power will be used?

I turn to the companies’ right to appeal fines imposed by the regulator. This is covered by Clause 6(7), in particular the right of appeal. This provision appears to create the possibility of the regulator imposing an automatic penalty. The company that is the subject of the penalty will not be able to appeal a decision by the regulator to the effect that there were no exceptional circumstances to mitigate the culpability of the company for what is otherwise a strict offence.

In other words, an event has happened which the company rightly or wrongly says made it impossible or very difficult to take reasonable steps to prevent an otherwise unlawful discharge. That discharge will on its face be unlawful but, as matters stand at the moment, the company can escape or mitigate that penalty if, but only if, it can show there are exceptional circumstances.

This Bill would give that decision simply to the regulator, but those words “exceptional circumstances” are important. The courts understand them well; as they have said repeatedly, they do not admit of detailed exegesis—they mean what they say. It is the context that matters. The burden is on the person who asserts exceptional circumstances to make his case. In practice, that is a heavy burden, because it has to be exceptional. If it is not made out, an appeal to the courts is dismissed with costs. What is wrong with that? Where is the evidence that this provision has been misapplied by the courts?

If there is an extraordinarily heavy rainfall or other event that may or may not be an exceptional circumstance, the water company would still have to show that it could not have anticipated that event—and we know that rain does fall in this country—and could not reasonably have taken suitable preventive measures. But why, if the company believes that exceptional circumstances have obtained and is prepared to risk the costs of an appeal, should it be deprived of challenging the regulators’ decision to the contrary? Where is the evidence that this provision is not working appropriately at present? The Government, through the regulator, surely have the details of cases, and the number of cases, where decisions on exceptional circumstances have been appealed, and details of the outcomes. They are all there—the regulator must know. They can point then to the misuse of the provision and failure by the courts. I suggest that may be hard to establish.

Generally, let us have proper information and an impact assessment, then we can make a fair and sensible decision. At present, it does not look right. Adopting a clumsy and over-penal approach will drive up costs and put at risk the very investment that we all want.

I have a final point on legal advice on compatibility with the European Convention on Human Rights. I have highlighted two provisions in particular, Clause 5 and 6, although I do not limit it to that. The Minister has declared on the face of the Bill that the provisions in the Bill are compatible with convention rights. In respect to those two provisions, and others, I am not sure that that is right. We would be greatly assisted if the Minister would provide a copy of the advice. If she is minded to fall back on the argument that the advice is privileged, there is another route. Will she set out in writing, without reference to the advice itself, the legal reasoning that underlies that conclusion in respect of those two clauses? If she does not cite the advice itself, what she sets out is not privileged, and she has not opened up disclosure of the advice. What could be the problem with that? It would put my concerns, and I suspect those of others, to rest.

Baroness Bakewell of Hardington Mandeville (LD)

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My Lords, I congratulate the Minister on her introduction to this Bill. The issue of continual sewage overflows and the failure of water companies to deal with this effectively has been the subject of many debates in this Chamber. It is also a subject of great concern to the public, who have to suffer the consequences of raw sewage in their waterways and lakes, and often in their back gardens. The noble Lord, Lord Lipsey, and others have referred to public involvement in this issue.

This is a hot political issue, which featured in manifestos during the recent general election. I know that the Minister is keen to deal with this problem, and I am pleased that this Bill is one of the first pieces of legislation that the new Government have decided to start in this Chamber—especially since we have had so many debates and Questions on the subject. Every noble Lord this afternoon has welcomed this Bill. The performance of the water companies and their regulators is an especially important part of our everyday lives. Industry through to domestic householders rely on an efficient water system and have been badly let down in the past. I concur completely with the comments of the noble Duke, the Duke of Wellington.

The Bill is only part of an overall programme of reform needed for the water industry. The Government are promising a review. This is urgently needed, and we all look forward to it being holistic and in-depth, and setting out a clear programme of action to provide the country with an efficient water and sewage industry that will be fit for purpose. My noble friend Lord Russell has referred to this.

The Bill itself has 13 clauses and three main sections: remuneration and governance; pollution incident reduction plans; and sanctions. Remuneration and governance are in desperate need of reform. Since privatisation, CEOs, directors and shareholders have enjoyed payouts that do not reflect the appalling performance of the industry. At privatisation, the water companies were debt free. Since then, they have borrowed money on a large scale, not to invest in infrastructure but to reward themselves. No new reservoirs have been built since 1992, and sewage works are crumbling and out of date. Infrastructure needs addressing urgently.

Solutions so far have been concrete construction-based, which has a high carbon footprint. Nature-based solutions, which are more carbon friendly, have been rejected. Only 2% of Ofwat’s budget is allocated to nature recovery solutions. Bill payers have had an extremely poor deal, while the shareholders and directors have been rewarded. It is time that this trend was reversed. There will be amendments in Committee to ensure that this happens efficiently—and we have heard a lot about the amendments that may be coming forward.

It is absurd that Ofwat is unable to rescind the licence of a poorly performing company without giving 25 years’ notice. My noble friend Lord Russell referred to that. I wonder what planet those who drafted that legislation were living on when they drew up that guidance.

Pollution incident reduction plans should help to concentrate the minds of those managers running the sewerage systems. The plans should include reporting on the state of the sewerage infrastructure, alongside the action being proposed to remedy this within a reasonable time limit. Monitoring each sewage discharge within the hour of occurrence is to be welcomed but, once the spillages have been recorded, are they to be published in a way that can be readily accessible to the public and those directly affected? Transparency is strongly recommended by the Information Commissioner’s Office.

I note that the regulations under this section will be made only after the Minister has consulted such persons as the Minister considers fit. That could be anyone—the CEO of the water company concerned, Ofwat, the Environment Agency or some other person. I am sure that this is something that will come forward in Committee. If the regulations are to be meaningful and effective, the regulator has to have teeth and be up for the job. Currently, there is little confidence in the ability of either Ofwat or the Environment Agency to deal with the scale of the problem, which is endemic within the water industry.

This leads me on to sanctions. It is going to be extremely difficult to identify who is the guilty party responsible for a breach of the regulations regarding sewage discharges, as well as dealing with water leakages. The noble Baroness, Lady Jones of Moulsecoomb, raised the issue of leakages. I welcome that the sanctions are to be stricter and toughened up. The Bill gives the job of monitoring and implementing this section to the Environment Agency.

During the passage of both the Agriculture Act and the Environment Act, the woeful reduction in funding for the Environment Agency was a cause for concern to your Lordships across all sections of the Chamber. This funding situation has not improved. It seems unlikely that the Environment Agency will be able to conduct its role in this Bill effectively.

The system of fines laid out in the Bill may be levied and go into a consolidation fund. Those fines will recompense the EA for the cost of the work that it has conducted in imposing fines, but it will be retrospective. Surely any fines levied should go into a fund for remedial action to ensure that a problem does not occur again and be returned to bill payers, who have, after all, suffered as a result of loss of water supply and incursions of sewage into their homes and business premises.

One of the Environment Act’s tenets is that the polluter pays. That has to happen. The noble Lord, Lord Lipsey, gave a graphic description of pollution in the River Wye—and we have heard that before. My noble friend Lady Parminter referred to yesterday’s news that Ofwat had fined water companies £158 million, with Thames Water having the largest share. I received an email from David Black, CEO of Ofwat, yesterday morning informing me of this, and giving me some detail. Later, I listened on the radio to David Henderson, the CEO of the water industry’s union, Water UK, saying the problem was lack of investment due to Ofwat preventing the industry raising consumers’ bills and preventing borrowing for investment. There was no mention that the water companies were set up debt free; nor that some of their assets had been sold off to increase shareholders’ dividends; nor that salaries and bonuses of CEOs and directors had been increased to what an ordinary bill payer would consider an obscene level.

The water industry as a whole is in a dire state. The regulators are ineffective and too close to those they are supposed to be bringing to book. My noble friend Lady Pinnock and the noble Baroness, Lady Browning, raised the issue of ex-water board members being on the regulatory boards—hardly impartial. The noble Lord, Lord Sikka, gave detail of Ofwat’s poor performance. Neither Ofwat nor the Environment Agency are going to change their modus operandi in the way in which the Government envisage. The EA has been chronically underfunded for years. Ofwat already has powers which, if they had been exercised continually since inauguration, would have prevented some of the excesses and failure of service from which the country is suffering. It is no secret that on these Liberal Democrat Benches we would have abandoned the current system and replaced it with a clean water authority to take on the relevant environmental and regulatory powers, including river health, as my noble friend Lord Russell indicated.

We have heard some excellent contributions from all sides of the Chamber. Many have suggested how they would improve the Bill. My noble friend Lady Parminter referred to public interest being essential for Ofwat. The noble Lords, Lord Remnant and Lord Douglas-Miller, and my noble friend Lady Pinnock warned about a broad-brush approach that lumps all water companies together. Your Lordships are exercised about the state of the water and sewage industry, quite rightly so. I am grateful to all those organisations which have provided briefings for this debate, many of which have suggested amendments for Committee. I agree completely with the need for impact assessments and statutory instruments to be prepared.

I look forward to the Minister’s response to the debate and to working with her during future stages of the Bill to ensure that we have a Bill that is effective into the future and dovetails into subsequent legislation which the Government intend to bring forward following the review of the water industry. As all noble Lords have said, this is not going to be an easy task—quite the opposite.

Lord Roborough (Con)

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My Lords, I am delighted to speak at Second Reading of this important Bill, which is being followed closely by concerned members of the public across our country. I thank the Minister for her exemplary engagement with me and all Peers with an interest in this area. I am sure that we can continue to have these conversations to make the Bill as effective as possible.

We on this side of the House are committed to cracking down on pollution by water companies and we will support the Government to deliver effective measures that bring polluters to justice. While government can always do better, we are proud of our record. We increased the number of storm overflows monitored across the network from 7% in 2010 to 100% today. The Thames Tideway tunnel is now complete. This is a £4 billion project that happened because our Government faced down opposition from Ofwat and others, including Members of this House, in guaranteeing the scheme by Act of Parliament. Aided by improved monitoring, we took firm action against persistent polluters, delivering the strictest targets ever on water companies to reduce pollution from storm overflows. The Environment Agency can now use new powers to impose unlimited penalties for a wider range of offences. The effectiveness of these measures was shown this week when water companies in England and Wales were told to pay £158 million in penalties to customers, having failed to meet their targets.

In this Bill, we intend to work with the Government and the House to create the right balance of stakeholders’ interests. While the Government may not be willing to accept all our proposals for the current Bill, we hope they will get further attention in the promised further legislation.

Consumers have a right to expect affordable, clean drinking water and clean rivers, lakes and beaches. Our overall concern for consumers in this Bill is that it will add significant compliance costs to the industry that will then need to be passed on to those consumers. There is not enough clarity in the Bill on the potential fees that regulators and the Drinking Water Inspectorate will be able to charge, and we would like to understand what those fees will be and how they will impact consumer bills.

The measures on special administration orders appear to give the Government the power to change a water company’s charges paid by consumers to whatever level they wish to recover costs. It will be important to understand what work the Government have done to establish the impact these measures might have on consumer bills. The Minister mentioned that increases would be taken very seriously, but we may need more reassurance than that.

It is also relevant to raise the question of to whom water companies should pay their fines. We on this side of the House would be interested to hear whether Ministers agree that when water companies fail to deliver a service to customers that is safe and does not pollute our rivers, they are failing their customers and should compensate them accordingly. Ofwat already acts on behalf of the consumer, so can the Minister explain what assessment the Government have made of the impact of consumer involvement on decision-making? What responsibility will those consumer representatives take for such involvement given the dire consequences of failure laid out in this Bill? The noble Duke, the Duke of Wellington, made a number of suggestions which we are likely to be interested in supporting.

Our natural environment deserves to be treated better than it has been for many decades and the industry must continue to clean up its act. It is clear that those who focus on protecting our natural environment are not wholly impressed by this Bill. There have been a number of representations from River Action, Surfers Against Sewage and, as the noble Lord, Lord Lipsey, eloquently pointed out in respect of the River Wye, among others on how the Bill could be improved. We will monitor those and other suggestions with interest.

On pollution incident reduction plans, we agree that water companies need a clear plan of action to deliver positive change. However, it would be useful to know what assessment the Government have made of the practical benefits of the plans to ensure those documents have the desired effect.

We will also be looking at the measures to increase reporting of overflow events. Do the Government intend to make any distinction between events caused by third parties, such as run-off from roads, and those that are a result of failure within a water company?

I turn to employees. This sector creates livelihoods for 100,000 of our fellow countrymen and women, and we must ensure that this remains an industry that is an attractive place to build a career, while we also root out offenders. We support tough sentences for those who break the law but, to slightly repeat my noble friend Lord Remnant’s point, can the Minister explain why sending water executives to prison, under the measures in Clause 4, is really the best use of our prison capacity when current pressure on our prison estate has led to the Government implementing a prisoner early-release scheme? I ask the Minister to publish the Government’s justice impact assessment to understand the impact of this clause.

Clause 2(4) places a serious obligation on those qualifying as being authorised by the agency, and in turn will require a significant compliance effort to ensure that all those impacted are aware of the law and what their obligations are. My noble friend Lord Sandhurst has spoken about a number of other measures that touch on justice-related matters, and it is important we get this right in the Bill. I will not repeat his arguments, but we will certainly be looking to improve the Bill in those areas as it passes through your Lordships’ House.

I would also be grateful if the Minister could confirm that the measures in this Bill on remuneration and performance-related pay are designed to be retroactive, to take effect from the beginning of the financial year prior to the Bill becoming law. In addition, how will this interference in existing employment contracts work in practice? I would also agree with my noble friend Lord Remnant’s points— echoed by other noble Lords, including the noble Lord, Lord Sikka—about unintended consequences, as seen in the financial services industry, that this may simply mean that basic salaries increase dramatically.

The Bill also lacks clarity on the fit and proper person test for senior water executives. I am very familiar with how this works in the financial services industry but, in relation to this industry, I ask the Government to publish exactly how it will work, before the Bill reaches Committee. It is crucial we have more clarity on these issues, as water companies may now need compliance departments to comply with additional regulations. This will also have an impact on customer bills. What assessment have the Government made of the impact of introducing a fit and proper test and these other regulatory requirements on consumer bills? As other noble Lords have pointed out, shareholders and debt holders are essential to providing the long-term investment the industry needs, with £88 billion targeted. Returns must be sufficiently attractive and predictable to attract that capital.

We are concerned that the offences specified under Clause 6 are not listed in the Bill. The Government need to include these in the Bill rather than setting them down later in secondary legislation which noble Lords cannot amend. We would very much like to see a draft of these offences prior to Committee. As other noble Lords have pointed out, there are significant delegated powers provided in this Bill, and I echo all the comments for “More disclosure, please”.

As the noble Duke, the Duke of Wellington, and my noble friend Lord Douglas-Miller and many others mentioned, Ofwat and the Environment Agency may not be the right bodies to deliver the additional monitoring, penalties and enhanced regulatory regime required by this Bill. We would be very grateful to know what assessment Ministers have made of the performance of Ofwat and the Environment Agency before pressing ahead with a Bill that grants those regulators more powers. I particularly take note of the comments made by the noble Lord, Lord Whitty, on this subject.

We are concerned that, under the recovery of costs provisions in a special administration regime, the Government may be able to recover costs incurred in action on one company from the wider industry. That represents a risk that shareholders should not be exposed to, and I would welcome clarification from the Minister on this point.

While the Bill makes significant provisions to increase the accountability of directors, companies and employees to the Government, we would really prefer to give this accountability of management, and performance-related pay, to shareholders, by adding more clarity to the impact of regulatory actions on shareholder returns. That is likely to lead to more coherent and efficient thinking throughout these businesses and less onus on government enforcement. It is also far more likely to achieve the change in culture that many noble Lords have demanded.

The Government should not be placed in a position where they may be forced to step in and correct market failures. Given the failures of regulation to protect the industry from aggressive financial structures, we think it is appropriate to introduce a cap on the leverage that a regulated water company can have within its operating company. Should shareholders and debt investors choose to put additional leverage on these companies above the operating company level, it will be at their own risk as we cannot allow these regulated monopolies providing essential services to be threatened in that delivery. Contributions from many Members suggest this might be a welcome move.

While not within the scope of the Bill, we would also like to see water companies incentivised to work with land and waterway managers on ecosystem restoration, bringing cleaner water and better flood resilience. I very much support the comments and questions on this area from the noble Earl, Lord Devon. Within that context, I also draw the House’s attention to my interest as a land and river owner.

In conclusion, we on these Benches firmly support the Government’s ambition to deliver the cleaner rivers, lakes and beaches we all want, but we will be holding Ministers to account on the measures in the Bill in Committee, to ensure there is more clarity both for noble Lords and for the sector before the Bill goes for scrutiny in the other place. Once again, I thank the Minister for her engagement to date and I look forward to much constructive discussion about the Bill in the coming weeks.

Baroness Hayman of Ullock (Lab)

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My Lords, this has been a very interesting and worthwhile debate. I thank all noble Lords who have spoken for their thoughtful, informative and constructive comments.

As we have heard, the Bill is going to be used to drive meaningful improvements in the performance and culture of the water industry, as part of our wider efforts to ensure water companies deliver both for customers and for the environment. Many campaign groups, as well as parliamentarians, have called for measures to hold water companies to account. We also know that there is huge public support for the Government to do something. There is clear and broad recognition of the need for action. Let me now take the opportunity to address some of the points and questions raised during the debate.

First, I would like to stress that the Bill goes beyond the previous Government’s ambition. It is not true that the Bill does not contain anything further than measures put in place by the previous Government. For example, the Bill will go beyond the current regulatory framework. To give a couple of examples, it will provide legal powers to ban bonuses—currently, you can only set expectations—and it will also require water companies to report in near real time on discharges from emergency overflows, which are at present largely unmonitored.

The noble Duke, the Duke of Wellington, the noble Earl, Lord Russell, the noble Lord, Lord Blencathra, my noble friend Lady Young of Old Scone, the noble Earl, Lord Devon, and many other noble Lords were particularly interested in what exactly the review is going to do. As I said, the Bill alone is not enough to fix our water system; it is only an immediate down payment on the wider reform that is needed after many years of failure and environmental damage. As I mentioned, the review is going to be carried out to fundamentally transform how our water system works so that we clean up our rivers, lakes and seas for good. We will invite views from a range of experts, covering areas such as the environment, public health, consumers, investors, engineering and economics. We will have a public consultation to test that any proposals are robust and ambitious enough to clean up the pollution from our waterways. Through our review, we will look at long-term wider reform of the water sector as a whole, including considering and clarifying the roles of regulators. We expect this work to culminate in shaping further legislation and intend to set up further details about the review later this autumn. It is also really important that specific measures are consulted on during the passage of the Bill, and we will be looking to do so.

The noble Baroness, Lady Jones, and my noble friend Lord Sikka particularly asked about nationalising water companies. As I have said previously, the Government have no intention to nationalise the water companies. We are focusing on improving the performance of the water industry as an urgent priority. The measures in the Bill are designed to do exactly that.

As we have said, it will cost billions of pounds and take years to unpick the current ownership model, during which time underinvestment in infrastructure and sewage pollution will only get worse. Research that has been commissioned by the Consumer Council for Water, which we have heard about—

Lord Sikka (Lab)

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First, can the Minister say how many billions of pounds, and can she publish that calculation? Secondly, she says it will take a long time, but the Government are going to integrate the newly created companies to manage the railways, and there are numerous mergers and takeovers everywhere where new entities are accommodated. Could the Government publish a paper to see what the complications would be? Although I recognise some of the complications, I do not think that any of this is insurmountable.

Baroness Hayman of Ullock (Lab)

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Rather than get into a discussion around this, as I have a lot of questions to answer, I suggest that perhaps the noble Lord and I—and the noble Baroness, if she so wishes—take this away into another meeting and discuss it further when we have more time.

The noble Baroness, Lady Jones of Moulsecoomb, asked about the special administration regime, as did other noble Lords, and she asked particularly about profits for shareholders and creditors. The special administration regime is there to enable a seriously underperforming or insolvent water company to be put into special administration, with the requirement that vital public services—that is, water and wastewater—are continued to be provided pending a rescue package and transfer to new owners. This contrasts with normal administrations, where the appointed administrator is focused on the creditors’ interests only.

A number of noble Lords—the noble Duke, the Duke of Wellington, the noble Baronesses, Lady Parminter, Lady Pinnock and Lady Bakewell, and my noble friend Lady Young of Old Scone, in particular—asked why the Bill is not being used to reform Ofwat or the Environment Agency. The Bill introduces the most significant increase in enforcement powers for the water industry regulators in a decade and is designed to give them the teeth they need to take tougher action against water companies in the next investment period. However, we want to go further. Through the review, as I mentioned, we will look at the regulators in order to carefully consider their roles and responsibilities and how we can ensure that they operate as effectively as possible. So that will be part of the review.

The noble Lord, Lord Douglas-Miller, asked whether the regulators were adequately resourced to implement all the new provisions in the Bill. Through the new cost recovery power in the Bill, we will enable the Environment Agency to fully recover costs for the full extent of its water company enforcement activities. That will include prosecutions and civil sanctions, revocation notices of permits, and pollution incidents. In addition, the EA is already recruiting up to 500 additional staff for inspections, enforcement and stronger regulation, increasing compliance checks and quadrupling the number of water company inspections by March next year. This will be fully funded by around £55 million per year through increased grant in aid funding from Defra and additional funding from water quality permit charges levied on water companies. I hope that helps to answer the noble Lord’s question.

There were also questions around the detail of Ofwat’s rules. The noble Lords, Lord Blencathra and Lord Remnant, mentioned this. We feel that it is more appropriate for Ofwat, as the independent regulator, to determine the specific performance metrics that should be considered when setting the rules. Allowing Ofwat to set out in the rules the performance metrics to be applied will also enable those standards to be more easily amended—subject to the relevant procedural requirements, of course—where or when it is appropriate to do so in the future. Ofwat would need to consult with relevant persons, including the Secretary of State, Welsh Ministers, the Consumer Council for Water and others, before such rules were finalised. I also reassure noble Lords that Ofwat will issue a policy consultation in October on the scope of the rules.

Consumers were mentioned a number of times. First, on representation on boards, as we go through the Bill, we will look at this in more detail, but the idea behind the Bill is that Ofwat will be required to issue rules on consumer representation. Customers largely foot the bills for water company decisions, so we believe it is right that they have a say where their interests are at stake. Ofwat will need to consult with relevant persons, including the Consumer Council for Water, before finalising the rules on performance-related pay, and fitness and propriety and customer representation. I think my noble friend Lord Whitty asked about some of those issues.

The noble Lord, Lord Roborough, asked in his speech just now about further increases to customer bills. Where increased costs are a result of penalties being issued by the regulators—for example, under the new automatic penalties regime—the penalties will come out of water company profits and not from customers. Where costs are unrelated to penalties—for example, where they will fund new and improved infrastructure—we are working closely with the water industry regulators to see how we can best minimise the impact of measures introduced by the new legislation on customer bills. We do not want to see the customers bearing the brunt of these new actions.

A number of noble Lords, including the noble Lords, Lord Remnant, Lord Douglas-Miller and Lord Cromwell, and the noble Earl, Lord Devon, asked about investor confidence. Private sector investment is at the core of how we grow our economy. The Government are committed to establishing a strategic framework in order to deliver long-term stability, and which is conducive to attracting the sustained investment in the sector that we need. The Bill will deliver a clear and consistent regulatory framework for the water industry and its investors. I do not think anyone would think that investors have a lot of confidence in much of the water industry as it stands. On 10 September, Defra and Treasury Ministers held a round table with investors where they outlined how the Government will work in partnership to attract the billions in private sector investment that we desperately need to be able to clean up our rivers, lakes and seas.

On that issue, there was also discussion around attracting talent. A number of noble Lords talked about the fact that it is more stick than carrot and asked how we are going to attract people into this. We believe it is right that companies and their executives are held to account for basic and fundamental performance requirements. Should companies meet their performance expectations, we believe that executives should rightly be rewarded, and there are also previous and existing examples of similar rules in other sectors. I will give a couple of examples. The financial services sector previously had a set cap on the level of bonuses—somebody mentioned that; I am sorry but I cannot remember who it was—and fit and proper person tests are also conducted by the Financial Conduct Authority and the Prudential Regulation Authority in that sector. Those sectors have continued to attract talent.

The noble Earl, Lord Devon, asked about ensuring that water companies invest sufficiently when considering pressures such as climate change and population growth, and about ring-fencing money for improvements. In July, Ofwat announced in its draft determinations a proposed £88 billion worth of expenditure between 2025 and 2030, which will be the largest investment in infrastructure that has ever been made by the water industry. We hope that that investment will deliver much of the work needed to achieve the issues that the noble Earl referred to.

The pollution incident reduction plans were discussed by many noble Lords during the debate. One question was: why have we not included a duty to implement the plans rather than just publish them? I think the noble Baroness, Lady Parminter, in particular talked about this. We say that these plans should be seen as part of the broader package of powers for regulators which exist and which are strengthened through the Bill to reduce pollution incidents.

The Environment Agency already has access to a range of tools to enforce against pollution incidents and this Bill is designed to supplement this with its provisions for automatic penalties and for Ofwat to ban bonuses when water companies have not met environmental standards. Water companies will also be required to report on overall progress on the actions that were set out in the previous plans. A specific duty to implement the plan would make enforcement more difficult, we believe, as it would cut across the wider legal requirements for pollution reduction.

The noble Baronesses, Lady McIntosh, Lady Browning and Lady Pinnock, all talked about sustainable drainage systems—SUDS. This is a complex issue. Existing planning policy requires that SUDS are included in all new major developments unless there is clear evidence that that would be inappropriate. This is in addition to requirements that SUDS should be given priority in new developments in flood-risk areas. However, I am aware of the issue around the previous legislation that has been sitting in front of us for 14 years, so I want to assure noble Lords that the Government are currently assessing how best to implement their ambitions on SUDS, while also being mindful of the cumulative impact of new regulatory burdens on the development sector. We are having regular discussions and trying to co-ordinate joint work with MHCLG officials on this issue. We want to move this forward.

The impact assessment was mentioned. There is an impact assessment for the Bill—I am sure noble Lords will be delighted to hear that—but it is currently with the Regulatory Policy Committee. We will publish it as soon as it has concluded its review. We are hoping that will be fairly soon.

The timeline for implementation was mentioned. Our ambition is to implement the provisions to give the regulators the powers they need to take tougher action against water companies for the next investment period, which is due to start in April next year.

The use of delegated powers was mentioned by the noble Duke, the Duke of Wellington, the noble Lord, Lord Sandhurst, and my noble friend Lady Young of Old Scone. I want to reiterate the reassurances I made in my opening speech that the provision of delegated powers will be subject to appropriate scrutiny and safeguards. We believe the powers are necessary to ensure that the provisions in the Bill keep pace with the changing requirements on the water industry and the changing expectations of customers. A full justification for the inclusion of delegated powers in the Bill is available through the delegated powers memorandum which has just been published.

On the statutory instruments for new penalties, we will be consulting on whether new automatic penalties can be used. Parliament will debate and vote on secondary legislation before any changes are made, so we intend to bring that before the House.

A few noble Lords mentioned local issues. The noble Earl, Lord Devon, talked about Devon, not unexpectedly, and my noble friend Lord Lipsey talked about the River Wye. I was impressed that he got away with that word. When I was in the other place and we had a similar debate, I got ticked off and had to change what I had said. But we are concerned about the issue of poo in the River Wye and he is right to raise it. There are also issues in Cumbria, where I live, around Lake Windermere and the other lakes, as mentioned by the noble Lord, Lord Inglewood. This is something that I personally feel we need to sort out. Our national parks are hugely important. They should be peaceful, beautiful places, not places that have been damaged by sewage overspills and other pollution. I reassure noble Lords that cleaning up iconic sites such as the River Wye and Lake Windermere is a top government priority. We want to get this sorted. The 2024 price review package that I mentioned earlier will include funding for improvement projects at priority sites and we are also working closely with the Welsh Government, particularly on the issues around the River Wye.

I am just about out of time. If I have missed anything that I should have answered, we will of course check Hansard and I will get back to people in writing, but once again I thank all noble Lords who have spoken today for their valuable contributions. It is clear that we agree on the importance of addressing issues in the water sector swiftly and decisively and that there is a consensus on the core aims of the Bill. The water industry really does need an overhaul, so I look forward to continuing constructive engagement with noble Lords. My door is always open. I commend the Water (Special Measures) Bill to the House and beg to move.

Bill read a second time and committed to a Committee of the Whole House.

Baroness Willis of Summertown (CB)

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My Lords, in moving Amendment 1, I will also speak to Amendment 91 in my name. These amendments seek to set a strategic direction for the Bill and, crucially, to apply a new duty on the water regulator to take account of—and take all reasonable steps to ensure that Ofwat and, by extension, the water companies that it regulates, contribute to—our targets under the Climate Change Act and the Environment Act. It would have immediate effect outside the price review process by applying climate and nature considerations into yearly in-period determinations. I am grateful to the noble Baronesses, Lady Parminter and Lady Young of Old Scone, and the noble Lord, Lord Randall of Uxbridge, as well as the Blueprint Coalition, for their support.

As the first speaker in Committee, and conscious that I was not here at Second Reading, I will quickly say that I fully support the general intent of the Bill and note that this is just one stage of the Government’s wider plans for tackling water pollution. While I do not have major issues with what is in the Bill, it presents us with a legislative opportunity to strengthen the regulator to ensure that Ofwat has the duty to contribute to the delivery of our climate change and nature targets. This is a key chance to modernise Ofwat’s remit and ensure that it is fit for purpose.

As we all know and hear daily, the water industry has a huge impact on our natural environment. Its shortcomings and their effects are well documented—I will not repeat them here—but it is not just the shortcomings of the water industry. It is hard to imagine that these shortcomings would have been possible with a regulator which had a remit that also ensured it took these issues seriously. But the fault, or reason, does not lie simply with Ofwat. It lies with the duties it has—or, more importantly, does not have—which have been legislated by this Parliament over the past three decades. In short, there is a misbalance between what Ofwat currently does and prioritises and what the Government and the public would like us to do: ensure that industry cleans up its act.

In Ofwat’s duties there is no mention of climate change—which is going to make its job harder as we experience more erratic weather events—or biodiversity, on which we have binding targets that will be impossible to achieve without putting an end to sewage pollution in our rivers. We can all acknowledge that the regulators are busy and, without these targets on their list of things to do, this will continue to fall by the wayside or be deprioritised, as it so obviously has been in recent years. That is why I have tabled Amendment 91, which would help the Government and the public to ensure that a greater contribution is made by the sector. With a clear duty, it would mean that the regulator has to further two of the Government’s core aims.

Amendment 91 would amend the Water Industry Act 1991, which established Ofwat, to require it to take all reasonable steps, in exercising its powers, to contribute to the achievement of our biodiversity targets under the Environment Act and our net-zero targets under the Climate Change Act, and to adapt to the impacts of climate change. Such a duty is currently missing from Ofwat’s governance.

Ofwat’s current primary duty, set under Section 2 of the Water Industry Act in 1991, is

“to further the consumer objective … to protect the interests of consumers, wherever appropriate by promoting effective competition”.

Section 3 goes on to state that Ofwat’s work to further the conservation of flora and fauna should be undertaken only as far as is consistent with the primary consumer objective. This clear subordination of environmental considerations to economic ones was not corrected by the introduction of a rather muddled resilience objective in 2014 and was actively exacerbated by the 2024 imposition of a new statutory growth duty on Ofwat

“to have regard to the desirability of promoting economic growth”.

In a speech in the other place last Wednesday, the Secretary of State announced an independent water commission that

“will ensure that we have the robust regulatory framework that we need to attract the significant investment that is required to clean up our waterways”.—[Official Report, Commons, 23/10/24; col. 279.]

That is good and welcome, as is the text in the notes that it must consider alignment with net-zero objectives. However, I went back through it and did a word search. Nature is mentioned once in the notes and there is no mention at all of biodiversity or of consideration of alignment with our mandatory targets for biodiversity, as outlined in the Environment Act and associated secondary legislation.

Is it relevant that we are asking Ofwat and, through it, our water companies to look at the biodiversity and water targets? Over the weekend, I went back and looked at the 2030 species abundance target, which was one of the biodiversity targets that was published as a statutory instrument in January 2023. I counted the list of species that will contribute to this target; included are 244 freshwater invertebrate species, which absolutely require clean water; 40 species of birds that forage and nest in riverine environments—that is 25% of the total list of bird species; and 48 plant species associated with, or growing in, rivers, streams or marshy freshwater environments, which is 22% of the plant list. By the most basic calculation, almost a quarter of the plants and birds on our species abundance list—the list that will be used to check whether we meet those targets—and 100% of our freshwater invertebrates rely on clean, unpolluted rivers to thrive, yet we have no statutory purpose or duty for Ofwat to look at this. Many of those species will not recover unless we improve the quality of our rivers, so this is a fundamental part of what we should be looking at. We urgently need every water company to acknowledge the Environment Act targets and for Ofwat to measure their performance against them.

It may well be argued that this would be covered by the independent water commission review, but there is an issue of timing as well. Even if these biodiversity targets are included as part of the consultation outlined by the Secretary of State last week in the other place, it will not, as stated, have any findings until the first half of 2025; and because of the current price review processes, changes will likely not come into effect until 2029 to 2030, which, if I have understood correctly, means they would be implemented after the biodiversity target to halt species decline in 2030 has come and gone. Perhaps the Minister can clarify on this.

A review is not legislation—I do not need to remind people in this Committee of that. Legislating for a climate and nature duty for Ofwat early in this Parliament would allow benefits to accrue ahead of the looming environmental deadlines falling at the end of Parliament, including the previously stated 2030 biodiversity targets. If we do this now, with a duty that will come into force in 2025, we can build these environmental objectives into work on the next price review from the start, as well as applying climate and nature considerations into yearly in-period determinations and everyday decision-making.

In summary, it would be counterproductive not to take this opportunity to give Ofwat a new duty to help ensure that we meet our climate and, crucially, Environment Act habitat and species targets. I hope we can find some agreement there.

The public were clear at the election that they expected change and that protecting and restoring our environment, including biodiversity, is a priority. This amendment would be a simple, proportionate, pragmatic and positive change that we could make today. I beg to move.

Baroness Parminter (LD)

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My Lords, I will be brief because the noble Baroness, Lady Willis, has set out clearly the case for a duty for Ofwat to deliver on the Government’s biodiversity and climate change objectives. I just want to pick up on the point about the review, because I think the Minister will say, “This is a fantastic amendment, but we just need to wait for the review”, and there are three reasons why this Committee will find that response unsatisfactory.

The first point is that made by the noble Baroness, Lady Willis, which is around the timing of the review, which we all welcome, but we do not know when exactly it is going to finish. Of course, by the time it is in legislation, and we do not know when there is going to be a slot, we could have missed our biodiversity targets, let alone our climate target.

Secondly, there is nothing in this amendment which is not already Government-stated policy. It is Government-stated policy to deliver on our biodiversity objectives, to move towards our climate change objectives, and to adapt to respond to those. So why do we need to wait for the review? There is nothing about putting this in legislation now which is counter to the Government’s position and therefore there is no barrier.

Thirdly, the wording is rather clever. It does not say “Ofwat”; it talks about “the Authority”. So, whatever the review decides, it is relevant. It is also clever because it says that it must “take all reasonable steps”. Again, it is not precluding or being prescriptive about that future authority; it is just setting the parameters.

It is a very well-crafted amendment and I think the Committee will be deeply disappointed if the Minister comes back and just says we should wait for the review. It would also make us question what the point of the review is, and we would not wish to do that because we have the highest regard for the Minister. If the Government are not prepared at this stage to put in the Bill that part of the review is to ensure that we deliver on our environmental and climate targets, then how can we be sure the review is going off on the right foot?

Baroness Young of Old Scone (Lab)

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My Lords, I add my support to these two amendments, to which I have put my name. I was pondering why Ofwat lost the plot on the environment around 2010. In a way, it is not surprising, because the reality is that it was getting a strong steer from government that the important thing was to keep bills down and that everything else should take second place. It was eminently possible to say that to Ofwat because the number of objectives and duties that it had been given was quite a large, disparate and often conflicting set and was growing yearly.

Ofwat currently has a primary duty under Section 2 of the Water Industry Act 1991 to

“further the consumer objective … to protect the interests of consumers, wherever appropriate, by promoting effective competition”.

That really became the sole mission of Ofwat in the 2010s.

Section 3 says that Ofwat’s work to further the conservation of flora and fauna should be undertaken only as far as it is consistent with the primary consumer objective. So, there is a “get out of jail free” card for Ofwat about environmental improvement and biodiversity decline and they take a very second-class seat. Ofwat also has a duty for pursuing sustainable development and a whole suite of environmental and recreational duties.

In 2014, a very muddled objective was added to Ofwat’s increasing list relating to resilience. In 2024, Ofwat got a statutory duty to promote growth. If one was being benign towards Ofwat, one could say that perhaps it was a bit confused by a number of directions which were mutually inconsistent, but the primary one was that Ofwat was told very firmly to keep prices down, and it pretty well did that in terms of the environmental elements of successive price rounds since then. Had Ofwat been challenged at any point as to whether it was meeting these duties, many of which are about contributing to or furthering or having regard to, it would have been very easy for it simply to construct arguments that demonstrated that it had a limited compliance with almost anything and to deliver nothing that it did not want to deliver.

The Minister will no doubt say that the broader review which has been referred to will consider how to streamline and focus Ofwat’s duties, and I agree that that is important and that the review should do it, but I share the views expressed that we cannot wait that long. The review will report eventually and there will be a delay while legislation comes forward. This amendment, which gives equal prominence to environmental duties and consumer duties, is fundamental if Ofwat is going to immediately play its full part in meeting the legally binding targets of the Environment Act and the Climate Change Act. At the end of the day, though I gather the debate on climate change last Thursday tried to deny it, these are in fact existential issues, which is why there are legally binding targets on both climate change and biodiversity.

Baroness McIntosh of Pickering (Con)

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My Lords, I congratulate the Minister on bringing forward the first Defra Bill to Committee stage; I congratulate the noble Baroness and those who supported the amendments moved.

I wish to add a note of caution and I declare my interests in the register: not least, I am an officer of the All-Party Parliamentary Water Group, and I worked for five years with the water regulator for Scotland, the Water Industry Commission for Scotland. The degree of caution I would like to urge in this regard is that I believe we are already committed in law. The Water Industry Act 1991 reflects that very carefully, as do the Environment Act and the Agriculture Act and others, not least the Flood and Water Implementation Act 2010, which is built on that.

I urge the Minister to be cautious in trying to reach a balance both in the Bill before us in Committee today and, more especially, the review to which other noble Lords have spoken, which we will go on to consider. I believe that the balance is currently right but falls heavily on the side of environmental benefits. I do not think that it is entirely clear what the costs will be.

I will issue a note of regret that I have not had the chance to go through the 87 pages of the impact assessment, which was released only on Thursday when I was due to speak in a debate on the Friday—literally, the first working day before Committee. One thing I have picked up that the impact assessment looks at is what the cost of natural capital and decarbonisation, for example, would be. I would certainly like more information on this, if possible. In relation to natural capital and decarbonisation, it says:

“This measure will help to protect the Water Environment and improve the state of the UK’s natural capital. The measure will ensure Water Companies take steps to protect the environment”.


It goes on to say:

“The measure is not expected to significantly impact greenhouse gas emissions”.


That is possibly debatable.

We will go on to discuss my main concern in greater depth in relation to amendments in my name in later groups, so I will not argue this at length now. However, I was absolutely astounded to learn this week that water companies are prevented from encouraging customers to take water efficiency measures. This addresses the point raised by the noble Baroness, Lady Young of Old Scone—a very pertinent point in this regard—about keeping customers’ bills down, which has been the concern of successive Governments as well as of the Consumer Council for Water, Citizens Advice and many MPs, as I found when I was next door, along with other noble Peers.

I am concerned that the definition of “wholesome water” is focused entirely on environmental matters and does not allow for measures to introduce water efficiencies, which I think all noble Lords would sign up to, such as recycling grey water to wash vehicles and, possibly, even dishes. I am a firm believer that clean drinking water coming into the home should be kept precisely for that purpose. It is extremely expensive to produce. We should keep drinking water for the purposes of drinking water. We should seek at every opportunity to encourage water companies to encourage their customers, in whichever area they live. In an area of hard water, for example, it is more difficult to work up a lather. Water companies are best placed to know the water quality in that area and I believe they should be allowed to address it.

The second thing that astounded me this week was that Ofwat had taken away some of the powers for water companies to introduce water efficiency schemes. It took some of those moneys away for better use—to give back as grants for water efficiency. I have no truck with Ofwat in this regard, but I would argue that water companies are better placed to know what water efficiency measures will work in each region in which they operate.

I conclude by saying that, while I listened very closely and admire the eloquence and knowledge with which the noble Baroness, Lady Willis of Summertown, moved the amendment, I think we have to err on the side of caution and make sure we are allowing the water companies the tools they need to do the job, to ensure that we preserve as far as possible drinking water for drinking water purposes, and allowing them to roll out measures to ensure that water efficiency going forward will encourage us all to use water differently. They are currently prevented from doing that by the definition as I understand it of “wholesome water”. We will go on to discuss that at a later stage, but one has to be cautious with the best intentions that are sometimes expressed in these amendments.

Lord Cromwell (CB)

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My Lords, I also add my support for these amendments, and I agree with much of what has been said already. On the matter of water usage, I have lived in deserts and I find the idea of people power-washing their cars with pure drinking water in this country extraordinary. But that is where we are today, I guess.

Why do I support these amendments? It is simply because it is vital that this Bill is consistent with existing policy and legislation to which it naturally links. The only reservation I have, which may be something that comes out of the review, is that it brings us back to the question of whether Ofwat and the Environment Agency should be a single agency or two separate ones with a division of responsibilities.

Lord Blencathra (Con)

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My Lords, I declare my interests as on the register. I thank the noble Baroness, Lady Willis of Summertown, for moving the amendment and for the interesting points she makes regarding the importance of clarifying the intention of this Bill. As we said at Second Reading, we are committed to cracking down on pollution by water companies and we support the Government’s intention to deliver effective measures that bring polluters to justice. While government can always do better, we are proud of our record in the past: we increased the number of storm overflows monitored across the network from 7% in 2010 to 100% today; and the Thames Tideway Tunnel is now complete.

So we on these Benches share the Government’s concerns about the many instances of water and sewerage companies discharging pollution in recent years. This poses a risk to those who use and enjoy our waterways and is causing serious damage to the environment. It is imperative that the Government continue to build on the progress the previous Conservative Government made on improvement, monitoring and tougher action to tackle sewage overflow incidents.

The Government are right to prioritise this issue, but we have serious concerns about the impact of this Bill on the water industry that we expect to explore as we go through Committee. I reiterate my thanks to the Minister, who has continued to engage constructively with us. I am grateful for the time she has given us in the lead-up to Committee. I hope we will continue to make constructive progress and improve this Bill for the benefit of all stakeholders—cost-effective water for consumers and security for the 100,000 employed in the water industry—while protecting the Government from financial risk and restoring our natural environment and incentivising investment.

Amendment 1 would make the purpose of the Bill clear and place a duty on the Secretary of State to have regard to that purpose, as well as the need to meet certain biodiversity targets and the current unpredicted impacts of climate change. The noble Baroness, Lady Willis, is right that we should take every opportunity to improve biodiversity, and there is an opportunity in the Bill to deliver transformative change for our rivers. We have amendments coming up in later groups that would help to incentivise the industry to invest in catchment restoration. That would not only improve water quality and flood management but contribute to nature restoration, biodiversity protection and, more importantly, the recovery of our biodiversity.

The Government want to keep the Bill narrowly focused on the regulation of water companies and their manifesto commitments on penalties for water companies, with the promise of further reform soon. We on these Benches are disappointed that the Government have not brought forward more comprehensive reforms in the Bill. If the promised water Bill does not materialise next year, it would not be the first time that a Government had delivered just partial reform.

We want to see a more ambitious approach from the Government, focused on the whole water sector and not just penalties for water companies—or for executives of water companies. For that reason, we believe there are areas beyond the Government’s fairly narrow focus in the Bill that ought to be included and should not be put at risk by the unclear timing of the future water Bill. The Minister has previously spoken about the need for incentives to attract talent to the sector, as well as an effective penalties regime. We need whole-sector reform if we are to deliver the clean rivers and healthy environment that people across the country are calling for. We support the spirit of the amendment by the noble Baroness, Lady Willis. We on these Benches agree that the Government must go further than the measures included in the Bill, and must do so urgently.

Amendment 91 similarly seeks to place duties on the Secretary of State to take reasonable steps to contribute to the achievement of our biodiversity targets and our climate change targets and to adapting to the impacts of climate change. The Minister will know that, in 2023, the last Government published the first ever comprehensive Environmental Improvement Plan, setting out targets and indicators for water-quality improvement.

Over 25 pages of the plan are devoted to water and targets. There were targets to reduce nitrogen, phosphorus and sediments; a target to halve the length of rivers polluted by abandoned mines; an interim target to construct eight water treatment works; targets on reducing water waste, reducing leakage by a further 20% by 2027; a target to restore 75% of our water bodies to good ecological status; a target to require water companies to have eliminated all adverse ecological impact from sewage discharges at all sensitive sites by 2035 and all other overflows by 2050; a target to create a level of resistance to drought so that emergency measures are needed only once in every 500 years; a target to direct water companies’ fines relating to environmental breaches to improving the water environment; a target to crack down on sewage pollution by holding water companies to account for delivering the targets set out in the Storm Overflows Discharge Reduction Plan; a target to require water companies to upgrade 160 of the wastewater treatment works to meet the strictest phosphorus limits by 2028, with a further upgrade of 400 of them by 2038, which would reduce nutrient pollution from treated wastewater; and—of great concern to me—a target to protect our chalk streams by supporting the chalk stream strategy. Lastly, there was a target to make sustainable drainage systems mandatory in new developments, subject to final decisions following consultation on scope, threshold and process.

I mention those targets to show that the Opposition are not coming here to say that we have just discovered some good ideas and actions for the future. We have a track record of setting tough targets, and they are in the EIP. These targets are specific to water quality and will greatly increase biodiversity. They are not just reasonable steps but specific, measurable targets.

The Government have said that they are urgently reviewing the latest EIP, which is about to be published. I do not expect the Minister to say what the tweaks will be, but can we expect any changes to the water EIP targets when the Government publish them? We share the ambition of the noble Baroness, Lady Willis, for water sector reform, and we hope that the Government will listen to the concerns of noble Lords, who are calling from all sides of the Committee for a more ambitious approach.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Baroness Hayman of Ullock) (Lab)

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My Lords, I thank the noble Baroness, Lady Willis of Summertown, for her interest in and general support for the Bill. I am sure that, despite missing Second Reading, she will make a very valuable contribution to Committee.

As I set out at Second Reading, the purpose of this Bill is deliberately narrow in order to improve water industry performance as an urgent priority. On her Amendment 1, I agree with the noble Baroness that addressing the wider issue of river pollution arising from water and sewerage companies’ operations is of critical importance, as of course is meeting our biodiversity targets. The noble Baroness, Lady Parminter, said that she hoped I was not going to just refer to the review, and I am sure she will be delighted to know that I am not.

The noble Baroness, Lady McIntosh of Pickering, made the important point that we already have commitments in law on this; we already have targets that we need to be meeting on biodiversity and the wider environment. It is important to stress that we must have regard to the Climate Change Act in this space. The Government are already required to meet the legally binding targets under the Environment Act 2021 and the Climate Change Act 2008, and to set out their plans to adapt to the impacts of the changing climate.

As the noble Lord, Lord Blencathra, just mentioned, we are doing a rapid review of the environmental improvement plan. This is because we are serious about meeting the Environment Act’s biodiversity targets. We did not feel that it was fit for purpose to meet those targets, which is why we are doing this review—to protect and restore our natural environment and come up with a delivery focus to help meet very ambitious targets.

Ofwat—I think the noble Baroness, Lady McIntosh, mentioned this—has a core duty under Section 2A of the Water Industry Act 1991 to work towards strengthening resilience. This duty ensures that Ofwat is already required to promote long-term planning for water companies to adapt to environmental pressures, including climate change. I take on board the comments of my noble friend Lady Young of Old Scone, who felt that Ofwat at some point lost the plot. This is why we need to look at the role of regulators through the review—I am afraid I will be mentioning the review from time to time today.

I hope that the noble Baroness, Lady Willis, is reassured that the Government share her ambition to tackle the wider issues of river pollution, biodiversity and climate change. I hope she understands that, because we feel we are already acting in this space through legislation that is in place, we will not accept Amendment 1.

Amendment 91 was also tabled by the noble Baroness, Lady Willis. In addition to the duty under Section 2A, Ofwat has a core duty under the Water Industry Act to work to ensure the long-term resilience of water companies’ supply and sewerage systems. Furthermore, on 23 October the Government announced the independent commission into the water sector and its regulation. This is intended to be the largest review of the industry since it was privatised, and part of the development of further legislation, not just a review. We want it to have a positive end in tackling the problems we see in our water industry. The objectives of this independent commission will include ensuring that the water industry regulatory framework delivers long-term stability to restore our rivers, lakes and seas to good health, to meet the challenges of the future and drive economic growth.

I hope the disappointment of the noble Lord, Lord Blencathra, will be replaced with excitement when he sees that these will form the basis of this further legislation to attract long-term investment and set out recommendations to deliver a collaborative, strategic and, importantly, catchment approach to managing water, tackling pollution and restoring nature.

The noble Baroness, Lady McIntosh, made a specific point about the impact assessment. I do not have the assessment in front of me, so I am not entirely sure what section she was referring to. I hope she and I can catch up following Committee and discuss this, so I can answer her questions in more detail.

The commission’s terms of reference do include environmental aspects. The commission’s objectives include to “support best value delivery” of environmental outcomes, and to:

“Rationalise and clarify requirements on water companies”


to achieve better environmental outcomes. Furthermore, under “approach and deliverables”, it says that the chair

“will invite views from an advisory group of nominated experts, covering areas including the environment”,

and

“will also seek views from wider groups of stakeholders, including environmental campaigners”.

Therefore, we are trying to make sure that, as well as meeting the targets already in legislation, we put the environment at the heart of what we are doing.

I hope that the noble Baroness, Lady Willis, is reassured that these two new Clauses are unnecessary as they overlap with existing government requirements, Ofwat’s core duties and our ambitions for the future. I hope she will take an active part in what we are trying to achieve with the commission, and I thank noble Lords for their engagement on these important matters.

Baroness Willis of Summertown (CB)

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I thank the Minister and everybody else who has contributed to this discussion on my amendment. I am not going to repeat the valid and important points that have been made, but I will respond to the noble Baroness, Lady McIntosh, on the term “caution on costs”. There is a lot of debate about costs, and nature-based solutions can often be much cheaper while also elevating biodiversity. For the last 20 years we have been told to be cautious about costs and on-costs, and as a result our species targets have gone down and down. The time has come to redress that balance, and I look forward to debating this another time.

On the commission, I appreciate the Minister’s comment that we already have commitments to the environment in the Environment Act and the Climate Change Act. However, I was shocked when I discovered over the weekend that, according to the list of protected species that we want to stop the decline of by 2030—not 2035—25% of plants and birds and 100% of freshwater invertebrate species rely on clean rivers. Therefore, while I am delighted about the commission and will absolutely get behind it and join in, it is going to be too slow and too late to achieve the biodiversity targets we set out in the Environment Act. I look forward to picking up this issue on Report, but for now I beg leave to withdraw the amendment.

Earl Russell (LD)

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My Lords, in rising to speak to this amendment, I declare my interests as set out in the register. I wish to inform the Committee that my noble friend Lady Bakewell is unwell and unable to attend today, so I will be speaking to many of her amendments as well as my own. This second group of amendments concerns the rules for renumeration and governance, and Amendment 2, tabled by my noble friend Baroness Bakewell, requires Ofwat to issue such rules.

This Government are seeking to strengthen the measures in this Bill by making them firm commitments with due weight in law, and not merely the vague assumptions as currently written into the Bill. We on these Benches have little faith that, without this amendment, the water companies will keep to the spirit of the law on these matters. I have a very similar “must” to “may” amendment, Amendment 24, in group 6, and I shall make general points on both in this speech. We have strong grounds for taking such a position, based on the past performance of the water companies themselves, especially in relation to awarding pay and bonuses and returns to shareholders, which have always come first. Meanwhile, investment in infrastructure and the protection of our environment from the harm these companies have caused and continue to cause have always come a very distant second, if at all.

By way of a very brief introduction, we would of course prefer it if this Government had a more comprehensive and clearer set of plans in place to make more rapid progress on these matters. We on these Benches are clear that we would abolish Ofwat and replace it with a new, unified and far more powerful clean water authority, and we would make water companies public interest companies. This Government have taken a different route and are of a different opinion, believing that the shopping list of measures in this Bill can bring improvements that will hold while a full review is undertaken, before fuller and more fundamental reforms are implemented later on.

We welcome the announcement of the review, but I share the concerns expressed by the noble Baroness, Lady Willis, particularly about our commitment to 30 by 30 and further delay on these matters. The trick for the Government is to make sure that they can make the rapid change required and make Ofwat fit for purpose, since that is their stated intention, and to put in place all our environmental regulations and protections in the timeframes available. That is a bit of a magic trick, and I remain to be convinced that the Government will be able to pull it off, so that is a key concern for us.

We will work to support the Bill where we feel that it brings improvements, and there are many measures that we welcome and will support. We thank the Government for bringing them forward and signalling the future direction of travel and intention to take these matters very seriously. But the measures are really a list of stopgaps and quick fixes, intended to make the system work somewhat better than it has until the full review is finished and implemented. These measures come first and will need to work alongside any further actions. That is something we will need to think about in Committee—how the measures and amendments we are bringing forward and discussing today might work with potential outcomes from the review that is yet to come.

For the measures in the Bill to work, even the stopgap measures, the clauses need to be strong and effective. If they are not firm or binding, or can be easily ignored or circumvented without clear consequences, they simply will not work or do what they are intended to do. This is one area of the Bill that we think can easily and should be strengthened, so that it has the intended and required effect. The wording here as it stands is simply not strong enough. We cannot allow weak and ineffective measures to stand while the country waits for the Government to consider making further legislative changes post the review, and these then to pass through Parliament, to be enacted at a much later stage, which, as we have heard, could be by 2030. I seek clarification from the Minister as to when those measures will go through that process and come into force.

Since privatisation 35 years ago, we have witnessed one of the worst environmental crises in the UK, with unabated and unprecedented pollution. Just 14% of our rivers and streams are in good ecological health. In 2023, there were some 3.6 million hours-worth of untreated sewage discharges in England alone. Meanwhile, water companies have paid at least £78 billion in dividends, while failing to invest adequately in the infrastructure required. At the same time, they have piled on £64 billion net in debt, yet they were privatised debt free. The levels of executive pay and remuneration have rightly caused outrage across the country, as water bosses have got even richer as our bills have got even higher and we face more and more pollution in our rivers and streams.

Clause 1 amends the Water Industry Act 1991 to insert new Section 35B, which links the remuneration of water company directors to the meeting of a single set of specified standards, which include environmental standards. This is a welcome and long overdue measure. Performance-related pay and profits must be linked to the outputs achieved, and investment and environmental standards must be the benchmarks. While the intention is clear, the determination of the proposed legislation is weak. As drafted, it simply says that the authority “may” issue such rules. That is neither clear nor well-defined enough as it stands. The Bill must ensure that Ofwat issues clear and well-defined guidance, in a defined timeframe. What is written is not enough and brings no guarantee that Ofwat will issue such guidance, with no means of holding it to account if it decides that it is simply not minded or does not see any need to issue any guidance.

The Duke of Wellington (CB)

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My Lords, first, I congratulate the Government on having set up, last week, the review under Sir Jon Cunliffe. That is an excellent move by the Government; a very respected individual will carry out the review, and a number of us have been asking for this for a while. I really think the Government have made a wise decision.

I want to comment on Amendment 2. I have sympathy with “must” rather than “may”, but I have a reservation about the then wording, “must issue rules”. It seems to me that it is necessary for the authority to issue what I would prefer to call “guidance” rather than “rules”. That would give a certain flexibility to individual companies—no two companies will ever have the same set of circumstances, either among their executive management or in the environment in which they are operating. I ask the Government to consider changing the wording of the clause, so that it reads: “The Authority must issue guidance about the arrangements made by relevant undertakers”.

There is no doubt that the water companies have abused the total independence they have had to date around setting remuneration and everything associated with it. They are monopolies, and I think they have gone too far. Many people have been rather dismayed to see the levels of executive remuneration. I ask the Minister to consider changing “rules” to “guidance”. That would be a great improvement.

On Amendment 3, in a light-hearted manner I point out to the noble Lord, Lord Remnant, a misprint, where his amendment refers to “renumeration” rather than “remuneration”. I am sure that that is an oversight which he will have already noticed.

There is a good point in the amendment from the noble Lord, Lord Remnant, in his proposed new Section 35B(1B)(b), about the importance of attracting, motivating and retaining persons of sufficient quality to work in the industry. We must all remember that what we all want is better-run water companies. I do not think we should be tying too tightly the hands of remuneration committees and the board in general in how they attract and retain executives. I am very persuaded by that particular aspect of the noble Lord’s amendment, but I worry about seeking to define too closely exactly how water companies should make their remuneration arrangements.

Lord Remnant (Con)

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My Lords, I will speak to Amendment 3 in my name and I apologise for the typo. I had noticed it, but only recently, and only a moment or two before the noble Duke, the Duke of Wellington, brought it to the Committee’s notice.

As we know, Clause 1 contains rules about remuneration and governance. Most importantly, it contains provisions giving Ofwat the power to block the payment of bonuses to senior executives of water companies. My amendment clarifies that Ofwat’s powers under this clause cannot be exercised in a way which conflicts with its general duties with respect to the water industry and emphasises that the industry’s capital and human resources needs are of critical importance. I declare an interest as having been a non-executive director of Severn Trent, the largest of the listed water companies, for eight years, between 2014 and 2022, chairing the board’s remuneration committee for that time.

Why is it that these clarifications are required? Essentially, it is because we are giving extremely wide powers to Ofwat to draft rules in a very complex area, seemingly at its discretion and without further scrutiny by this House, which may have many unintended and harmful consequences. There is no clarity in the Bill on the appropriate targets and performance standards, how they will be measured, when relevant triggers occur and which remuneration, in which year, will be affected. This will all be for Ofwat to determine—yes, Ofwat.

I have huge sympathy for regulators—I was one myself for a period, running the Takeover Panel—and know that they attract only criticism and never praise. Having said that, I thought the mood of your Lordships at Second Reading was especially stark in expressing views about Ofwat’s past performance, and some of those views have already been reiterated in the short time we have had today. That was as regards its role as an economic regulator—its core competence. We are now effectively extending Ofwat’s remit into difficult areas of fine judgment best left to company boards and for which Ofwat is totally unsuited. Can we be so reassured by the integrity of the ensuing process and the safeguards built in that my concerns can be assuaged by leaving this clause unamended? I fear not.

First, it offends the principles of natural justice, as there is no distinction between the legislative process and the judicial one. The powers will lie with one body, Ofwat. It will make the rules and then judge companies and individuals under them. Secondly, the Minister may refer me to the consultation process which Ofwat will undertake, to which she drew the attention of your Lordships in her helpful letter dated 25 October. I welcome that, although it would be a heroic achievement for Ofwat to decide definitively on such a wide range of questions and responsibilities that this Bill, if enacted, will impose on it. Yet we all know that consultation is no panacea. The responses will contain many conflicting views and the conclusions that Ofwat will reach will be influenced by the weight it gives to particular views and to some preconceived ideas that it will inevitably hold.

Thirdly, there will be no opportunity for your Lordships to scrutinise the rules promulgated by Ofwat. For this reason, I support the thrust of Amendment 27 in the names of my noble friends Lord Roborough and Lord Blencathra and Amendment 25 from the noble Lord, Lord Sikka, which are designed to achieve such scrutiny. I will leave those noble Lords to talk to them in more detail.

But is this enough? I suggest not, because the scrutiny so achieved would be after the rules had been made by Ofwat. There is a need to influence Ofwat’s thinking much earlier in the process. That is what my amendment is designed to achieve. It is drafted with an eye to the wider objectives to which this Bill should aim: the need for more innovation, the recruitment of new talent and, above all else, the greater investment required to raise standards.

The amendment is in two parts. First, it is designed to ensure that Ofwat does not exercise its powers in a way that conflicts with its general duties under Section 2 of the Water Industry Act 1991. Such duties include a consumer objective, a duty to have regard to principles of best regulatory practice and a growth duty. Indeed, Ofwat refers to such duties in its consultation document when it says that one of its desired outcomes is that the rules should be proportionate. That is to be welcomed.

The Minister may be tempted to say that existing duties in the Water Industry Act and Ofwat’s acknowledgement of them should satisfy me and render this part of my amendment redundant. Were she to do so, I would say that that might hold good if the Bill imposed some constraints on Ofwat rather than adopting a blanket “Over to you, Ofwat” line. In the same section of its consultation document, it appears to qualify its commitment to proportionality by saying that

“we will be bound by statute”—

presumably as a result of this Bill—

“to introduce rules with the requisite effect”.

It is therefore critical that there is not just implicit recognition of Ofwat’s duties under the Water Industry Act of over 30 years ago but explicit recognition of those obligations on the face of the Bill, linked directly to this new and additional power that we will be giving to the regulator.

The second part of my amendment requires Ofwat to have regard to two further considerations in exercising its powers under this clause: namely,

“the need for a relevant undertaker”—

the water company—

“to … attract the investment required for its capital programme, and … attract, motivate and retain persons holding senior roles”.

I can find no reference to these considerations in Ofwat’s consultation document generally, nor in the specific questions it proposes, yet the scale of the investment in the industry that is required is such that we cannot afford to deter that investment, or experienced executives from working in it. Unlike in the past, much of that investment will have to come from equity investors, who assume a higher level of risk than debt investors and have more of a vested interest in, and so take a more critical attitude to, the prospects of a company, its financial plans and, importantly, the quality of the management tasked with delivery.

There is a limited number of appropriately qualified and skilled candidates to take on the most senior roles in water companies, and one of the successes of privatisation has been the ability of such companies to attract successful individuals from outside the utilities sector. In a competitive world for talent, Ofwat should not introduce rules that put water companies at a significant disadvantage when recruiting and seeking to retain such staff.

When launching the independent review of the water sector last week, the Secretary of State was at pains to stress the importance of attracting the investment needed to clean up our waterways and rebuild our broken water infrastructure—and, specifically, facilitating a regulatory environment that attracts investment. The least we can do is play our part in supporting the Secretary of State in this noble endeavour. I should have thought that this amendment would be music to the Minister’s ears, so I look forward to her response with a great deal of hope and expectation, and indeed no little optimism.

Lord Sikka (Lab)

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I will speak to Amendment 25. This amendment seeks to strengthen Parliament’s role in crafting and approving regulations for the water industry. The Bill as it stands asks people and Parliament to trust regulators, which the Bill calls “authority”—currently they include Ofwat and the Environment Agency—to make rules. Well, that trust has already been severely eroded.

Lord Roborough (Con)

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My Lords, I thank the noble Earl, Lord Russell, for moving the lead amendment in this group. I will speak to Amendment 27 in my name.

Amendment 27 seeks to set a timeframe of six months within which the authority must publish rules regarding remuneration and governance, and it ensures that these rules are scrutinised by both Houses of Parliament through the affirmative procedure for secondary legislation. This amendment is necessary to ensure that water companies are able to review the rules that Ofwat intends to implement within six months of the Act coming into effect. The amendment will also ensure that there are mechanisms for raising any concerns within which Ministers and Parliament can scrutinise them fully.

Baroness Hayman of Ullock (Lab)

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My Lords, clearly, public trust in the water sector has been severely damaged and the number of serious pollution incidents is increasing, as we heard very clearly from my noble friend Lord Sikka when he introduced his amendments. At the same time, companies have been paying out millions in bonuses. To rebuild public trust, the Bill enables Ofwat to issue new rules on remuneration and governance to ensure that companies and executives are subject to robust oversight and held accountable for failure. I thank the noble Lords who have tabled amendments relating to the application of these rules.

I will start with Amendment 2, tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville. I thank the noble Earl, Lord Russell, for introducing it on the noble Baroness’s behalf and wish her all the best from these Benches. I also listened with interest to the suggestions made by the noble Duke, the Duke of Wellington. Clearly, he and the noble Earl, Lord Russell, had different opinions on the wording. Our approach is intended to strike a balance between the approaches suggested by the noble Lords, to give Ofwat some flexibility while ensuring that it issues rules in relation to our priority areas.

However, I emphasise that the provisions in the Bill state that Ofwat must exercise its power to set rules in relation to performance-related pay, fitness and propriety, and customer representation. Ofwat may also make rules about other remuneration and governance arrangements at its discretion, but it must take action regarding the specific matters referred to in the Bill. We are pleased that Ofwat is already taking action to implement these rules through the publication of its consultation announced on 22 October. This was referred to by number of noble Lords, including the noble Lord, Lord Remnant. I hope the noble Earl will tell the noble Baroness that we hope that this has reassured her that her amendment is unnecessary.

I turn to Amendment 3, tabled by the noble Lord, Lord Remnant. Ofwat has a range of primary duties, including acting to protect the interests of consumers, ensuring that companies properly carry out their functions, and securing that companies are able to finance the delivery of their statutory obligations. I assure the noble Lord that Defra has worked to assure agreement with companies to update their articles of association to place customers and the environment at the heart of business decisions which impact on consumers.

The noble Lord is correct that I am going to say that Ofwat’s existing duties are already consistent with the outcomes that this amendment aims to ensure. This includes ensuring due consideration of the human and capital needs of the sector. He also raised concerns about influencing Ofwat. The current consultation that I have referred to is an initial policy consultation which has been launched with the express purpose of inviting views early. This will be followed up with further statutory consultations, which will also take into account the views shared through this initial policy consultation.

I thank the noble Lord for bringing his knowledge and experience to the development of this legislation. It is very valuable to hear his contributions. However, I hope that he is reassured that, in setting the rules about remuneration and governance, Ofwat will continue to act in accordance with its core duties and understands that it is for this reason that the Government will not accept the amendment.

Amendment 25, tabled by my noble friend Lord Sikka, and Amendment 27, tabled by the noble Lord, Lord Roborough, relate to the timing and process for setting the rules for remuneration and governance. My noble friend took the opportunity to lay out clearly the many concerns around the behaviour of water companies and the ability of regulators to hold them to account. Ofwat is required to undertake statutory consultation with the relevant persons, which includes the Secretary of State, before any rules are finalised. Allowing Ofwat to set rules in this way, rather than through legislation, will enable those standards to be more easily amended, subject to the relevant procedural requirements, where it is appropriate to do so in the future. The Government and Ofwat agree that the rules should be in place as soon as possible after Royal Assent, and Ofwat intends to implement them following its statutory consultation, which, as I previously mentioned, has already been launched. I hope the noble Lords are therefore reassured their amendments are not necessary.

Finally, Amendment 101, tabled by my noble friend Lord Sikka, relates to dividend payments. Sustained investment in the water industry will continue only if the shareholders of companies can expect a fair return. Ofwat already has the power to stop the payment of dividends if they would risk the company’s financial resilience and to take enforcement action if companies do not link dividends to performance for consumers and the environment. The amendment risks deterring much needed investment in the sector. I highlight that the Government’s new independent water commission will look at how we can improve the regulatory framework to attract investment and support financial resilience for water companies. I hope this is helpful in explaining to my noble friend why the Government will not accept his amendment.

A few noble Lords talked about the importance of investor confidence and the impact that we could have on this and talent in the water industry. While we believe it is right that companies and their executives are held to account for basic and fundamental performance requirements, it is important that, should companies meet their performance expectations, executives can still be rewarded. The proposed £88 billion in investment under PR24 is the largest ever in the water sector and has the potential to create up to 30,000 new jobs. It is crucial that the sector can recruit the talent it needs to deliver the PR24 proposals, because improving the performance of the water industry will help the industry attract and retain talent. Private sector investment is also at the core of how we grow the economy, and the Bill is designed to deliver a clear and consistent regulatory framework for the water industry and its investors. Noble Lords may be interested to know that on 10 September Defra and Treasury Ministers held a round table with investors where they outlined how the Government will work in partnership to attract the billions of pounds in private sector investment that are desperately needed if we are going to clean up Britain’s rivers, lakes and seas.

Finally, I assure the noble Lord, Lord Roborough, that I always try to get on well and work constructively with everybody, including Ofwat. I once again thank the noble Lords for their suggestions and input to this discussion on the general application of the rules for remuneration and governance.

Earl Russell (LD)

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My Lords, I thank the Minister for her comments. The noble Duke, the Duke of Wellington, put forward an interesting idea on issuing guidance, and it is one that I will take back to my noble friend for further consideration. The noble Lord, Lord Remnant, talked about the lack of ability to scrutinise the rules, the need to attract talent and the carrot and stick approach. The noble Lord, Lord Sikka, talked about broken trust, the poverty of regulations and the level of convictions in the water industry. His Amendment 101 would curb excessive dividends, financial engineering practices and practices inflating the worth of companies. The noble Lord, Lord Roborough, n his amendment said that rules must be published within six months and he talked about the powers of Ofwat being unchecked.

Lord Sikka (Lab)

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My Lords, Amendment 4 seeks clarity as to what the Bill is getting at. The Bill’s intention appears to apply penalties to only selected directors and not the entire board of directors, even though decisions are made collectively. The Explanatory Notes say it commits to

“ban bonuses for persons holding senior roles”,

and the Bill defines a “senior role” as a person who

“is a chief executive of the undertaker”—

a somewhat unfortunate phrase—

“is a director of the undertaker, or … holds such other description of role with the undertaker”.

The tone of the Bill suggests that references may all be to executive directors, but we know that water companies also have non-executive directors, and under the Companies Act non-executive directors have exactly the same liability and responsibility as executive directors. The Bill does not mention non-executive directors.

Amendment 4 seeks clarity and asks the Minister to confirm that the prohibitions and penalties will apply to not only non-executive directors but legal persons who may be acting as directors, because natural persons can be directors as well as legal persons. I beg to move.

Lord Remnant (Con)

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My Lords, I must admit to having experienced a degree of trepidation on discovering that I was to share a group of amendments with the noble Lord, Lord Sikka, and with him alone. Having listened to his views on the Bill in general, so eloquently expressed at Second Reading, I feared that we would find little common ground when debating particular aspects of it. Imagine my surprise, therefore, when I compared his Amendment 4, to which he has just spoken, with my Amendment 18, to which I am about to speak, to discover that we might have more in common than I had thought.

I think that some of the rationale behind Amendment 4 is misplaced. While I agree with the noble Lord that all members of the board under company law are held to account, performance-related pay is in practice paid only to executives, while non-executives are remunerated by way of fixed fee. Given that the provision to which Amendment 4 relates is in respect of performance-related pay, the inclusion of non-executive directors is of no practical importance. Notwithstanding this, Amendments 4 and 18 effectively would achieve the same practical impact in respect of the individuals to whom these remuneration rules apply. Amendment 4 would remove the reference to senior roles and replace it with a reference to directors of the company, while Amendment 18 would retain the concept of senior roles but effectively define them as directors of the company.

I do not believe that it is right for Ofwat to extend the rules to

“such other description of role”

as it specifies. Not only would such an extension be wider in scope than the current disclosure requirements of Section 35A of the Water Industry Act 1991 but it would be difficult to implement in practice, as different water companies will have individuals described differently by title and role. Nor would such an extension be consistent with the general remuneration and corporate governance rules for listed companies, which do not extend to individuals below board level.

I hope the Minister agrees that, through the adoption of my amendment, this additional power conferred on Ofwat by the Bill should be removed. If we wish to attract and support the next generation of leaders in this vital industry from middle management, this will not be achieved by extending these restrictive remuneration practices to them.

Baroness Pinnock (LD)

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My Lords, I start by reminding the Committee that I have an experience, rather than an interest, as I was a non-executive director for a number of years on the board of Yorkshire Water. I reassure the noble Lord, Lord Sikka, that I never had a bonus during that time, for the reasons that the noble Lord, Lord Remnant, has explained.

This group of amendments follows on neatly from the previous discussion about performance-related pay and the remuneration of senior directors of water and wastewater companies, so I thought it was worthwhile to draw out a bit more of the debate around this issue. The fundamental problem lies in the fact that water and wastewater companies are regulated by a number of different institutions. Ofwat is the economic regulator and, because of the way that the water Act was written, is primarily looking at the financial performance of the water companies. That inevitably leads to a disregard for the environmental outcomes of water companies as a priority. Consumers, who see that their rivers, lakes and coasts are being heavily polluted by these water companies, are astounded to see the same water companies giving huge bonuses to their directors. That is because the two issues are not related in the mind of Ofwat. That is why my party wants a single regulator for water companies, so that all the issues that are the responsibility of water and wastewater companies are taken into account. Part of that debate was reflected in the first group of amendments, discussed earlier.

We need to remind ourselves that remuneration in companies is decided by boards of directors. They will look at the financial objectives of the company and the outcome of the price review agreed by Ofwat and come to conclusions, whether or not objectives have been achieved or considerable benefit to the company accrued by the actions of directors.

That is part of the problem. As the noble Lord, Lord Sikka, has attempted to describe, the price review is a tussle of words and figures between the companies on the one hand and Ofwat on the other. I remember the discussions. If you are in a company and you want to make sure there is a good outcome for your owners and shareholders, you make sure that the submissions you make in a price review to Ofwat enable profits to be made. That is the whole purpose of a private company. It is at the heart of all the discussions we are having about water companies, their performance and their remuneration and bonuses. The 1991 Act was designed for them to be private companies with shareholders, who were going to receive dividends as a consequence. If that is the prime duty, and the main regulator oversees that prime duty, the other issues that water companies ought to be taking into account—the environmental issues in particular, as we heard earlier—become less important.

I hope that, when we come to Report and discuss these issues more closely, the Minister will think about a government amendment that strengthens the duties of water companies, and of Ofwat as the regulator, to take into account these other issues. For me, that is at the heart of the discussions we have had on this group and the previous group. I agree with the amendment from the noble Lord, Lord Remnant. You cannot try to control pay awards further down the company; those often very talented people need to be attracted into water companies if we are to improve what is a sad state of affairs.

The Duke of Wellington (CB)

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My Lords, I support Amendment 18 in the name of the noble Lord, Lord Remnant, which simply deletes new subsection (5)(c) on page 2. It seems to me that we cannot allow the authority—whatever it may be in the future, after the review, or even from now on—to start getting involved in the remuneration of those below board level. That really becomes too much intrusion into the way a company is run.

The noble Lord, Lord Sikka, is entirely correct that, in the end, a director of a company is a director, whether executive or non-executive, as covered by the Bill; it mentions “a director” of the company. It seems to me that, while senior role remuneration should have some guidance from the authority, that should be restricted to the chief executive and other executive board members. There is no point entering into a discussion about non-executive directors, who clearly do not participate in performance-related pay or bonuses or anything like that. I think the noble Lord, Lord Remnant, is right; it would be appropriate to delete new subsection (5)(c) and include in this clause only the chief executive and any other executive director.

Lord Roborough (Con)

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My Lords, I thank the noble Lord, Lord Sikka, for moving Amendment 4. It is right that the Government should take steps to put appropriate pressure on water and sewage companies to reduce the frequency and scale of water pollution incidents, and imposing financial penalties on board-level executives is a powerful way of disincentivising unwanted behaviours in the sector. But if we are to have financial penalties targeted at water executives who do not meet the standards expected of them, we must ensure that these are appropriate. As we discussed in the last debate, it is crucial that Parliament gets the opportunity to scrutinise the rules that Ofwat will be implementing.

Baroness Hayman of Ullock (Lab)

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I thank noble Lords for their interest in the rules relating to performance-related pay. The public have been clear that they expect to see change in the performance of the water industry and, where performance is poor, that executives should not receive bonuses.

I turn to the amendments in this group: Amendment 4 from my noble friend Lord Sikka and Amendment 18 from the noble Lord, Lord Remnant. I thank them for their introductions and their unexpected agreement. I also thank the noble Baroness, Lady Pinnock, for sharing her experience of working with Yorkshire Water; these shared experiences are important as we develop the legislation going forward.

In line with the general principles of regulatory independence, Ofwat will rightly be responsible for developing and enforcing the rules on remuneration in governance, including determining the individuals in scope. As I mentioned in the previous group, Ofwat published its policy consultation on 22 October, and this will run through to 19 November. This consultation is to design the rules that are outlined in the Bill.

In response to the noble Lord, Lord Roborough, I will say that the consultation sets out Ofwat’s intention to apply rules on performance-related pay only to executive directors who are members of the regulated company board and receive performance-related pay. Ofwat has also stated in its policy consultation that it intends for the rules relating to fitness and propriety to apply in the first instance to chief executives and individuals appointed as directors to the board, and that would include both executive and non-executive directors. But Ofwat may consider extending the rules to other senior management roles in the future.

Allowing Ofwat to set out in the rules the performance metrics to be applied will also enable those standards to be more easily amended, subject to the relevant procedural requirements, where or when it is appropriate to do so in the future. Ofwat will of course need to consult with the relevant persons, and this will include the Secretary of State, Welsh Ministers, the Consumer Council for Water and other stakeholders, before these rules are finalised.

In conclusion, the Government will therefore not be accepting these amendments, because we need to ensure that Ofwat can retain the flexibility to expand the group of persons covered by the rules in future if appropriate.

Lord Sikka (Lab)

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My Lords, I thank all noble Lords for their contributions to this debate and I am sure that some of the issues will return. Perhaps I may just clarify a point. The Bill also holds out the possibility of criminal sanctions against directors. Are we to assume that non-executive directors will never be charged with anything? The Post Office scandal shows that non-executive directors were culpable, so there appears to be a case for including them in some of these considerations. I am sure I will read Hansard with considerable interest and possibly return next time. For the time being, I beg leave to withdraw the amendment.

Lord Sikka (Lab)

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Gosh—my turn again. This amendment seeks to replace the words “performance-related pay” with “total remuneration”. At Second Reading, I raised the question of how the ban on bonus payments was actually to be implemented. At the time, the Minister did not reply and, to my mind, the question still stands. Over the years, I have written many executive remuneration contracts and seen many others; some of them contain many odd bits. For example, so-called performance-related pay may come in the form of cash, shares, share options, chauffeur-driven cars, even gardeners, rent-free accommodation, children’s school fees and much more.

Published company accounts never really make it clear what the complete components are and the executive remuneration contracts are never filed at Companies House for anyone to see what exactly they are getting paid for. The value of some of these payments may not be known until some time in the future. For example, the value of a share option granted today and exercisable after a certain number of months or years would not be known until the date of the exercise. So how will the regulator decide whether any bonus payment is materially significant and deserving of a possible ban? Somebody might simply say, “This does not appear to be significant at the moment, but it could be significant by the time it is exercised”.

Companies can also shift the basis of bonus plans to retain or attract executives. If Ofwat or any other regulator were to impose a ban, it might change the weight attached to the part of the performance that may be considered by the regulator, and thereby defeat the whole objective of imposing any ban. The company can also easily bypass any restriction on bonus payments by adjusting the bonus pay. It can simply say to directors, “Your basic pay will increase and your bonus pay is down”. As many water companies are part of giant conglomerates, directors can be offered seats on other company boards so that their total remuneration is no less, even if a bonus is banned.

So it is not clear to me how this ban is going to be implemented. It looks good on paper, but in practice I have yet to hear the details, so what I am suggesting is that the attention needs to focus on total pay, not just bonuses, because bonuses can easily be bypassed. That is why this amendment seeks to substitute “performance-related pay” with “total remuneration”. I beg to move.

Earl Russell (LD)

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My Lords, I have two amendments in this group. Amendment 6, tabled in the name of my noble friend Lady Bakewell, to which I have added my name, would mean a water company could not give performance-related pay to persons holding a senior role if the company had failed to prevent all sewage discharges, spills or leaks. This definition also includes legal spills. We have included legal spills as this practice also needs to stop, and the only way to ensure that it does is by working to put pressure on private water companies to apply the appropriate and necessary levels of investment in infrastructure. Only then will these companies be operating as intended, and only then should they potentially be free to think about remuneration above and beyond basic salaries to their top executives.

I have also added my name to Amendment 28, also in the name of my noble friend Lady Bakewell. This amendment creates a new section in the Water Industry Act 1991 to require Ofwat to ban bonuses for water company bosses if they fail to prevent sewage discharges, spills or leaks. Taken together, these amendments seek to help tackle head-on one of the main issues that I am sure many of your Lordships had raised with them, with passion, on the doorsteps at the last general election: the sheer hypocrisy of water companies continuously and seemingly endlessly failing to protect our environment. It is outrageous that they are continuing to get away with unabated sewage spills in our much-loved rivers and lakes, all the while paying themselves massive bonuses and dividends and racking up huge amounts of debt.

We are not able to go to the beach or to wild swim, while they get rich off the back of failure after failure. All of this has been done while failing to adequately invest in the infrastructure that is so desperately needed to end this seemingly endless cycle of scandal. My party has tirelessly campaigned on this issue and we will continue to do so. No other issue has cut through to the electorate on such a scale and with such a level of arguable clarity as this one has. Indeed, the promise to scrap CEO bonuses was a core manifesto pledge we stood on at the last general election. The electorate are outraged and rightly so. No one feels good when they are overcharged for the privilege of receiving an appalling service. To be clear, this is exactly what bill payers are getting with a proposed 40% increase in bills and no end in sight to the pollution of our environment. Our rivers, streams and lakes have been polluted to the point of collapse. My party has led a campaign on these issues that cut through on all sides of the political spectrum.

The broken system has seen those who have a duty to protect polluting with no consequences, and time and again they have rewarded themselves lavishly for the privilege. Instead of the “polluter pays” principle ever being applied, we have the “polluter awards themselves a pay increase” principle applied every time. In 2023 alone there were some 3.6 million hours of untreated sewage discharges in England, up a staggering 105% on the year before. How many fines have been levelled against water companies in the previous few years? I have really struggled to find that information. Meanwhile, water companies have paid at least £78 billion in dividends while failing to invest.

Lord Cromwell (CB)

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My Lords, I will speak to Amendment 13 in my name. As this is my first contribution on an amendment of my own, I thank the Minister for meeting me, for the fact sheets and the letter, and for the good news that the commission and the review are taking place. We all appreciate that. I support the Bill and welcome the commission review to come.

I turn to the amendment. As touched on by other speakers, including the noble Baroness, Lady Pinnock, in the debates on the second and third groups of amendments, company employees require appropriate remuneration, just as investors need a return. But the financial engineering introduced previously by investors and company directors—for example, debt levels, transfers to parent companies and other practices that were forensically set out earlier by the noble Lord, Lord Sikka —has enabled opaque enrichment, and has subsequently brought some water companies close to bankruptcy. That is not what monopoly water companies are for, and I believe it lies at the very heart of the current problems of the water companies.

The amendment enables the authority to include rules or guidance, as we may decide, with regard to a company’s structuring and its transparent reporting. It is deliberately left as “may” rather than “must” because the authority may want some flexibility here. Nevertheless, the amendment would act as an overt reference to the responsibility of the authority and water company employees to evaluate clearly the company’s financial structures and changes to them, and how those would impact on the distribution of financial benefits across investors, employees, directors and, indeed, consumers.

Lord Roborough (Con)

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My Lords, I will speak to Amendment 17 in my name. I thank the noble Lord, Lord Sikka, yet again for introducing this group and raising these matters for consideration when the Government are establishing the regulations surrounding performance, pay and bonuses.

Amendment 17 seeks to clarify the definition of what constitutes performance-related pay. There are many ways in which companies can create performance-based incentive schemes. That can include multiyear programmes containing cash bonuses, share awards, restricted stock units, share options and pension contributions. In answer to the noble Lord, Lord Sikka, it rarely includes chauffeur-driven cars, private schooling or any other benefits in kind, which tend to be part of the base package.

Is the intention to capture all forms of performance-based rewards within the powers of the Bill? If so, would it not be better to be exhaustive in defining them in the Bill? It is vital that such a definition be as clear as possible to ensure that the Bill achieves its intent to punish senior executives who are not fulfilling their obligations to us all in cleaning up our rivers, lakes and beaches.

In the Bill as drafted, the rules are not clear enough as to what financial components could make up the bonus of a senior water company employee in a given financial year. The amendment is therefore necessary to prevent water companies redesigning performance-based awards to take them outside the scope of the Bill. This is not to suggest any nefarious activity, but anyone currently captured by the Bill would choose not to be if they were able. It would then become impossible for a water company not to offer schemes outside the scope of the Bill if they wanted to attract the best talent.

I understand the intention of Amendment 5 from the noble Lord, Lord Sikka. It is indeed important that we ensure that water companies have no incentives to continue polluting our rivers. We have looked at this issue in our own amendments. Amendment 27 would ensure that any rules relating to pay and governance will be suitably scrutinised, so I believe the issue could be solved without the inclusion of Amendment 5.

Additionally, I ask the noble Lord, Lord Sikka, whether he has considered the impact that this amendment would have on the hiring process of water companies. I think it unlikely that many people would respond to a job advert indicating that you may have a salary but that there is a chance that by the end of the year it could be taken away from you. If the total remuneration of senior roles is included in the Bill, it is inevitable that water companies will lose people with relevant skills and experience in the sector. That will worsen the leadership and perhaps lead to more serious issues within the sector.

It is also possible that the water companies would be forced to delegate their own management to third-party consultants outside the scope of the Bill entirely, in order to find the necessary expertise to run the companies. Have the Government given thought to how to cope with the possibility of such third-party consultants not captured by the Bill?

On Amendment 6 in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, I agree that both legal and illegal dumping of sewage lead to undesirable outcomes. As such, I agree with the sentiment of the amendment. In 2022 we published the Storm Overflows Discharge Reduction Plan, which put in place targets to reduce the release of the overflow of sewage and in fact to stop it, except in situations with unusually heavy rainfall, by 2050. So we recognise that the issue is a pressing one and that action must be taken to ensure our rivers are kept clean. However, in order to stop the legal release of sewage, a substantial investment of money and time is necessary, and the amendment does not allow for such provision of time.

Our sewerage systems are a result of Victorian infrastructure design, and the increasing population and heavier, more frequent storms have led to increased pressure on this system. The suggested penalty will make it even less desirable to hold a senior role in a water company. As such, it will further decrease the number of people with skills and expertise at senior levels. This is unlikely to lead to an improvement in the water system for consumers, which is ultimately the aim we share across these Benches. I fail to see how we can support the noble Baroness’s amendment, despite the case put forward by the noble Earl, Lord Russell.

The amendments tabled by the noble Lord, Lord Cromwell, would require executives to take personal liability through their performance-related pay for unspecified structuring or restructuring that may put companies at financial risk. This would appear to us to be too vague to have much bite. It also potentially means that executives’ performance-related pay would be contingent on issues over which they might not have responsibility because they could be overridden by shareholders.

As I mentioned earlier, in response to an amendment put forward by the noble Lord, Lord Sikka, I encourage noble Lords to support Amendment 92 in my name in a later group, which would be a clear-cut prevention of payments to shareholders where there are potential issues of financial distress.

I look forward to the Minister’s response and hope that the Government will tighten up the definition of performance-related pay in line with our amendment.

Baroness Hayman of Ullock (Lab)

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My Lords, I am grateful to noble Lords for their suggestions regarding matters we need to be considering in the rules for performance-related pay. As I previously noted, to rebuild public trust we are creating a new framework for supporting accountability. As part of this, Ofwat will be issuing new rules on bonuses, including standards relating to environmental performance.

I turn to Amendment 5, tabled by my noble friend Lord Sikka. In recent years, public concern has been focused on water company bonuses, particularly in the instances where performance has been poor. Companies must work to regain their customers’ trust, including by holding those in senior roles accountable so that their remuneration better reflects the service that customers rightly expect. We are giving Ofwat new powers to issue rules on remuneration and governance to ensure that companies and executives are held accountable for failure and to drive improvements in performance. We are requiring Ofwat to exercise these powers to prioritise making rules to prohibit bonuses for underperforming companies.

Ofwat already sets expectations on executives’ performance-related pay. This measure will strengthen its existing powers to ensure that bonuses are not paid in any financial year in which standards are not met. Ofwat’s rules on remuneration will cover both financial bonuses and bonuses in kind, limiting any potential loopholes in the policy. We believe that performance-related pay can be an effective tool within the overall remuneration package and will incentivise leaders to focus on improvements that can transform performance. Remuneration committees for each water company independently determine the appropriate level of remuneration for their executives. We therefore do not propose to amend the requirement on Ofwat to make rules to cover total remuneration.

Amendments 6 and 28 were tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, and ably introduced by the noble Earl, Lord Russell. These relate to the consideration of environmental standards in the rules for remuneration and governance. In line with the general principles of regulatory independence, Ofwat will rightly be responsible for developing and enforcing these rules. However, the Government are clear that environmental standards are a vital component. Ofwat must, following consultation, provide that environmental standards have to be met by companies if performance-related pay is to be given to persons holding senior roles. Ofwat’s policy consultation, which we have previously discussed, proposes that bonuses will be prohibited if a company has had a serious category 1 or 2 pollution incident in the preceding calendar year.

The noble Lord, Earl Russell, asked for some figures. I can tell him that, since 2015, enforcement action by the EA and Ofwat has resulted in over £400 million in fines to water companies or money back for customers. I hope that noble Earl is therefore reassured that this new clause is unnecessary, noting that Ofwat must already include environmental criteria when designing the rules in relation to performance-related pay.

Lord Sikka (Lab)

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My Lords, I thank all noble Lords who participated in this debate, giving us much food for thought. I thank the Minister for her response and I withdraw my amendment for the time being.

Baroness McIntosh of Pickering (Con)

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My Lords, I will speak also to Amendment 8 in my name. These amendments are in a group looking at exemptions from the rules under Clause 1. My particular concern relates to the obligations being imposed by Clause 1, and indeed the rest of the Bill, on water companies where they may not and could not possibly be held responsible for the activities they are undertaking because the fault lies with others who are not currently within the remit of the Bill.

The purpose of these amendments is to reflect the fact that water companies should be held responsible under the terms of the Bill, in particular Clause 1, only for those activities within their specific responsibility. Clearly, for example, where there are missed connections between wastewater pipes and major developments, water companies should not be held responsible if they are obliged to fit these new connections into inadequate, antiquated pipes that simply cannot take the amount of waste coming.

The background to this very simple measure follows from the Pitt review—the noble Baroness will recall that I raised this at Second Reading—following the severe floods of 2007. I think it is worthy of note that Sir Michael Pitt is from East Yorkshire, which is more vulnerable to coastal flooding than just about any other part of the country. His 2007 review identified, for the first time, surface water flooding as well.

In connection with surface water flooding, the two most consequential amendments set out that mandatory construction of sustainable drainage systems in major developments should take place so as to contain floodwater and prevent it mixing with sewage through overflows into the combined sewers.

Further, and this is where the developers should have a responsibility and not the water companies, I ask the Minister to look favourably at ending the automatic right to connect, which has so far never happened. That one measure alone would mean that misconnections—whereby the existing infrastructure is deemed to fit the amount of wastewater coming from major new developments—would simply not happen in the future. Most of these developments are made up of four or five-bedroom homes with, dare I say, four or five times the amount of sewage coming out of them into inadequate Victorian pipes. Currently, under the planning rules, developers and local authorities deem those connections to be safe and refuse to put in appropriate infrastructure to ensure that a safe connection can be made. Were the water companies to be recognised in the planning application process as statutory consultees, on the same basis as the Environment Agency comparatively recently has been, those misconnections could be averted. The simple measure of making water companies statutory consultees, on the same basis as the Environment Agency, would help in that regard.

When she looks at these amendments in summing up, would the Minister agree to obliging developers to have sustainable drains fitted to take excess rainwater into a soakaway, pond or culvert to prevent it mixing with sewage water in combined sewers, which is currently leading to sewage overflows? It is not fair to make the water companies responsible for that. Were they to be statutory consultees, they would probably argue that the wastewater will not fit the pipes currently in place.

This has led to some very perverse sewage spills. I remember when I was in the other place there was a school in Filey that suffered £1 million-worth of damage to its swimming pool and, I think, the maths department. Existing developments had to be evacuated for six to nine months because of the public health aspect of sewage coming in. Precisely because a small development of only 30 houses was pumping out so much sewage, the rainwater when mixed with it had nowhere else to go and it went into the school and the existing developments. I am sure noble Lords could give other examples of this.

I ask the Minister to review the way in which highways currently contribute to pollution through rainwater running off the road surface, taking with it oil, brake fluid and other pollutants. When this combines with floodwater, it enters the combined sewers and then often goes into homes, causing huge damage and a public health disaster.

I hope the Minister will agree that water companies should be held responsible for those activities within their control but cannot be held responsible for circumstances which are outwith their control. These two small, tightly-drawn amendments would fit that purpose.

I conclude by asking the Minister this. If these amendments are not added to the Bill, what mechanism do the Government intend to use to ensure that water companies will be held responsible under the Bill only for activities under their direct control and not those under the control of others, such as developers and highways authorities, which are currently excluded from the remit of the Bill? I beg to move.

Baroness Pinnock (LD)

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My Lords, I broadly agree with the amendments in the name of the noble Baroness, Lady McIntosh. She raised some important issues, about, first of all, the way that surface water drainage is treated. As the Minister will know, surface water is combined with sewage water in the same pipes in many of our towns and cities, and increasing rainfall and development is putting pressure on that combined drainage system.

The other issue to consider, which the noble Baroness raised, is the pressure put on local authority planning services to agree to housing developments where the existing infrastructure is not appropriate to support them, with developers reluctant to fork out huge sums of money to pay for the additional drainage systems needed. The answer lies in empowering local authorities’ planning services to put conditions on planning consent which specifically require developers to build the appropriate infrastructure to support the development that they wish to build.

There is a related point. I am a local councillor; in my experience, where there is an issue of surface water, the planning services require underwater attenuation tanks to be built to hold that water until it can be released to the natural drainage systems, such as streams. However, the developers are very reluctant to do that, and are seeking to get around it in other ways. Surface water drainage issues and local authorities’ inability to enforce this is something that the Minister may wish to raise with her colleagues in local government when it comes to reforms of the planning system, as it will affect the Minister’s environment responsibilities. I agree with the amendments tabled by the noble Baroness, Lady McIntosh.

Lord Whitty (Lab)

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My Lords, I was not planning to speak this evening, and indeed I have to go shortly, but this debate raises broader issues.

I agree with the noble Baroness, Lady McIntosh, that water companies should not be pursued by the authority for things which are not their fault and which they are unable to do anything about. However, this underlines the need to ensure that the new authority, whatever it is, is a very powerful authority.

As noble Lords may recall, the noble Duke, the Duke of Wellington, and I suggested that we should have a combined regulator. That has been rejected so far, but we need a regulator that can take steps against not only the water companies but other bodies which make the water companies’ tasks impossible or extremely difficult, and which are themselves primarily responsible for the pollution, flooding or other damage caused by the water.

That applies not only to developers, although I think that developers are probably explicitly the worst in this context, but, as the noble Baroness has just said, to highways authorities and to discharges from agriculture. If there is a water authority that has to deal with the far end of the effects of these discharges or the inadequacy of the piping, that authority should have the ability to take such steps. At the moment, it is either the local authority that does that in terms of planning permission, or it is the highways authority, which pays no attention whatever to water run-off, frankly, or it is the various bits of agriculture regulation. But if we are concerned about making sure that we have less sullied water and no threat of flooding, which may well be caused by people other than the water companies, I would argue that at some stage the Government will have to consider giving powers to the new authority that cover those companies, or particular actions by those companies, as well as the water companies.

Lord Cromwell (CB)

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My Lords, I support the amendments, but I want to make one comment on the discussion, which has possibly strayed a little from the Bill. Dealing with surface run-off and, in particular, developers’ right to connect are outdated. I hope that the Minister will urge those involved with the review to have a serious look at this, because it is completely outdated, and with increasing development, not to mention climate change, it will only get worse. It needs tackling properly.

Lord Blencathra (Con)

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My Lords, I thank my noble friend Lady McIntosh of Pickering for moving this important amendment, which has caused a little bit of welcome excitement in the Committee. Both Amendments 7 and 8 seek to ensure that senior executives do not receive a financial penalty for failures that were not their fault or within their control, and we on these Benches feel that the noble Baroness’s amendments merit consideration by Ministers. The intervention by the noble Lord, Lord Cromwell, at the end also merits some consideration.

It is right that the Government should take steps to ensure that, when a water company fails to meet the standards set by Ofwat, the responsible executive is held to account. While it is right that company directors take responsibility for the successes and failures of a business, under the Bill, other senior officers, who may not be members of the board of directors, could be penalised under these rules. The argument that the relevant senior executive is held responsible, rather than an officer of the company who was not responsible for the decision, is a simple one. Rather than applying financial penalties to all senior executives, including those below board level, these rules should penalise only those who are responsible for the company’s conduct.

It is quite a long time since I last worked in industry, but I do not think that much has changed to this day. Who is responsible depends on the level of direct supervision by a more senior officer. At lower levels of a company, it is quite straightforward: the supervisor or the foreman has minute-by-minute relationships with the team under him or her, so they could be held responsible for faulty work or bad behaviour by their workers. But that is at the lower level. As you get higher up a company, the whole ethos changes. Executives are supposed to set objectives and delegate to their other officers how it is done. The CEO, or directors, tell officers under their command, “Here are your legal duties and these are the company objectives. Here are your own personal targets and objectives—report to me weekly, monthly or whatever on how you are progressing. Now, just get on with it”.

There is no direct day-to-day supervision, and the CEO has to trust that the senior officers below him or her obey the law, behave properly and do not cause the breaches that we are concerned about. It would be wrong to blame and reduce the pay of CEOs or directors based on a mistake by a person under him or her where they have no direct control. Of course, the exception would be in the extraordinary circumstances in which the CEO or executive director gave instructions to the worker to break the law or not to care about the rules. That would be a different matter.

Without these amendments, we are concerned that it may prove difficult to find professionals willing to take on senior roles at water companies if there is a risk they will suffer an unfair loss of performance-related earnings through no fault of their own. It is a basic principle of performance-based pay for employees below board level that it should be tied to their performance as an employee within a team. It would not be an effective incentive scheme if one individual or team were deprived of their performance-related benefits because of the behaviours of failures of another individual below board level. As we discussed at Second Reading, arbitrary punishment will not improve performance; it will only encourage people to seek employment outside the water sector.

If we are to deliver the improvements to the water sector that the British people rightly expect, we must attract more talent to the sector through a fair incentives and penalties regime. The Bill is a bit too broad and could permit rules to be applied to the sector by Ofwat that are unfair and ineffective. Furthermore, when a current bonus scheme, or contractual bonus, provides for the bonus to be payable on the achievement of certain performance conditions, and the performance conditions have been met, an employer is, in effect, obliged to award the bonus. In cases where an employer may grant discretionary bonuses, employers are required to exercise this discretion honestly and in good faith, not to exercise it in an arbitrary, capricious or irrational way, and not to breach the implied term of trust and confidence.

It concerns me that, should the Government choose not to include these amendments in the Bill, and individuals’ performance-related pay was docked for actions or responsibilities beyond their control or remit, it would put the employer in a position of complying with the requirements of rules created by Ofwat under this Bill but then acting contrary to these common-law and contractual requirements. That leads to a concern that this scenario could result in costly and time-consuming litigation, thus diverting funds which would otherwise be better spent improving our water and sewage systems. Therefore, I encourage the Government to accept these amendments so that, should a water company fail to meet the standards set by Ofwat, only the relevant executives are held responsible. However, if the Government are unwilling to put this on a statutory footing, we hope that Ofwat would be willing to enact these principles under its rules, which could be overseen by the House under Amendment 27 as an affirmative instrument.

I want to comment on the points made by my noble friend Lady McIntosh of Pickering on surface water. I put it this way: if we were starting again from scratch a couple of hundred years ago, we would have designed a system whereby we never had rainwater from gutters or car parks running off into Mr Bazalgette’s sewage system—but we are where we are now. In an ideal world, two pipes would come into every house and, as the noble Lord suggested earlier, one would have clean water for drinking and the other water for flushing the toilet or for hose pipes. We cannot go back and do that now—but what we can do is look at new developments, and I hope that the Government will consider the suggestion from the noble Lord, Lord Cromwell, in that regard.

I understood that it is possible if one is building a car park, before one puts in the hardcore, to lay a whole series of ooze pipes and then collect all the rainwater run-off, so it replenishes the underground stream by putting the water back into the subsoil. That should be possible. Whatever it is, we need to look at new developments to ensure that surface water is not unnecessarily going into our sewage system. I hope that the Minister will carefully consider what my noble friend Lady McIntosh of Pickering has said.

Baroness Hayman of Ullock (Lab)

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My Lords, through provisions introduced by Clause 1, Ofwat will be able to issue new rules on remuneration and governance to ensure that companies and executives are subject to robust oversight and held accountable for failure. Among other things, these rules will ensure that executives will no longer be able to take bonuses where companies fail to meet standards on environmental performance, financial resilience, customer outcomes or criminal liability.

Amendments 7 and 8, introduced by the noble Baroness, Lady McIntosh of Pickering, seek to ensure that these rules apply only in instances where the failure to meet the required standards is due to a failing by that individual and not another person. I start by reassuring the noble Baroness that, should companies meet their performance expectations, executives will rightly be rewarded. However, the changes proposed through Amendment 7, in particular, would make it more difficult for Ofwat to implement the rules on remuneration and governance in a meaningful way. This is because it would introduce an additional test to be met before the bonus ban could be applied, where a link between the specific actions of an individual senior leader and the performance failings of a company as a whole might be difficult to demonstrate.

Senior executives are also collectively responsible for the actions of the company and therefore should be held responsible for poor performance. However, having said that, Ofwat has stated, in the policy consultation it published last week, that, while it intends for the rules to apply to most performance-related pay decisions by water companies,

“there may be … exceptional circumstances where a payment should not be prohibited”.

For example, if an incident leading to a rule breach was clearly and demonstrably beyond the control of the company, this could be grounds for an exemption from the ban.

Considering the changes proposed by Amendment 8, we also consider it unlikely that individuals in senior roles will fail to meet Ofwat’s future standards of “fitness and propriety” due to a failing on the part of another person. The potential criteria proposed by Ofwat in its consultation to measure “fitness and propriety” include character, previous conduct, and knowledge. These criteria are specific to the individual, rather than the performance of the company, and do not obviously relate to acts by other persons.

I just want to mention an issue that the debate moved on to, around drainage and SUDS. We are going to be discussing SUDS further in group 8, so we shall talk about that then, but I want to assure the noble Baroness that we are engaging with officials in MHCLG, because it is really important that we have a proper discussion around planning and drainage as we move forward with development. I am very aware of the problems that surface water can cause in new development if it is not thought through properly.

The noble Lord, Lord Cromwell, drew the Committee’s notice to the commission and asked whether it would be discussed there. I will draw the Committee’s attention, for interest, to part of the scope of the commission:

“Where housing, planning, agriculture and drainage interlink with strategic planning for the water system, these are in scope. ... The commission should have regard to how the water sector regulatory system provides the certainty around the provision of water infrastructure needed to underpin development plans, housing growth and sustainable development, while strategically protecting and enhancing the environment. This should include how regulation and planning for water infrastructure and for residential and commercial development can work together more effectively to anticipate and invest to provide for future growth, to quickly resolve and prevent issues where water and wastewater capacity constraints may otherwise inhibit necessary development (such as through their impact on requirements for water and nutrient neutrality)”.


So, although it is not entirely dealing with the issue around SUDS, I think it is something we need to explore further with the housing department, for example, and with local government. There is an opportunity to look at development and water within the scope of the commission. I hope that is helpful for noble Lords to understand.

I hope I have reassured the noble Baroness that the rules will be applied to individuals in a proportionate manner, and made clear why the Government consider these amendments to be unnecessary.

Baroness McIntosh of Pickering (Con)

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My Lords, I am grateful for the opportunity to debate in some depth these two amendments. I just clarify that the automatic right to connect is very different from SUDS and I do not think the noble Baroness addressed that point. I still have reservations, because I believe it is inappropriate in terms of Clause 2 to speak about pollution incident reduction plans when so many of the sewage discharges can self-evidently be found not to be the responsibility of water companies at all. As the noble Lord, Lord Cromwell, so eloquently and appropriately recorded, these incidents are only going to increase as we see the number of major new developments of four-bedroom and five-bedroom houses increase.

Earl Russell (LD)

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My Lords, the amendments in this group all relate to representation on water company boards. This is the third-largest of the 24 groups we are scrutinising in Committee, so it is clear that many noble Lords are concerned about these matters and have a number of ideas for discussion about how representation can be broadened, made more representative and more fit for purpose, and used as part of the wider toolkit to help ensure that water companies act appropriately and are held to account at all levels.

I have three amendments in this group. Amendment 9 in my name would require Ofwat to create rules to compel water companies to place environmental experts on their board, committee or panel. I find it extraordinary that water companies can be allowed to operate, selling a natural resource, where their actions are having such devastating impacts on our environment, yet they are still not required to have environmental experts at the highest levels of their corporate governance structures. To date, it is hard to avoid the conclusion that many non-executive directors on many water company boards have failed to bring significant added benefits for their presence. How do we expect senior leadership teams and the chief executive officers to have the necessary knowledge, senior accountability and the ability to have due regard in fulfilling their functions if environmental knowledge, expertise and challenge are not mandated at the most senior executive governance and decision-making levels? We have various rules and guidance in place for lots of other types of make-up, backgrounds and skills in other board structures, so why do we not have the environment as a condition? Is it simply that we do not value the environment in our decision-making at senior levels? I think this is something we should not allow to stand.

The environment and environmental decisions need to be at the very heart of water companies’ plans, decisions and actions. We must work to ensure that corporate governance is not able to use ignorance as an excuse for causing environmental damage or for failing to adequately prepare for the impacts of rapid global climate change. Our water companies need to have environmental concerns at the very forefront of their long-term thinking, plans and strategies, from issues such as drought and the impacts of extreme rain events and floods, to the projections and limits on abstraction and the need for new reservoirs. All these matters require environmental knowledge and challenge at the heart of water company boardrooms.

We also need community environmental experts sitting on water company boards—an idea my party included in our last election manifesto. As non-executive directors they could help improve accountability, transparency and community relationships, and provide an important interface that could help ensure that water companies take sewage spills seriously by ensuring that community concerns are raised at board level and that water companies take appropriate action and communicate it effectively with local communities. As environmental experts, they could hold community meetings and report back on action being taken by companies, improving information flows and accountability. Environmental governance concerns are at the very heart of the water companies’ business, and the case for requiring environmental experts to be included on their boards along with consumer representation is, in my opinion, very strong. I kindly ask the Minister to lend government support to this amendment and to give a response from the Government Benches to these ideas.

I have added my name to Amendment 20 in the name of my noble friend Lady Bakewell. This is another simple “may” to “must” amendment and would require Ofwat, as part of its rules on consumer representation, to require water companies to place consumers on their board, committee or panel. It would require Ofwat to direct water companies to perform certain actions if it considers them to be contravening rules under new Section 35B. New Section 35B(2) sets out that Ofwat must exercise this power to issue rules that achieve specific effects, but the power in new Section 35B(1) provides only that the authority “may” issue such rules. As the Bill is written now, it is not at all clear that it is incumbent on the authority to use the power specified in the Bill to lay such rules. In our opinion, it is necessary that the Bill clearly states that the authorities have a duty to lay out such rules. I call on the Minister to support this amendment to make certain that the Government’s own intentions are clear and well defined so that they can be enforced as they should. What is the Government’s thinking on when the initial rules might be published?

Finally, Amendment 24 would require Ofwat to direct water companies to perform certain actions if it considers them to be contravening rules under new Section 35B. The Bill says:

“If the Authority considers that a relevant undertaker is contravening the rules, the Authority may give the undertaker a direction to do, or not to do, a particular thing specified in the direction”.


All these clauses concern rules on remuneration and governance, including performance-related pay. If the authority does find that a relevant undertaking is contravened, the rules in the Bill do not say that the authority must give a direction. As written, it is not at all clear that it is incumbent on the authority to use the powers specified in the Bill. Why do we have the rules in the Bill if there is not also a clear requirement for breaches to be enforced? Left as it is, the clause leaves a get-out-of-jail-free card for the authority to not give a direction, even where the evidence of a contravention is clear.

Other amendments in this group include one from the noble Lord, Lord Cromwell, which requires the regulator to engage formally with civil society; one from the noble Duke, the Duke of Wellington, which requires CEOs of relevant undertakers to have regular meetings with relevant consumer and environmental panels; and one from the noble Lord, Lord Sikka, on the governance structures of the authority. I beg to move.

Lord Cromwell (CB)

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My Lords, I will speak to Amendment 16 in my name. I underline at the outset that this is not about putting people on the board; if that is a misapprehension, I want to dispel it. Civil society has been at the forefront of raising issues around water pollution, including monitoring pollution incidents, and, frankly, it has done a better job than the regulators, which have been playing catch-up ever since.

There is an unbalanced and sometimes adversarial power relationship between civil society, water companies and the regulator, and this has given rise to numerous complaints about a lack of transparency—for example, companies deliberately adopting a very narrow definition of “environmental” in order to reject and bat away inquiries from civil society and others. This amendment would require the regulator and water companies to engage with civil society on a regular and formalised basis to agree actions and to record these actions publicly.

This achieves two things. It addresses the disbalance between civil society, the water companies and the regulators and will be an important means to increase transparency, including detailed public transparency as to what is going on, what the regulators and water companies are being challenged on and what actions are planned. It is very easy to underestimate the importance of this. In a previous role I had, we were handing over large sums of money to organisations and one of the stipulations was that they had to publish on their own website exactly what actions they had committed to. This made life very easy for us, because the media then held them to account against those actions. I suggest that a formal process where these things are recorded properly and publicly will be of great assistance to keep the water companies and the regulators up to the mark. Without a formal process of that sort, the relationship will remain distant and most likely adversarial. Therefore, I hope the Minister will look favourably on this amendment or produce one of her own from the government side.

The Duke of Wellington (CB)

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My Lords, I will speak to Amendments 21 and 23 in my name. In effect, they both seek to amend new subsection (6) on page 2. The main point of my amendment is that I believe it does not lead to effective governance of a board of directors if sectional interests are represented directly on the board. It is much more effective and likely to have more influence if a specialist panel is created to advise and meet the chief executive. I cannot understand why the Government’s clause refers only to the views of consumers. It seems essential—I agree in various ways with the noble Earl, Lord Russell—that environmental interests are similarly represented on a panel. It could be a separate panel or one representing both consumer and environmental interests; I think it would be better to have two panels.

The real point is that I have never seen a board work effectively where there is a sectional interest represented directly on the board, with one or two members of the board speaking only for that particular interest. It makes it very difficult to reach a consensus on a board. Most boards work by consensus, and there has to be a collegiate atmosphere on any board. Where a particular interest is represented, be it environmental or consumer, that is less likely to lead to effective management of the board of that company.

I would like to persuade the Minister to delete from new subsection (6) “board” and “committee” but leave in “panel”, to include consumers and environmentalists on those panels and, importantly, that those panels should have regular meetings with the chief executive to exercise real influence over the conclusions of the board when it next meets on that subject.

Lord Remnant (Con)

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My Lords, as the noble Earl, Lord Russell, indicated, this group of amendments deals with a common theme of representation on water company boards but has several different facets.

Amendment 22 in my name would ensure that it is for the boards of water companies, rather than Ofwat, to decide in which forum—board, committee or panel—the views of consumers should be represented. As we have heard, Clause 1 includes provisions intended to establish consumer involvement in corporate decision-making. New subsection (6) provides that this

“may include a requirement for persons representing the views of consumers to be members of a board, committee or panel of”

the water company. While I support the principle of strengthening the voice of consumers, this should not be through a highly prescriptive, one-size-fits-all approach.

In this country we do not have different categories of director, as the noble Lord, Lord Sikka, reminded us earlier. Non-executive directors may have specialisations, but they are chosen for their wider skills and ability to make a comprehensive contribution. The noble Duke, the Duke of Wellington, just made a similar point. Those representing consumer interests may not wish or be equipped to sit on corporate boards, with all the responsibilities and liabilities that entails. It should not be for Ofwat to require that such people sit on the boards of water companies but should be left to the companies to decide which forum best suits their requirements, whether that be board, committee or panel.

Providing similar flexibility was effective when companies enacted the workforce engagement mechanism under the UK Corporate Governance Code’s requirements. A very small number of companies appointed a director from the workforce, largely for the considerations I have mentioned. Some established a formal workforce advisory panel, and a greater number appointed a designated non-executive director for workforce engagement. Each company chose the mechanism best suited to its circumstances, and the system has worked well.

Amendment 9 in the name of the noble Earl, Lord Russell, and Amendment 21 in the name of the noble Duke, the Duke of Wellington, extend the provisions of this clause to environmental experts. It will be for your Lordships to decide how widely to draw the categories of relevant interest, however represented, but the principle in the latter amendment of representation other than at board level is very much in line with the rationale behind my amendment. I shall listen with interest to the arguments put by the noble Lord, Lord Sikka, and the noble Baroness, Lady Jones of Moulsecoomb, for their Amendments 82 and 100 respectively. However, they would represent a radical departure from accepted standards of corporate governance and company law, so I would hesitate to support them.

My earlier dose of optimism is becoming somewhat jaded. A recurring theme seems to be emerging in the Minister’s replies: everything is for Ofwat to decide. That displays a touching and, if I may venture, possibly naive belief in Ofwat deciding wisely on many matters that are not within its competence as an economic regulator. Concerns have been expressed on all sides about its past record. Surely it should be the role of this House to take more responsibility on itself and give much more direction and guidance to Ofwat on how it should exercise the significant additional powers this Bill gives it—or, as in this case, remove the key choice from Ofwat and give it to the companies, within a defined framework imposed by us.

Lord Sikka (Lab)

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My Lords, my Amendment 82 addresses a major question that the Bill does not address: why do water regulators fail? After all, they have been at it for many years—at least 35 years, some of them—yet they continue to fail. No proposal in the Bill addresses that. They continue to fail because they are isolated from the lives of the people affected by sewage spills, high customer bills, low investment and water simply leaking away.

The regulatory bodies are generally made up of former Ministers and executives. Someone who has done a stint at a water company disappears to Ofwat; Ofwat’s former chief executive is now director of a water company. There is a revolving door. These people have a world of their own which does not connect with that of the people directly affected by their activities. For any regulatory system to be effective, it must represent a plurality of interests, but our regulatory system and bodies are closely aligned with corporate interests. They are, in essence, captured. If this capture is not there—and is not the reason for their failures—then someone will have to explain why the water industry is in a mess and why the guiding hand of regulators has not been able to put it on a path to recovery, good practices or good behaviour.

The Bill seems to propose consumer panels, which are, in essence, toothless: they have no social constituency to report to because they are not really elected by anyone but simply co-opted on the basis that someone knows somebody and brings them in; they are not required to report to any constituencies; they cannot easily object to the practices of the regulatory bodies; and they can simply be bludgeoned into silence and just go along because that is the norm. We have heard that these amendments somehow propose something unusual and therefore we have to be bludgeoned into silence and simply go along, because tradition is oppressive and that is what we have to do.

My amendment calls for direct representation of elected representatives of employees and stakeholders on the board of the regulatory authority and to give them power to vote on executive remuneration. That would be the ultimate sanction when they disapprove of how the regulatory body is safeguarding or protecting the public interest. If they cannot vote on executive remuneration, they will simply be a shadow. The amendment seeks, in essence, to democratise regulation. I know that democracy is not very fashionable these days, so if the Minister opposes this democratisation of regulation, it would be helpful to know how the Government will check cognitive capture of regulatory bodies, because no other solution is being offered by anybody. If we were to expand on this, in the next group I could lay out a complete framework of what else needs to be done, but this is simply to test and, I hope, elicit a response from the Government.

Baroness Jones of Moulsecoomb (GP)

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My Lords, I will speak to my Amendment 100. The issues of water pollution and the supply of clean water to everybody are ones I clearly care a lot about. But this Bill is just papering over the cracks. If we are going to paper over cracks, we could at least try a radical departure; perhaps we could try to bring some democracy into the regime.

I take issue with the noble Duke, the Duke of Wellington, and the noble Lord, Lord Remnant. I have chaired a board and it was extremely successful. Part of that was because I invited people who thought very differently on to the board. We had 20 members or so. It was called London Food and we were tasked with writing a report for the Mayor of London on a sustainable food strategy for the city. It was successful, I would argue, partly because of my charm—obviously —but also because we had extremely good reports from every single aspect of food and food supply for London. We had a member from the City who was obviously a Conservative, we had an organic farmer and so on. We had a huge range of people, but we agreed on the strategy and we came to some very useful conclusions. This is what we need: we need some democracy in the systems that try to keep us safe.

Honestly, given the scale of the challenge that the water industry faces at the moment, in trying to make a system work that has proved not to work, we need to ensure that there are some new voices that can represent other parts of society that use the water system and care very deeply about it. We should also involve the people who actually do the work. My amendment brings in people from the workforce.

At the moment, the CEOs and senior staff are more focused on delivering dividends than they are on delivering a quality service, so having worker representatives on the board would provide a constant voice for those whose job it is to provide a service. The regulators have been captured by the industry they are meant to be keeping an eye on, so they are almost useless. This system should not be a national scheme but one based on the geography of the water systems themselves.

I am a believer in democracy and this would be an extremely useful way of making sure that a crucial industry for our society has some resonance with people out there. I am sure that this would be welcomed by the majority of people, just as I am sure that the Minister is aware that polls suggest a majority of people would prefer public ownership. Failing that, however, let us get the public in there, talking and being listened to.

Lord Deben (Con)

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My Lords, I rise to support the amendments, particularly those placed before us by the noble Duke, the Duke of Wellington. To the last speaker I have to say that there is a fundamental difference between chairing a committee to produce a report and running a business, which is what the water company has to be. She is absolutely right, however, that this Bill does not properly address the fundamental problem that we have two regulators and they have failed to produce a co-ordinated programme for the water industry.

I speak as somebody who knows a bit about it because, until 10 or 11 years ago, I was chairman of a water-only water company—so do not blame me about sewage as I never had anything to do with that. However, I do therefore know a bit about water companies. It was always impossible to meet the requirements of both the Environment Agency and Ofwat. Ofwat was under pressure from the Government to keep bills down and the Environment Agency, perfectly rightly, was saying that we should do more for the environment. As chairman of a water-only company, I was interested in doing something about the pollution of the water sources right from the beginning instead of having to clean them up, which is a very stupid way of dealing with it. Ofwat, however, would never allow one to do those things, whereas the Environment Agency was much more sympathetic.

Lord Cromwell (CB)

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My Lords, we spoke earlier about the issue of two regulators and I will not go back over that. However, I will talk a little more about the presence of people on boards. I think there is a middle ground here—obviously beautifully set out in my amendment. To extrapolate a little from that, I agree that directors in a company have specific responsibilities which would not sit comfortably with having a consumer representative as a member of the board. That is clear and right.

These companies, however, are not just profit-making companies which represent shareholder interests; they are monopolies providing a service to the public for which they achieve a reward. That is an important distinction to make. For that reason, I agree with the noble Baroness, Lady Jones of Moulsecoomb, that avoiding groupthink and having challenge on a board is a very useful thing. However, I would not go so far as to make them directors, for all sorts of legal reasons that others have already expounded.

It pains me to disagree marginally with the noble Duke, the Duke of Wellington. I do not like panels, because they become ghettos that the unfortunate member of board who has to interact with them dreads going to—but they go anyway, they go through the motions and then they come back. I far prefer something more formal: a regular cycle of meetings with representatives of civil society, which are going to be challenging and sometimes uncomfortable but which end with recorded actions that are made public. Otherwise, it becomes just a token exercise and a ghettoisation into panels. I will not try to emulate the tone of the noble Lord, Lord Deben, but the representatives of consumers or environmentalists can be listened to but not heard.

Earl Russell (LD)

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My Lords, this has been one of the really interesting groups in the Bill. I am not certain that any of us—from any party, in any amendment—has the complete solution. There are questions about whether a one-size solution fits all. In any case, there is a lot for all of us to go away and think about. These are crucial issues that go to the heart of what we do, how water companies operate, how they are accountable and how people who are impacted by them can feed in to and influence what they do and how they operate.

I thank the noble Lord, Lord Cromwell, for his contribution. I fully support him on the role of civil society. It is particularly important that we all acknowledge, as he did, that we would not be here without the role of civil society. I have an amendment in a later group to encourage the Government to work more with civil society in monitoring the environment.

I also thank the noble Duke, the Duke of Wellington, for his comments on the need for environmental representation. I am not quite certain where I agree on that debate; I will go away and think about it some more. I have also been on a board, and to be honest, it was one of the most difficult things I have done in my life. That was even on a good, well-functioning board. Sometimes, if you are in a difficult situation, even with good people who work together, things can be very difficult.

I also thank the noble Lord, Lord Remnant, for tabling his amendment. The board should decide on its own make-up and we should not dictate to it. Perhaps there is some kind of compromise here between the Government setting guidelines for what needs to happen, while perhaps allowing some freedom within the way that it is organised and monitoring the outputs that come from it. Maybe there is something we can all work on there.

I also thank the noble Lord, Lord Sikka, for his contribution. It is a bold move, indeed, and I am not entirely certain that I agree with that kind of prescriptive democracy. I think that it is better to allow things to be inclusive, as opposed to dictating that they must be in their make-up, but again, I will think about that.

The noble Baroness, Lady Jones, spoke about bringing some democracy into the regime. I certainly think we need that, and that the environment needs a proper, formal voice. I take up the point from the noble Lord, Lord Deben, about the need to watch the environment. If we do not do that, and if nobody has that responsibility or role, then that protective piece that needs to happen will not be there.

I think our areas of agreement were the need to broaden representation to include the environment and community, the need for diversity, the need for boards to work well, the need for constructive challenge to operate and to be brought to these companies at the highest level, and the view what we have now is not working, so we need to go away and find something else.

Lord Sikka (Lab)

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My Lords, I have added my name to Amendment 100. The water authorities in Berlin and Paris are publicly owned and have stakeholder-elected directors. In most European countries, large companies have stakeholder-elected directors in them, as either a substantial proportion of the unitary board or a German-style two-tier board where one board is supervisory, and the other is executive. On the supervisory board, directors are directly elected. There are plenty of precedents for stakeholder-elected directors on company boards, and in many ways the UK is an outlier.

Lord Roborough (Con)

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My Lords, I thank the noble Earl, Lord Russell, for moving the amendment. I want to speak in support of Amendment 22, from my noble friend Lord Remnant, as well as Amendments 21 and 23 tabled by the noble Duke, the Duke of Wellington.

My noble friend is right to note that the decision whether to be on a board, panel or committee is the job of the company rather than any kind of external regulator. By allowing the company to make that decision, it can decide based on its own business needs. If this was left to Ofwat, not only could it lead to a situation where the board, panel or committee did not fit well into the company structure but it might harm relationships between those forums and the board of the company.

It seems unlikely that a regulator would ever have access to all the information needed to make decisions on how a company’s decision-making systems should be structured, and it is surely the responsibility of the company itself to ensure that it has the right processes in place to make the correct decisions according to its needs. Indeed, as we have heard from many noble Lords, it is clear that the regulator has failed to get important decisions right in the past, to the detriment not only of companies but of the environment. Yes, of course, the regulator should have its role in holding companies to account for their decisions, but the moment regulators are involved in decision-making, it surely takes some responsibility for those choices too.

We are concerned that having consumer representatives on the board or their being involved in any decision-making within the company creates a blurring of responsibility. There is already the risk of some confusion, given the role of regulators, but they are at least experts in the industry and well informed about their roles, acting within well-defined parameters.

I agree with the noble Duke, the Duke of Wellington, on sectional interests and the effective working of a board. Consumer representatives on a board lay themselves open to the responsibilities of being a company director and in some cases a director of a listed company. Do the Government really want such consumer directors to be open to fines or prosecution for failing to deliver accounts on time, trading while insolvent or even insider dealing? It is not clear to me as the Bill is drafted that those consumer representatives could not also be subject to fines or prosecution by the regulator. If a consumer representative proposed an action that led to penalties from the regulator, how could they not be responsible?

Turning this around to the perspective of the existing board and management, if consumers are part of decision-making, then it is conceivable that they could cause or prevent an action by the company that created regulatory breaches and punitive action. How would this coexist with the responsibilities and liabilities of professional managers and board directors? How could this not create liability for the consumer representative?

My comments about consumer representation apply equally, if not more, to the environmental experts proposed in Amendment 9 by the noble Earl, Lord Russell. I understand and applaud the sentiment behind the amendment, of environmental representatives representing the stakeholder that has no natural voice, the environment. However, environmental campaigners already have a strong voice. There are obligations already present for companies, and others may be imposed through amendments to the Bill. I also agree with the noble Duke, the Duke of Wellington, that environmental representatives, alongside consumer representatives, should be limited to panels.

Allowing the company to decide the forum in which such representatives take part would benefit both sides of the agreement. If the company has taken this decision, then it becomes clear that the company, its managers and employees remain jointly responsible for decisions. I am not clear from the Bill exactly how the Government intend that its proposals should work. Both my noble friend Lord Remnant’s Amendment 22 and Amendments 21 and 23 from the noble Duke, the Duke of Wellington, have considerable merit. While there is a contradiction inherent between them, both are good solutions to creating the involvement of consumers that the Government want.

I thank all noble Lords for their involvement in this spirited debate. I ask the Minister to explain exactly how she sees consumer involvement working in practice under the Bill. I also ask that she give serious thought before Report to the amendments that I have addressed.

Baroness Hayman of Ullock (Lab)

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My Lords, I thank noble Lords who have taken part in this debate. It has come across clearly that there is no agreement about who should sit on the boards. We want to rebuild trust in the water sector, and to do that we are giving Ofwat new powers to issue new rules on remuneration and governance.

I turn first to Amendment 9 in the name of the noble Earl, Lord Russell, and Amendment 21 in the name of the noble Duke, the Duke of Wellington. The powers on remuneration and governance outline a requirement for Ofwat to set rules on companies for including consumers in decision-making. We feel that it is appropriate for Ofwat, as the independent regulator, to determine how this is implemented. Water companies have a range of legal environmental obligations that they are required to meet, and actions related to these obligations will already be informed by specialists in the company.

We believe that introducing requirements to include environmental experts on company boards would take the focus away from involving consumers in water company decisions, which do not have the same level of legal requirements as the environment does. Environmental issues should already be a key consideration in water company decision-making. Importantly, my officials in Defra have worked to secure agreement with companies to update their articles of association, to place both customers and the environment at the heart of business decisions. I hope that this clarifies to noble Lords that the Bill ensures the prioritisation of consumer representation on company boards and that they feel able not to press their amendments.

Earl Russell (LD)

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I thank the Minister for her response. This has been an interesting debate. There is more for us all to think about on these matters. I share a slight concern with the noble Lord, Lord Remnant, that the Government are looking back to Ofwat for a big, expanded role, even though there have been failures in the past. We will come back to the idea of expanding representation in further debates on the Bill.

For us, and I think for others around the Committee, the environmental aspect is important. I hear the Minister’s reassurances that there are new powers on Ofwat. I will go away and look at that, and I thank her for her response. I beg leave to withdraw my amendment.

Lord Cromwell (CB)

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Amendment 10 in my name and Amendment 13, which we discussed earlier, seek to address the problem that lies at the heart of what went wrong with our water industry; the regulators were simply outsmarted by PE financial engineering, either because they were not paying sufficient attention to what was going on or because they just did not understand it. Regulators have either lacked or failed to deploy the skills needed to assess the impact and purposes of financial engineering introduced by corporate investors.

Amendment 10 addresses that shortcoming directly by requiring water companies to report regularly, not only on any financial restructuring or structuring but on the strategy lying behind it and any associated risks. This will ensure that such activities have to be made overt rather than, as hitherto, taking place under the regulators’ noses but apparently below their radar. I beg to move.

Lord Remnant (Con)

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My Lords, I am delighted that Clause 10 does not appear to envisage a role for Ofwat. The amendments in this group are not really related to each other. As such, I shall confine my remarks to Amendment 86 in my name and I shall be brief.

Under the “Special administration orders” section of the Bill relating to the insolvency of water companies, Clause 10 gives the Secretary of State the power to modify a water company licence in order to recover any shortfall in costs for the Government from its consumers. New subsection (4) extends this recourse to all other companies in the sector.

I hope the Minister will tell me that I am mistaken in my interpretation of what this new subsection is designed to achieve. Does it not force good companies and their blameless customers to bail out failed companies? Can this possibly be justified? It has been a recurring theme of this debate, supported by the comments of many noble Lords, that the sector is in critical need of substantial investment to raise standards across the board and deliver the service that consumers and the general public so rightly expect. Any suggestion of collective punishment for the financial woes of others is to be resisted.

The consequence of imposing an unquantified and unquantifiable potential liability on the sector will at best push up the returns required by investors to inject capital into the water companies, inevitably increasing costs to consumers. At worst, it risks making the sector uninvestable. That is surely not the intention of new subsection (4), but it may be the consequence. My amendment would remove that risk, and I hope the Minister will support it.

Baroness Pinnock (LD)

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My Lords, I will address my comments to the amendment in the name of the noble Lord, Lord Cromwell. I agree with him that financial restructuring of companies has led us to where we are now, with Thames Water potentially on the brink of collapse—who knows who is going to have to fund the huge injection of capital that has apparently now been agreed. Other water companies are heavily indebted. Ofwat, which is after all the economic regulator, did not query, question or challenge those decisions made in the early years of water company privatisation.

The consequence is that anything the Government now attempt to do is basically closing the stable door after the horse has bolted—and raced to the other side of the world—because the companies are where they are. Although I agree with the noble Lord, Lord Cromwell, that any future restructuring ought to be put under the microscope of the economic regulator, the current situation is leading us to a potentially very grave position, which the Government are trying to address with the other financial clauses in the Bill. I read the clause referenced by the noble Lord, Lord Remnant, as being directed pointedly at a particular water company.

I support the amendment moved by the noble Lord, Lord Cromwell. I suppose it is better to change the situation now than leave it as it is, but what has happened already is unfortunate.

Lord Roborough (Con)

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My Lords, Amendment 92 is very simple. Had it been in place when the water companies were privatised, it would have prevented the aggressive financial engineering that has led to the financial distress we see regularly reported in the press, which has provoked much anger in this House and elsewhere over the years.

Before I address Amendment 92, I will briefly comment on Amendment 10 moved by the noble Lord, Lord Cromwell. It coexists neatly with my amendment, allowing regulators to be better informed on issues with the financial structures of the companies they regulate, and to be aware of future problems. I am pleased that the noble Lord has moved this amendment, and I broadly agree that the regulator should have better information about the financial structuring of water companies in the interests of protecting their viability and preventing circumstances in which they become overleveraged.

I will speak to the dangers of overleveraging and the problems we have as a result of the weakness of the regulator, but we on this side of the Committee are interested in the amendment moved by the noble Lord, Lord Cromwell, which takes a fairly moderate step towards having a better-informed regulator. That said, it may be possible to go further, either by reforming the way the regulator works in the water sector or, as I propose in Amendment 92, by implementing statutory rules on borrowing for water companies and taking effective steps to prevent capital being taken out of companies that are overleveraged. We need to make the water sector attractive to investors so that they bring more capital into it to fund investment in cleaner and better water infrastructure.

I add my whole-hearted support to the amendment proposed by my noble friend Lord Remnant. It seems grossly unfair that a company that has behaved responsibly should be penalised by the actions of another in the sector. I am aware of precedent in the financial services sector, but that is to protect the integrity of the financial system, which is in all participants’ interests. In this case, each water company is a unique entity whose actions have little or no impact on others. Without this amendment, one bad actor could contaminate the industry.

I add my concerns about the wording that my noble friend Lord Remnant seeks to remove from the Bill. This new subsection as drafted applies the duty to render “relevant financial assistance” to any other company that holds, or held, an appointment under this chapter. This seems to me yet another example of retroactive effects that are littered throughout the Bill and which we will discuss in later groups. Could the Minister explain to the Committee what the Government’s intention is with this retroactive element in the Bill? Will there be a maximum period of time since the relevant company held an appointment for this duty to apply to it? This seems to us to be a concerning power, and we would seek clarifications from the Minister on both the unfairness at the core of this subsection and its retroactive element. I thank my noble friend Lord Remnant for introducing his amendment, and hope that he continues to make progress on this unfairness which exists in the Bill as drafted.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Baroness Hayman of Ullock) (Lab)

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My Lords, I thank all noble Lords who have put forward amendments relating to the financial management of water companies. I will start with Amendment 10, tabled by the noble Lord, Lord Cromwell.

Ofwat has a core duty under Section 2 of the Water Industry Act 1991 to ensure that companies can finance the proper carrying out of their statutory obligations. Ofwat already monitors the financial position of water companies and can take action when companies need to strengthen their long-term financial resilience. However, we recognise that some companies will need to take further steps to strengthen that financial resilience. Ofwat has required further assurance from these companies about their financial resilience into 2025 to 2030 and beyond, and the annual monitoring financial resilience report is due to be published this autumn and will provide a publicly available assessment of the financial resilience of each water company. I say to the noble Lord, Lord Cromwell, that we met and discussed these concerns previously. Clearly, the commission that we have talked about a lot today will look at performance and resilience, but I am very happy to discuss this with him further as we move forward through the Bill.

Turning to Amendment 86, tabled by the noble Lord, Lord Remnant, I emphasise that there is a high bar for the introduction of a special administration regime and the Government do not expect to have to use this power. A special administration regime will be required only when there is evidence that a company is insolvent or in serious breach of its statutory duties. The noble Lord’s amendment is to Clause 10, and Clauses 10 and 11 are designed to introduce new powers for the Secretary of State and Welsh Ministers to modify water company licences to cover any shortfall that results from a SAR. Government funding may of course be required to cover the costs of a special administration, and these clauses mean that the Government will be able to recoup any taxpayer money spent during a SAR that cannot be covered upon exit from the SAR, either by rescue or by transfer. I wanted to make that clear. Of course, in the unlikely event that the power in the Bill is used, it allows the Secretary of State or Welsh Ministers to decide, subject to consultation, the rate at which the shortfall is recovered. I hope the noble Lord is therefore reassured that any intervention would be considered very seriously and as a last resort.

I turn now to Amendment 92, tabled by the noble Lord, Lord Roborough. Water companies are allowed to raise debt to fund the delivery of their services and it is for companies to decide their financial structure. At sensible levels—that is the key point—debt can be an appropriate way to fund essential investment. Sustained investment in the water industry will continue only if the shareholders of companies can expect a fair return. This amendment may therefore threaten the ability of companies to attract investment if limits on borrowing are imposed.

I reassure the noble Lord that Ofwat already has appropriate powers to prevent dividends where they would threaten financial resilience. I appreciate that the noble Lord has extensive experience in this area, but I hope he understands why we cannot accept this amendment, because it is vital that we ensure companies are able to finance their functions. If he would like to send in more information about this, I would be very happy to receive it and have a look.

Finally, I once again highlight that the new independent water commission, led by Sir Jon Cunliffe, the former Deputy Governor of the Bank of England, will review the current water industry regulatory framework to ensure that it attracts investment and supports financial resilience for water companies. I once again thank noble Lords for their suggestions and input into this discussion on the financial management of water companies.

Lord Cromwell (CB)

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I thank everyone who has participated in this. I think we are all concerned about financial engineering of one sort or another. It is not only borrowing, but that is clearly an important part of it. I am sorry that the amendments have not passed muster, but I look forward very much to further discussions with the Minister, as she offered. I beg leave to withdraw the amendment.

Baroness McIntosh of Pickering (Con)

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My Lords, I welcome the opportunity to debate Amendments 11 and 12 in my name in this group, on flood and water management. The amendments relate to Clause 1 and, in particular, tie the environmental standards which the department has set out in the Bill to those specifically meeting relevant standards issued under Schedule 3 to the Flood and Water Management Act. So it is the same provision to come in two separate places.

I am very grateful to the Minister and members of the Bill team for meeting me prior to Committee to discuss this. I invite the noble Baroness to accept that this amendment and the provisions in Schedule 3 to the Flood and Water Management Act 2010 are Defra legislation, so I would like her department to take ownership of this. She is aware of my desire and passion that we implement the provisions of Schedule 3 to the 2010 Act as a matter of urgency. Defra itself has explained that Schedule 3 provides a framework for the approval and adoption of drainage systems, a sustainable drainage system approving body within unitary and county councils and national standards on the design, construction, operation and maintenance of sustainable drainage systems for the lifetime of the development. Schedule 3 also makes the right to connect surface water run-off to public sewers conditional on the drainage system being approved before any construction work can start. That goes to the point of ending the automatic right to connect that we discussed in a previous group.

Wales has already applied Schedule 3 and has done a report on how it has been implemented. It is not entirely perfect and there are ways in which it could be improved, but we have been yo-yoing on this under successive Governments and it now falls to her Government and her department to really run with this.

Baroness Pinnock (LD)

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My Lords, I do not know whether the noble Baroness, Lady McIntosh, is right to try to urge the adoption of Schedule 3 to the Flood and Water Management Act through this Bill, but she is right that there was an expectation that it would be implemented this year. Given the new Government’s determination to expand the construction of housing as quickly as possible across the country, this schedule is pertinent and relates to the water services Act. We ought to try to address it, through this Act or not. The Minister’s heart is in the right place on this one, so now she has the levers of power I am sure that she will pull the right one.

Lord Blencathra (Con)

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My Lords, I thank my noble friend Lady McIntosh of Pickering for tabling these amendments, which rightly seek to tackle the issues of flooding and drainage. The Flood and Water Management Act 2010 set out standards for water companies regarding the reduction of flood risks and created more power for local authorities to be able to take action to protect their local areas.

When in government, we tightened restrictions on water companies to protect our countryside, and we are pleased that this work is being continued. Since 2010, under the Conservatives, government investment has better protected more than 600,000 properties from flooding and coastal erosion. Since 2015, Conservative investment has protected over 900,000 acres of farmland, rightly putting the needs of rural communities first.

In 2020, we built on this further and announced a doubling of capital funding into flood defences in England, to a record £5.6 billion from 2021 to 2027. As the Committee will understand from these steps, we had a strong record of investment in flood defences and water management. It would be helpful to hear from the Minister what plans the Government have to improve on those Conservative measures to protect communities across the UK from the harms of flooding.

Much of our debate on the Bill has so far focused on the corporate structures and financial management of companies in our water industry. It is right that we consider these issues in depth and seek to put the right incentives in place to deliver better outcomes for the key groups and interests that we should be aiming to protect under the Bill; namely, consumers, employees of water companies and the protection of our environment.

While the majority of the public debate around our water sector focuses on the damage that sewage overflows do to our waterways, my noble friend Lady McIntosh is absolutely right to take this opportunity to consider the dangers of flooding and to seek to ensure that water companies put this issue front and centre. We on these Benches certainly understand the issues of sewage contamination in our rivers across the country and would like to solve this issue to preserve the nature and wildlife that this has serious impacts on. We also recognise the horrendous impact that floods have on many communities because those water companies have not done enough in terms of flood management.

The first impact most people experience when water management is poor is flooding on roads and on other key transport links. However, in serious cases—such as the 2007 summer floods and the floods of 2015-16—this can result in threats to lives and livelihoods, enormous costs to the economy and massive devastation for the people affected. I am not sure if the Minister is politically old enough to remember the terrible Carlisle floods a few years ago, but it was horrendous to drive through Carlisle and see thousands of homes with abandoned furniture outside, which was soaked through. In my own constituency, just south of Penrith, at Eamont Bridge, houses had been flooded to a depth of about three inches, but with osmosis, the water had been sucked right up the walls and everything had been destroyed. So, flooding seriously impacts people’s lives.

Reporting on those two exceptional examples together, the Office for Budget Responsibility estimated that the 2007 summer floods cost the UK economy £3.2 billion, while the 2015-16 winter floods cost the economy roughly half of that, at £1.6 billion. These examples alone demonstrate the importance of improving water management to protect our communities from flooding.

That said, it is not only the extreme examples that demonstrate the importance of managing flood risks. As anyone who is involved in farming or other rural affairs will tell you, 2024 has been a very wet year, with many communities facing difficult challenges with flooding. In April 2024, England as a whole received 150% of the long-term average rainfall for the time of year and the north-west was particularly wet—as the noble Baroness and I will testify—with, as my notes say, the wettest April since records began in 1871. I can also tell noble Lords that it was also the wettest August, with one dry day this year.

This is a good opportunity to remind ourselves that it is not just people’s homes that rely on a good water system but our food supply—people’s livelihoods rely on it too. That is why my noble friend Lady McIntosh of Pickering is right to bring this point forward for debate as the Bill makes progress.

When flooding and poor water management affect our rural communities, invariably this has a knock-on effect on agriculture and, in turn, consumer costs. Earlier this month, the Guardian reported that fresh food inflation increased to 1.5% from 1% just in August as the wet weather affected British production of salads and soft fruits, while storms in the Atlantic delayed imports of more exotic fruits, driving up prices.

No Government can control the weather—thank goodness; farmers would like to control it of course, but each would want to control it differently—and no water company can entirely mitigate the impacts of wet periods on our agricultural output. However, good water management is very important when we are faced with unusually poor conditions.

I am grateful to my noble friend Lady McIntosh of Pickering for tabling these amendments to the Bill. I know many farmers will be pleased to hear their concerns about the impacts of poor water management are being discussed in your Lordships’ House tonight. While the Government may not be inclined to accept these amendments, we on this side of the House see this as an important opportunity to ask the Government to please keep the issue of flooding and water management high on the agenda, in light of the very serious impacts it has on people across the country, in both direct damage to their homes and communities and the secondary impact it can have on food prices for all of us.

I would therefore be interested to hear whether the Minister might consider bringing tougher flood mitigation duties for water companies into the Bill. As we have heard constantly, the Government intend to bring forward much wider reforms in the coming year, but, as we approach winter, many families up and down the country will have concerns in the backs of their minds about the risks of flood, in light of the continued failures in our water sector.

Will the Minister take this forward and look at possible improvements that can be made to the Bill now? I hope the Government will listen to the important points raised by my noble friend tonight and consider these carefully before Report.

Baroness Hayman of Ullock (Lab)

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My Lords, I thank the noble Baroness, Lady McIntosh of Pickering, for her amendments relating to Ofwat’s duties. I will take Amendments 11 and 12 together.

As I have previously noted, public trust in the water sector has been severely damaged, and the number of serious pollution incidents is increasing, yet companies are still paying out millions in bonuses. To rebuild public trust, we are creating a new framework to support accountability, including the new rules relating to remuneration and governance. As the independent economic regulator of the water industry, Ofwat will be responsible for developing these rules.

However, the Government are clear that environmental standards are a vital component of performance. As such, the Bill requires the forthcoming rules to include standards that relate to the environment. The noble Lord, Lord Blencathra, has mentioned the devastation that flooding can bring; I reassure him and other noble Lords that I completely understand why it is so important for us to tackle flooding. I live in a house that has been flooded—living in Cumbria, you are always aware of these issues.

With regard to the Flood and Water Management Act 2010 specifically, while the Act includes provisions relating to sustainable drainage, it does not prescribe or define any environmental standards capable of being applied in this context. It would therefore not be appropriate to include reference to standards in this legislation within Ofwat’s rules, as Ofwat does not have any functions or expertise in relation to the technical requirements prescribed under the Flood and Water Management Act 2010.

The noble Baroness, Lady McIntosh, suggested that Defra should take ownership of delivering this. The issue we have is that it also impacts directly on development and developers, which is why the Government are currently working with the Ministry of Housing, Communities and Local Government to assess how best to implement their ambitions on sustainable drainage, while also being mindful of the cumulative impact of the new regulatory burdens on the development sector. At this stage, I do not want to pre-empt the outcome of that process.

On this basis, the Government do not accept either of the amendments from the noble Baroness. However, I would like to say that the noble Baroness knows that I am very sympathetic to her concerns. As she said, we have discussed this previously. If she is willing, I suggest that we look to arrange a meeting between herself, myself and MHCLG, in order to discuss this further, where she can clearly explain her concerns to both departments—Defra and MHCLG—that have responsibility for moving forward on this.

Baroness McIntosh of Pickering (Con)

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My Lords, I am most grateful to all who have spoken, and in particular for the support of the noble Baroness, Lady Pinnock, and, from a sedentary position, the noble Baroness, Lady Parminter, as well as my noble friend Lord Blencathra. He referred to the flooding. I was actually a candidate—at a very early age—for Workington in 1987. I went back and visited as a shadow Minister during the severe floods of 2007 and 2009, so I am well acquainted with the pressures faced by Carlisle, Keswick and Cockermouth. It was very sad to see that many of the residents felt that they could not afford to take out insurance in those floods.

I will add that it is not just flooding that concerns me; it is the surface water going into the combined sewers taking the sewage from the new developments that do not have mandatory SUDS that is causing the problem.

I would like to take up the Minister’s offer. It would be good to have the meeting before Report, because I would be prepared to come back with these amendments then. Alternatively, if the department wish to come forward with even better amendments that achieve the same end, that would be very welcome.

Lord Roborough (Con)

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My Lords, in moving Amendment 14, I will speak also to my Amendment 15.

As I mentioned in an earlier debate this evening, there are a number of areas in this Bill where its effects are retroactive on existing agreements, but the Bill fails to set out the exact limits of these powers. On these Benches, we have been clear at every stage in the passage of the Bill that we want to see tougher measures to hold water companies to account and to ensure that we have better outcomes for consumers and our environment. However, it would not be right for us to approve this Bill because it has a worthy goal, without scrutinising those areas where it is deficient. We have already spoken about Ofwat’s failures, and noble Lords across the Committee will surely admit that there are improvements to be made to the way that Ofwat itself works. Giving unclear levels of retroactive powers to the regulator is not something that should be accepted by Parliament, and we will scrutinise the Bill very closely on its retroactive impacts.

My Amendment 14 seeks to remove the lines from Clause 1 that seek to empower Ofwat to void existing agreements, including employment contracts. The Bill gives Ofwat the power to issue these rules without proper scrutiny, and in this part of the Bill we see how powerful those rules can be. Retroactively overriding employment contracts may be necessary for the Government’s objective to implement a blanket set of rules on remuneration for senior officers of water companies, but it is surely not an acceptable way to go about regulating the sector. I ask the Minister: what message does it send to a talented person working in the water sector today, as they build their career, to see measures such as this retroactively changing the rules of the game? We on these Benches fear that many talented people may choose to pursue a career outside the sector, for fear that the Government may yet again move the goalposts retrospectively.

I have intentionally tabled my related Amendment 15 separately, to probe whether the Government are willing to move at all on the retroactive impacts of the Bill. Amendment 15 seeks to remove the part of Clause 1 that enables the retroactive deprivation of performance-related pay under the rules. It is surely not right to implement rules now that have effect from the beginning of the year. Our concern is that the lines in the Bill that we seek to remove allow the Government to renegotiate unilaterally an employment contract that has been freely entered into between a third-party employer and a third-party employee. While it is customary that employment legislation often does just such a thing, there is very limited precedent for picking on one class of employees in one particular sector.

This is a very unfortunate precedent to set, which opens the door to a Government inserting themselves into employment contracts across other sectors to achieve the outcomes they want. That smacks of overreach. Should we seek to remove performance-related pay from software company managers if their software crashes; from insurance industry executives if we do not like their handling of claims; or from airline executives if their flights are late? I am sure that there may be some noble Lords across the Chamber nodding their heads that the Government should be doing just that; however, that is completely against the Government’s claims of being business-friendly. No competent executive would ever want to work for a UK-based company were these kinds of rules to be brought in.

Our amendment does not suggest a better alternative but simply suggests that the current method is unacceptable, and that the employed and the employer also need to be cognisant of the law and agree that these contracts be amended or replaced with agreement to reflect the intent of the Bill.

There is also the issue, which my noble friend Lord Remnant may address in greater detail in his comments, of interference in multiyear contracts, where portions of that payment may already have been earned and yet could potentially be prohibited under the Bill. I draw the Committee’s attention to the Explanatory Notes provided to the House by the Department for Environment, Food and Rural Affairs. Paragraph 79, under “Compatibility with the European Convention on Human Rights”, says:

“Provision relating to remuneration of water company executives is also not considered to result in ‘deprivation’ within the meaning of Article 1 of Protocol 1 to the Convention, as the provision relates to future income. Such income will only constitute a possession once it has been earned”.


I suggest that income in prior years in multiyear contracts has already been earned, just not yet paid. Therefore, I question the Minister on how compliance with the ECHR can be guaranteed in this case.

My amendments are, by their nature, probing. Given that they address an election manifesto commitment, they are designed to produce convincing answers from the Government on how these issues can be addressed. I look forward to the Minister’s reply. I beg to move.

Lord Remnant (Con)

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My Lords, I am delighted that Amendment 26 in my name falls into the same grouping as those in the name of my noble friends Lord Roborough and Lord Blencathra. Although I very much regret that your Lordships’ time is having to be spent on potentially amending proposed legislation that has retrospective effect, it gives me the opportunity very much to support the arguments advanced by my noble friend Lord Roborough in support of Amendments 14 and 15.

It cannot be right retrospectively to override contract law with respect to employment contracts freely entered into by company and individual in line with relevant legislation and regulations in force at the time. Similarly, to the extent that, today, pay can be recovered from senior individuals under malus and clawback provisions in listed companies’ remuneration policies, such a draconian power can rightly be exercised only in extremely limited circumstances known in advance by the individual. The proposed exercise of the pay prohibition in the Bill retroactively goes way beyond accepted remuneration practice, and unacceptably so.

On my own amendment, I will not repeat the general arguments made by my noble friend against the principle of retroactive or retrospective legislation. I am no lawyer, so I hope that your Lordships will forgive me if I perhaps erroneously use the terms interchangeably. The offending principle, though, remains the same. The general rule in this country, and indeed in most modern legal systems, is that legislative changes apply prospectively. If we do something today, we feel that the law applying to it should be the law in force today, not tomorrow’s backward adjustment of it.

The Bill proposes that the provisions about performance-related pay apply from the financial year beginning 1 April 2024. We are currently some seven months into that financial year, and the Bill will not be enacted for some months hence. In effect we are talking about backdating the provisions for the best part of a year. The remuneration arrangements entered into between senior individuals and their employer will have been agreed under remuneration policies agreed by shareholders well before April for them to take effect from 1 April 2024. It surely cannot be right, whatever the merits of the Bill, for its provisions subsequently to alter those arrangements and the remuneration paid, or to be paid, under them.

Few things concern investors more than retrospective legislation, and listed companies will need to consult with and seek approval from shareholders on changes to remuneration policies at their AGM. Requiring retrospective changes risks companies breaching shareholder-approved remuneration policies. More fundamentally, it will undermine investor confidence at a time when they are being asked to fund a record investment programme.

My amendment would simply change the date from which the performance-related pay provisions come into effect from a historic 1 April 2024 to a mildly prospective 1 April 2025. Is that really too much to ask, to avoid breaching a fundamental legal principle? I do not think so and I hope that the Minister will agree with me.

Baroness Hayman of Ullock (Lab)

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My Lords, I thank all noble Lords who have stuck with us this evening and carried on the debate. We know that the public have been clear that they want to see change and that where performance is poor, executives should not receive large salaries or bonuses.

I will start with Amendments 14 and 15, tabled by the noble Lord, Lord Roborough. The conditions of existing employment contracts may not align with Ofwat’s new rules. Our concern is that Amendment 14 may prevent Ofwat being able to apply its rules even when performance has not met the required standards. On Amendment 15, it is also right that where companies breach Ofwat’s rules on performance-related pay, Ofwat should be able, if it considers it appropriate, to require the company to recover any payment made in breach of the rules. Linking pay to performance should incentivise decision-making, resulting in improved outcomes for customers in the environment. I reiterate what I said earlier: should companies meet their performance expectations, executives can still be rewarded. So I hope that the noble Lord will understand why we will not accept his amendments.

I turn to Amendment 26, tabled by the noble Lord, Lord Remnant. This legislation will ensure that Ofwat is able to implement rules on performance-related pay in the current financial year. However, I listened really carefully to the speech that the noble Lord just made introducing his amendment. I would really like to understand his concerns better, so I wonder whether he would welcome further discussion on this matter so that we can look at it in more detail. I would very much appreciate it if the noble Lord was prepared to do that. But currently we are not going to accept the amendments as we feel that they would prevent meaningful implementation of the rules.

Lord Roborough (Con)

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My Lords, I am grateful for the Minister’s reply. We respect that this is an election manifesto commitment and therefore needs to be in the Bill in some form, but my noble friend Lord Remnant and I would both like to discuss further with the Minister, if possible, how we can help to improve this part of the Bill. In the meantime, I beg leave to withdraw my amendment.

Lord Roborough (Con)

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My Lords, I will attempt to be brief, in view of the hour.

Amendment 19 provides a clear definition of the criteria that will be used in determining whether someone is fit and proper to hold a responsible role in the water industry. As currently drafted, there is no definition and, as such, it is likely that everyone consulted would have their own different definition of what “fit and proper” might look like. There is precedent in another industry for such a test, which was undoubtedly in the back of the drafter of the Bill’s mind, in the financial services industry. My amendment is an edited version of the Financial Conduct Authority’s definition of a “fit and proper person”. As I was previously a senior manager in an investment management business under the FCA’s senior manager regime, I have first-hand experience of this test.

Even as laid out by the FCA, there was considerable debate about the application of the tests. I also question whether Ofwat is really the right place for such an assessment to be made. In the financial services sector, it is for the member firm to make its own determination and express its view to the FCA when seeking to register a new employee. The FCA could then query that view and potentially overturn it. Should Ofwat be required to do this, it is likely to use less professional help and real-world experience in forming that view and will require dedicated infrastructure to process applications. If the undertakers are responsible, overseeing those applications becomes relatively straightforward.

This may not be a long debate, with only one amendment, but it is an important amendment to consider when giving effect to the Government’s intentions in this Bill. In providing clarity to the undertakers, what is intended by this provision? I am most interested in the Minister’s response and hope that, if she is not happy with my amendment, she might set out who she considers a fit and proper person and how that will be communicated to Ofwat and the industry. I am also most interested to hear why the Bill’s proposal for how to implement this is different from the financial services industry, despite a reasonably long and moderately successful record within that industry. I beg to move.

Baroness Hayman of Ullock (Lab)

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My Lords, how nice to have a quick last group. I thank the noble Lord, Lord Roborough, for introducing the last group of today with his Amendment 19, which seeks to specify the criteria to be covered by the rules on fitness and propriety, ensuring that senior leaders meet the public’s expectations.

I have mentioned Ofwat’s consultation on remuneration and governance before, and I would just like to confirm to the noble Lord that this consultation references similar criteria to those proposed by his amendment. Ofwat’s consultation seeks views on whether it would be appropriate to include a concept of “ability” in the new test, defined as an individual having adequate knowledge and understanding of the duties of the undertaker. Ofwat has stated its intention to design a fit and proper person test with criteria that will improve public trust and company culture in the water sector, having considered how other sectors are regulated around these same principles. I hope this captures the noble Lord’s concern that standards of fitness and propriety will need to be relevant and encompass concepts of knowledge and understanding. Of course, we feel that Ofwat’s independence is an important part of the trust that companies have in the regulatory regime.

The noble Lord asked why we felt Ofwat should be setting these criteria. We think it is right that Ofwat has the opportunity to consult on these criteria and that companies then have the opportunity to respond and perhaps propose different criteria. It needs to be a situation where Ofwat can then tailor these fitness and propriety standards to the water industry, rather than having prescriptive standards set out within the primary legislation. It is important that Ofwat’s independence is clearly upheld, because it will support its ability to hold senior officials to account for their actions.

Ofwat also notes in its consultation that the 16 largest water companies have a licence condition that requires them to meet the four objectives of its board, which are leadership, transparency and the governance principles. These objectives include the requirement for boards and board committees to have the appropriate balance of skills, experience, independence and knowledge. I hope the noble Lord is content that this is already being looked at; I hope that he will look at the consultation and therefore see that his amendment is no longer necessary.

Lord Roborough (Con)

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My Lords, I am grateful for the Minister’s reply, and it is certainly very helpful. Perhaps something I could have brought out more in my initial comments were the concerns over accountability. When I look at the FCA’s senior manager regime, and the fit and proper tests, none of that is here—nowhere is there any accountability to Parliament. We will take the Minister’s comments away and give this further thought. I beg leave to withdraw the amendment.

Lord Sikka (Lab)

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My Lords, I should like to introduce the amendments in this group. They all seek to create, strengthen or delete regulations. Amendment 56 tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, seeks review of the environmental permits. Amendment 78 tabled by the noble Baronesses, Lady Parminter, Lady Bakewell of Hardington Mandeville and Lady Jones of Moulsecoomb, and the noble Lord, Lord Randall of Uxbridge, seeks to impose duties on the regulator to provide clean water. Through Amendments 79 and 80, the noble Baroness, Lady Bakewell, of Hardington Mandeville, and the noble Earl, Lord Russell, seek to abolish the water authority and create a clean water authority. Through Amendment 81, the noble Earl seeks a regulatory review of the water industry. Through Amendments 84 and 85, the noble Baroness, Lady Jones of Moulsecoomb, seeks to remove the regulator’s growth objectives and make environmental protection a statutory duty. I am sure that they will have plenty to add when they speak.

Meanwhile, I should like to speak to Amendment 29, which is about the prohibition of possible conflicts of interests. The key principle is that regulators must not only be independent of the regulated entities and personnel but be seen to be independent and free from any conflicts of interests. They must avoid cognitive capture. Individuals from regulatory bodies are in demand by the regulated entities because they can open doors and help to secure favours, and enable water companies to game the regulatory system.

No matter how vehemently such charges are denied, that is how it will always appear to the public at large, and public perceptions matter. Thanks to the wage freeze and the real wage cuts over the past 14 years, too many regulators are poorly paid. While in regulatory positions, they begin to look for greener pastures or are targeted by water companies for enrolment. In fact, every interaction they have with a water company is a potential job interview. There is always a temptation to go easy and be extra helpful to a potential employer, as that can help to land a much better-paid job. No one wants to sour that potential by being tough, awkward or robust with their potential employer. That applies to the regulators’ employees too.

There is plenty of evidence about the merry-go-round between the core regulators and water companies. A report last year noted that at least 27 former Ofwat directors, managers and consultants working in the industry, which they helped to regulate, subsequently began to work for water companies, mostly in senior positions. Six water and sewerage companies in England have hired directors of corporate strategy or heads of regulation from Ofwat. They were the insiders. One celebrated name, Cathryn Ross, at one time interim joint chief executive of Thames Water, was a former head of Ofwat. Several former Ofwat senior people now work at Thames Water. In addition to Ross, there is Jonathan Read, who is a director of regulatory policy and investigations. There is also Giles Stevens, director of regulatory strategy and innovation. Another executive from a regulator was recruited by Thames Water as recently as March last year as a “regulatory engagement lead”. At Severn Trent Water, there are at least nine employees who were previously at Ofwat. They include Shane Anderson, director of strategy and regulation, and Jonathan Ashley, head of economic regulation. Both previously worked as directors at the regulator that oversees water and sewerage firms in England and Wales.

I add for clarity that none of these people has broken any rules; I am not accusing them of doing so. It is simply that the rules are inadequate or, if they exist, incredibly poorly applied and permit this merry-go-round.

Amendment 29 requires that senior staff who work at the regulator cannot and must not have a potential conflict of interest by being lured into a job at a regulated company. It also requires that the Secretary of State must have no conflict of interests or appearance of a conflict: for example, by accepting gifts, free tickets for football matches, or even possibly tokens to buy new suits. None of that should be permitted. All regulators must be seen to be above any reproach, and there must be no question whatever about their integrity. An enforceable statutory framework is needed, and that is what this amendment seeks. We do not need voluntary codes, because they cannot be enforced by any court of law. We need legal backing. I beg to move.

Baroness Parminter (LD)

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My Lords, I rise to introduce Amendment 78 and to return to the issue we covered on the first day in Committee around the duty of the water regulator, Ofwat, and the fact that at the moment it does not have a core duty which comprises a public interest. I thank the noble Baroness, Lady Bakewell of Hardington Mandeville, who again is unwell and cannot be with us today, the noble Lord, Lord Randall, and the noble Baroness, Lady Jones of Moulsecoomb, for their support for this amendment.

It is quite clear that the public feel extremely strongly about how the regulator is ensuring, not ensuring or unable to ensure that companies perform their duties towards the public interest correctly. If we have any doubt of that, we saw the strength of feeling in the general election, we see it every day in the newspapers, and I am sure we will see it on the streets of London this Sunday with the March for Clean Water; I declare my interest as stated in the register.

However, if anyone were to sit down and read the Water Industry Act 1991, they would be amazed that there are no duties for Ofwat with regard to the public interest, to promote public health or to ensure the protection and conservation of our environment. They would see it as an absolutely astonishing omission. What they would see is a core duty to ensure the “long-term resilience” of water company services and sewerage systems. That is effectively a “keep the taps on” clause—which my local water company, Thames Water, seems to be unable to do on quite a regular basis, although that is beside the point. Then there is a whole swathe of legally binding economic duties which ensure that Ofwat absolutely focuses the water companies on making a profit. I am not against making a profit; of course they should make a profit. However, Amendment 78 says that we should look for a triple bottom line: for profitability, environmental returns and social outcomes.

As this returns to an issue that we looked at on Monday which is fairly similar to the amendment from the noble Baroness, Lady Willis, which talked about taking all reasonable steps to contribute to the environment and climate change targets, I made sure that I read the Minister’s reply carefully in Hansard because I thought I might get the same sort of reply myself. She made three points. She says that the amendment is not necessary because it overlaps

“with existing government requirements, Ofwat’s core duties and our ambitions for the future”.—[Official Report, 28/10/24; col. 939.]

The Government do not have of themselves the mechanisms to deliver on all these targets; they rely on other bodies to work with them. Giving Ofwat this duty would enable it to support those government requirements and targets.

Secondly, on the point about Ofwat’s core duties, I strongly but respectfully disagree with the Minister. There is no evidence in Ofwat’s existing core duty of any public interest duty. Thirdly, the Minister talks about our ambitions for the future, by which I think that, rightly, she means the water industry commission. I shall quote again from her response on Monday. With regard to the independent water commission, she said the Government would put the environment

“at the heart of what we are doing”.—[Official Report, 28/10/24; col. 939.]

Great, fantastic—but, as we discussed on Monday, once we get the commission done, we will have to wait for legislation and time is rolling on, while our environmental and climate targets are here and now. We cannot wait. We should be using this opportunity in the meantime to strengthen the duties for Ofwat to ensure that our water companies can support the Government in the very necessary task of protecting our environment and delivering clean water for the public.

Earl Russell (LD)

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My Lords, I declare my interests as set out in the register. I will speak to Amendments 56, 79, and 80, tabled by my noble friend Lady Bakewell, to which I have added my name, and to Amendment 81 in my name.

Amendment 56 would require the Environment Agency to review permits applying to water and sewerage companies every five years rather than “periodically”, as regulations currently dictate. It brings in measures to ensure that a review of environmental permits happens on a regular basis rather than the ad hoc arrangements that are currently in force. Current Regulation 34 of the Environmental Permitting (England and Wales) Regulations 2016 requires the Environment Agency only to

“periodically review environmental permits”,

including those attached to water and sewerage works. The reality is that many of these permits are unfit for the intended purposes and do not properly protect our rivers, lakes and coastal waters from pollution incidents. It has been a long time since the system was fully reviewed in any meaningful way. The system is outdated, not really fit for purpose and clearly not working as it was intended. The Bill offers an opportunity and it would be wrong not to make use of it.

“Periodic review” could mean absolutely anything. It could mean that there are regular reviews in place, with systems for a review after serious pollution incidents up and working well. Equally, it could mean that water companies conduct reviews only once every 10 years, regardless of the number of incidents that happen over that time. The language we use in the Bill is of the utmost importance. We have an industry that is not abiding by the rules and a regulatory framework that is underresourced and low on morale and has not been able to prevent, contain or stop persistent breaches of environmental regulations. The public are fed up to the back teeth with illegal sewage overflows that no one seems to be taking seriously. They want action and they want it now.

While it can be argued that at least every five years is not often enough, it is a clearly defined requirement that can be monitored and enforced. We must also bear in mind that the Environment Agency is operating under such budgetary pressures that insistence on more frequent reviews would put it under a fair amount of strain. We need to be realistic about where we are and what we can enforce. This is put forward as a compromise that we feel best achieves those two aims. It is important that we set targets that are both achievable and operable. The amendment proposes that the Environment Agency should be placed under a duty to review permits applying to water companies every five years. Ideally, this should be done in advance of each periodic review, to reflect other legal obligations on sewage pollution and water quality and therefore drive investment.

Amendment 79 seeks to abolish the Water Services Regulation Authority. Amendment 80 establishes the “clean water authority” and provides it with duties concerning the water companies’ governance and performance standards. It is well known that the Liberal Democrats do not believe that Ofwat in its current form, alongside an underfunded Environment Agency, can achieve the change necessary to prevent continued sewage overspills, provide a return to clean water running in our streams and rivers, and achieve the reversal of biodiversity decline currently found across our natural environment.

Baroness Jones of Moulsecoomb (GP)

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My Lords, following the noble Earl, Lord Russell, is very useful because I agree very much with his last few statements. This is an incredibly helpful group. The Labour Government would be very well advised to take all these amendments. They are so helpful, reasonable and sensible and bring in issues that I think have been left out without any rational reason.

I deeply regret not having signed Amendment 29 in the name of the noble Lord, Lord Sikka. I agree with him completely. In fact, I support most of the amendments in this group. I signed Amendment 78 because who does not want regulators of a public service to work in the interests of the public? That is a very clear statement to make, I would have thought, and it is quite necessary, even though it seems so obvious.

Amendment 84 is in my name. I admit that when I tabled this amendment to remove the duty of economic growth from water companies and regulators, I had not really appreciated that if I looked at it from a completely different perspective, possibly from the perspective of the previous Government, it was a remarkable success story over 14 years because we had huge growth in sewage and pollution—well done, guys—and it had a multiplier impact on gross national product. It is so gross that other countries see it as indicative of the UK’s approach to running privatised services—that is, not very good. When we have a river full of dead fish, the authorities buy more fish to replace them. That is economic growth—a huge success. When E. coli is found in our water systems, we get a double hit of economic growth. There is the extra spending by the NHS on treating all the cases of gastro-enteritis and all the extra money spent on plastic bottles of water handed out when consumers cannot drink from the tap. We even have the prospect of a rain-soaked country like ours spending millions on hiring supertankers to import drinking water from Norway. That is extra spending and extra growth. I can see that growth is a success factor in the previous Government’s estimation. Of course, we also cannot forget the staggering growth in shareholder dividends and CEO salaries. When these private water companies take money out of the hands of bill payers and help the rich to buy new private jets, that also adds to GNP.

My problem is that this kind of GNP adds to most people’s unhappiness. In fact, that is why the promotion of growth for growth’s sake is complete nonsense. I do not understand why anyone would advocate that. The more that rivers are polluted, the unhappier the lives of everybody using that space, whether they are dog walkers, anglers, wild swimmers or nature lovers. The more money that shareholders and CEOs get, the less happy the bill payers are about 40% of their money being spent on debt repayments and dividends. Growth is not an indicator of happiness or of the economy being run for the benefit of many. It is a nonsense soundbite for the economically illiterate and needs to be deleted from this legislation.

On Amendment 85, if Ofwat had been given a duty to protect the environment when it was set up decades ago, we would not be in the mess that we are. There would have been a clear connection in Ofwat’s role between signing off bill payers’ money to fund environmental improvements and ensuring that those improvements actually happened. Ofwat needs two sets of books open on its desk all the time. The first would show the real state of the industry’s finances, including the accounts of the big financial businesses that own the water companies, and the second would show whether those companies were environmentally solvent. By that, I mean whether they are capable of meeting the environmental standards on clean water and the obligations to maintain the health of the waterways.

Whether Ofwat is competent enough to carry out this new duty, or any other duties, is a completely separate debate. We have to remember that Ofwat was meant to be looking after the interests of bill payers but has completely failed to do so. It has allowed the water industry to become owned and controlled by a superstructure of financial institutions that use clever scams to fleece the bill payer in ways that Ofwat has appeared to be completely oblivious to.

We know that if this Government allow Ofwat to remain the main regulator of private water companies over the next few years, its role must include the environment. Fixing the regular discharges of sewage into our waterways, along with the polluting run-off from agriculture, is by far the biggest financial challenge the industry faces. If Ofwat does not understand that duty, the regulation will not match up to the challenge.

I am afraid the Government did not turn out very well on climate change and our ecological crisis in the Budget. They do not seem to understand how climate change comes down to the lowest level and affects every single individual, and I would be really happy to help explain that. It is time to put this particular duty on the environment into the legislation.

Lord Cromwell (CB)

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My Lords, a thread that runs through many of these amendments is the divergence between the environmental objectives and the clean water consumption objectives. A number of times, we on these Benches have raised the issue that there are two regulators with those responsibilities separated between them. That is something with which the Minister is going to have to grapple in her reply. I think it was the noble Baroness, Lady Parminter, who made the point that time is of the essence, and that waiting for the review may be too late. There is a choice to be made about giving Ofwat these objectives now or making a more fundamental structural change about who regulates the whole environmental question around water.

The noble Baroness, Lady Jones, may be pleased to note in the Budget the increase in tax on people flying on private jets, which she referred to. Apart from that, I agree that there was not much coverage of the environment.

This thread keeps coming up and it needs to be addressed. Is it going to go into the Bill now or will it become part of the review later?

Lord Remnant (Con)

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My Lords, I was not intending to speak to this group of amendments, but I have been so impressed, not for the first time, by the ability of the noble Baroness, Lady Parminter, to speak fluently without notes that I thought I would try to emulate her on this occasion.

I merely make an observation on Amendment 29 from the noble Lord, Lord Sikka, because it is very widely drawn. Clearly, there are no individuals working at any of the regulators who, at the same time, are taking employment from water companies. I assume the amendment is intended to address not that but people moving from the regulator into water companies thereafter. I am not sure whether that in itself produces an appearance of a conflict of interest but, if it does, we have to be careful about constraining people’s ability to earn employment and move from one job to another. Indeed, it may stop experienced and competent people working for regulators in the first place, which is something for us to avoid if we can.

It also has much wider implications. The amendment would apply to this sector but there are lots of other regulated sectors, not least the financial services sector, where I believe this prohibition does not exist. Certainly, many people move from the PRA and the FCA into financial companies, banks, insurance companies and so on. We need to be careful when we consider the implications of this amendment.

Lord Kerr of Kinlochard (CB)

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I agree that the amendment from the noble Lord, Lord Sikka, is very widely drawn. As I read it, it would ban the Secretary of State from taking advice from anyone who was a director or an employee of a water company, and that seems rather absurd.

Lord Roborough (Con)

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My Lords, I thank the noble Lord, Lord Sikka, for introducing this group on the duties and running of the water regulator. Before I address the amendments, I would like to ask my question from the repeat of an Oral Statement yesterday again; it was also echoed by the noble Earl, Lord Russell, and the noble Baroness, Lady Pinnock. Will the Minister make some commitments on the timing of the legislation that will follow the independent commission? As I mentioned, that timing will have a significant bearing on noble Lords’ commitment to their amendments going into this Bill to address shortcomings of the industry that are blatant now.

The noble Baroness, Lady Pinnock, and I also referenced the commitment by the Secretary of State that this review will not make recommendations that affect the 2024 price review. That would seem to indicate that any new legislation could not come into effect until the end of this decade. Does the Minister agree?

I turn to Amendment 29 in the name of the noble Lord, Lord Sikka, on conflicts of interest. We on these Benches feel that propriety in the water sector is crucial and there should clearly be appropriate rules for all employees of Ofwat. That said, it is not clear to the Official Opposition that this should be placed on a statutory footing and I agree with my noble friend Lord Remnant that there are implications outside the water industry from this kind of move.

It is right that the Government should take steps to ensure that Ofwat is run in a manner that appropriately prioritises the consumer and environment, and the majority of amendments in this group address the failures of Ofwat and the need for improvements. Amendments 79 and 80 from the noble Baroness, Lady Bakewell of Hardington Mandeville, Amendment 81 from the noble Earl, Lord Russell, and Amendments 84 and 85 from the noble Baroness, Lady Jones, all address the fundamental need to reform the way we regulate our water sector.

The Government have not yet told us when they will bring forward whole sector reform. I am grateful that we have an opportunity to discuss reform of the regulator today, and it may not be an issue that disappears from the debate on this Bill until we have confidence that this further reform will be delivered in an acceptable timeframe. While it is worth noting that any transition period would most likely be disruptive, there are certainly important failures that must be addressed at Ofwat. Whether the Government choose to reform our existing regulator or, as has been suggested by a number of noble Lords, abolish and replace it with something better, it is clear that the British people deserve better.

I was going to raise further evidence of the failure of the regulators but the Committee may have heard enough on that. As far back as 2011, the Gray review into Ofwat found:

“Many stakeholders told us that Ofwat was not sufficiently accountable either to Parliament or to stakeholders in general”.


This situation has not changed. As I noted yesterday, it is welcome that the review will address accountability.

On the creation of public benefit companies, which has been hinted at by the Government and mentioned in the amendment from the noble Earl, Lord Russell, it is very much the view of the Official Opposition that the continuation of the role of private capital in the water sector is imperative. Recently, the Thames Tideway tunnel was completed, which modernised the Thames sewage system and has made it fit for the 21st century—a feat that would not have been possible without private investment. This project shows the value of innovation, which is considerably harder to prioritise under a nationalised or public benefit system. When there are market incentives, better financial decisions are made. As such, the existence of private stakeholders and investment allows for a more successful sector.

We recognise that, to prevent water companies from causing further damage to our rivers, lakes and beaches, the regulator must be reformed and we hope that the Minister will listen to the arguments from across the House today as the Government look to finalise their wider plans for whole sector reform.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Baroness Hayman of Ullock) (Lab)

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My Lords, I thank everyone who has taken part in today’s first debate in Committee for their valuable contributions and for the amendments suggested regarding the duties and the running of the water regulators. The Government agree that strong and effective regulation is essential if we are to turn around the performance of the water industry. That is why the Bill contains the largest increase in enforcement powers for the water industry’s regulators in a decade.

I start by addressing Amendment 81 in the name of the noble Earl, Lord Russell, and Amendments 79 and 80 in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, which speak to the duties of Ofwat. As I have previously noted, the Bill is intended to drive improvements in the performance and culture of the water industry by strengthening the powers of the regulators to hold companies accountable. However, this Bill will not and cannot fix all the water sector’s problems.

There were a few particular issues. The noble Earl, Lord Russell, asked about drinking water. It is worth noting that Yale’s Environmental Performance Index ranks the drinking water in England and Wales as the best in the world, alongside 10 other countries—we are all on the same level—so we should celebrate that fact about our water industry.

The independent commission that was launched last week, which we heard a lot about on Monday and will, I am sure, continue to hear a lot about, is intended to facilitate the further development of what we need to do to sort out the water industry. As I have mentioned previously, it will be chaired by Sir Jon Cunliffe, who as a former deputy governor of the Bank of England has decades of experience in regulation and finance. The terms of reference for the commission have been published, clarifying its scope and objectives. It will be broad-ranging and make recommendations in line with eight objectives, such as ensuring that

“the water industry has clear objectives for future outcomes and a long-term vision to support best value delivery of environmental, public health, customer and economic outcomes”.

The commission will bring in expertise from a wide range of areas, including the environment, public health, investors, consumers, engineering and economics. I hope the Committee will be pleased that its scope explicitly covers the regulators’ purpose, structure, powers and responsibilities. As the noble Earl, Lord Russell, said, it is really important that the review is able to consider a wide range of suggestions on the future of regulation, so it is right that the commission, rather than this Bill, is the vehicle for considering the water regulators’ roles and responsibilities. We absolutely need to ensure that regulators are fit for purpose to clean up the mess we found ourselves in, with our water systems and lack of investment, if we are to end the appalling pollution that we have witnessed over recent years. I hope this reassures the Committee that, while the Government are not accepting these amendments, we are absolutely committed to strengthening the water industry’s regulatory system through the review.

I move on to Amendment 56 in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, which relates to the review of environmental permits. The water industry regulators take a risk-based approach to managing permits. This is because there are over 21,000 of them. This risk-based approach ensures that regulator resource is managed effectively and allows regulators to focus their efforts on reviewing permits that pose the highest risk of environmental harm.

If we create a duty on regulators to review all water company permits every five years, it could have the adverse effect of preventing them reviewing the higher-risk permits in a timely manner. It would also create significant resource pressure and detract from work to provide wider oversight of water companies. That could result in the conditions of high-risk permits not being updated quickly when issues are identified, potentially increasing the risk of environmental harm. I hope that I have explained clearly why, although the amendment has good intentions, in practical or pragmatic use it would not be effective.

I turn to Amendment 78 in the name of the noble Baroness, Lady Parminter, and Amendment 85 in the name of the noble Baroness, Lady Jones of Moulsecoomb. These amendments both speak to the environmental duties of Ofwat and, as the noble Baroness, Lady Parminter, said, we discussed this a bit on Monday on the amendments of the noble Baroness, Lady Willis.

Ofwat has a range of primary duties. These include duties to protect the interests of consumers, to secure that companies properly carry out their functions, to ensure that companies are adequately financed, and to ensure that companies deliver their statutory obligations, including environmental obligations.

On Amendment 78, tabled by the noble Baroness, Lady Parminter, as part of its draft determinations, Ofwat proposed the largest environmental investment programmes in the sector’s history and will hold companies to account against a wide range of environmental performance commitments. In all, the sector should invest £20 billion to reduce pollution, reduce harm from storm overflows, improve river water quality and increase biodiversity. This includes an expansion in nature-based solutions.

In addition, Ofwat is undertaking its most significant sector-wide enforcement action to date. It has issued draft penalties totalling £168 million and enforcement orders against three companies for failing to manage their wastewater treatment works and networks. I would also like to stress that the duties outlined in paragraph 21 relating to customers and the environment are set out in Sections 2 and 3 of the Water Industry Act 1991. We also know that there is still enforcement action going on for other wastewater companies.

I absolutely agree with the noble Baroness and others that we need to move rapidly on our environmental improvement targets. These are challenging targets, as the noble Baroness knows. Meeting environmental targets and turning around the issues we have with biodiversity in this country is not just about what is in the review or in this Bill; it is also about why we have not been delivering on these targets. This is why the Government have decided to do a rapid review of the environmental improvement performance requirements. It is one way we can start to work much more quickly on how we improve our environment. That is really important. If we constantly wait for the next piece of legislation when we already have things in place, we are not doing justice to what we have already said we will do.

I am sure the noble Baroness, Lady Parminter, knows that I am really committed to improving the environment; it is very close to my heart. She made some very good points, and I suggest it might be useful for us to meet and discuss this between Committee and Report to see how we can bottom out improving our environment, not just through this Bill but in other ways.

We are clear that companies need to deliver on obligations to customers and the environment, but we also need to make sure that Ofwat is properly financed to do this. Again, this is where the review comes in; we need to make sure we can achieve what we want to achieve. There are existing duties which can deliver better, and we need to look at how we push this forward.

We have worked to secure agreements with companies to update their articles of association to ensure that customers and the environment are placed at the heart of business decisions. That is an important move forward.

Under Amendment 84, tabled by the noble Baroness, Lady Jones of Moulsecoomb, the EA and Ofwat would not be subject to the regulators code or the growth duty. The economy relies on a secure supply of water, and water is a key factor in ensuring sustainable growth in the UK. It is therefore important that Ofwat and the Environment Agency consider the implications of their actions on growth, and that they create a stable regulatory environment.

It is, however, also the responsibility of the regulators to appropriately balance their growth duty alongside all other duties. In line with this, the independent commission will consider both the roles and responsibilities of the water industry regulators and how to ensure that the water industry regulatory framework maintains resilient finances and contributes to economic growth. I am sure that the noble Baroness, Lady Jones, will understand that, now we have the commission and the review, we do not want to pre-empt the outcomes. We therefore cannot accept the amendment, but this is the kind of thing to feed into the review, so that we can look at how to take these concerns forward.

Amendment 29, in the name of my noble friend Lord Sikka, speaks to possible conflicts of interest. We believe it would be disproportionate to prevent all Defra and Ofwat employees from being able to accept employment in a water company. However, both Defra and Ofwat take the handling of actual or potential conflicts of interest very seriously, including when either staff or board members leave the organisation. Staff in both organisations are bound by the Civil Service business appointment rules, and any requirements with respect to future employment or business relationships are managed appropriately and proportionately in accordance with these rules.

Lord Sikka (Lab)

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My Lords, I thank the Minister for her reply and all noble Lords for their observations, comments and speeches. Amendment 29 does have implications for other sectors, because they all suffer from the same malaise—a merry-go-round of regulatory capture. The result is that regulation is not what it should be.

The Minister referred to the Civil Service code on appointments and the migration of workers to companies. That has clearly failed—otherwise, how else do you explain the Ofwat chief executive becoming the chief executive of Thames Water, given the financial mess and other problems Thames Water has? No matter how the Minister explains it, people will not accept that everything is above board with that kind of migration. However, I hear what noble Lords have said and, in light of that, I may well revise this amendment and return with it. Meanwhile, I beg leave to withdraw the amendment.

Baroness Parminter (LD)

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In moving Amendment 30 I will introduce it and seven other amendments in this group. I say immediately that a number of them are consequential, and I am very mindful of the time—so do not panic. They are all about pollution reduction.

Amendment 30, proposed by the noble Baroness, Lady Bakewell, is specifically around the issue of pollution incident reduction plans, which I think the whole Committee welcomes. She is seeking to highlight that, at the moment, it is only water and sewerage companies that they apply to; they do not apply to water-only companies. Yet five out of the 16 regional water companies are water-only companies, and they are in areas of high ecological importance, including some that have some of our most precious chalk streams—and we have had plenty of debates in this House explaining how they are of global significance.

I wanted to quote what Ofwat said this summer about water companies. It stated:

“We recognise that water only companies … can be responsible for serious pollution incidents and intend to hold them to account”.


Making water-only companies subject to this provision, as well as water and sewerage companies, would allow it to do just that.

Amendment 32 is in my name and that of the noble Duke, the Duke of Wellington; I thank him for his support. Also in this group are Amendments 31, 39, 40 and 36. They all deal with the issue of the water companies having a duty to publish these pollution incident reduction plans but having no obligation to actually implement them. We are saying that they should have a duty to implement them.

I raised this issue at Second Reading. In response, the Minister said to me about pollution incident reduction plans:

“A specific duty to implement the plan would make enforcement more difficult, we believe, as it would cut across the wider legal requirements for pollution reduction”.—[Official Report, 9/10/2024; col. 2072.]


I want to unpick that a bit, because I have a couple of issues with it.

First, the Water Industry Strategic Environmental Requirements, a document drawn up in 2022 by the Environment Agency and Natural England, sets out that pollution incident reduction plans can be a mechanism for water companies to discharge their pollution reduction obligations, and says that if they do that then they must be implemented. Secondly, it is fairly common practice in the corporate world that, if there is a duty to undertake an action plan or similar, it should be implemented. The most recent example I could find was in the financial sector, where last year a consumer duty was placed on financial companies, to be overseen by the Financial Conduct Authority, whereby they have to draw up specific action plans, and there is a duty in the law that these must be implemented. If it is in law elsewhere, why is it not appropriate here?

I tried to think whether there was any other reason why the Government might not want water companies to implement these plans. I thought they might be worried that the water companies would use them as a bargaining chip in the price reviews, or with local authorities when they sought permission for various planning applications: they could say, “You’ve got to give us this permission or allow us to spend this money—we’ve got a legal duty and you have to succumb”. I have more faith in local authority members not to accept that position. Equally, as we have just discussed, given that Ofwat does not really have that many environmental duties, I think that it will keep clear of that as well. But even if it is still an overriding concern of the Government, it is not insurmountable. Between now and Report, I think we could come up with some wording that said that, subject to the necessary permissions, the water companies must implement these plans.

These plans are really important. If we do not put it in the Bill that the companies must implement them, it begs the question whether the Government really want them implemented. We know that pollution levels are stubbornly high, and we know that the water companies are not doing enough. Unless they have an explicit duty to follow through on them, we are missing something of a trick.

Finally, Amendment 34A, in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, picks up the important issue of pollution in national parks. I know that a number of local noble Lords, including the noble Earl, Lord Devon, and indeed the Minister herself, raised this at Second Reading. There are stubbornly high levels of pollution in our iconic national parks and the Broads. It is a travesty that not one of the rivers, lakes or streams in our national parks is in good ecological state—that is appalling. It was only earlier this month that we found out that United Utilities had discharged 140 million litres of sewage illegally into Lake Windermere. Frankly, it beggars belief.

This amendment very reasonably proposes that the companies must come up with plans to deal with these pollution incidents by 2030. I think that most members of the public would think that an entirely reasonable request. They have had just about enough of these companies constantly making our rivers, streams and lakes in national parks filthy and stinking while, in many cases, making themselves filthy and stinking rich. I beg to move.

The Duke of Wellington (CB)

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My Lords, I support some of the detail in Amendments 30, 31 and 32—I have added my name to Amendment 32. Amendment 30 makes a very good point and I would be surprised if the Minister was not prepared to devise her own amendment that would cover all these points. Obviously, water-only and sewerage undertakers should be included in the scope of this clause.

Amendments 31 and 32 are very similar. As the noble Baroness, Lady Parminter, has already said, it seems extraordinary that a water company could publish a pollution incident reduction plan without intending to implement it. It would then be just a nice idea but nothing more would happen. I would be very surprised if the Minister did not accept it; I cannot quite understand that there is a legal argument for not accepting it. My hope from this short debate is that the Minister will agree to look at these points carefully. I am sure that, with the benefit of parliamentary draftsmen who help on these matters, she could come up with an amendment of her own that would cover the points. Clearly, there is support for what I would say are the rather obvious points made in these amendments, and I hope that the Minister will react accordingly.

Baroness Young of Old Scone (Lab)

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My Lords, I support Amendments 32, 39 and 40 in the names of the noble Baroness, Lady Parminter, and the noble Duke, the Duke of Wellington. The case has already been put very well that there is absolutely no point in having these plans drawn up and published if there is no requirement for the companies to implement them and no sanctions if they do not. This seems a bit of a no-brainer. I suggest to the Minister that, if there is some legal impediment to these plans being implemented, we should do away with the requirement to draw up and publish them. That would be the most honest thing to do, if there will be no requirement to implement and no sanctions if they do not; otherwise, they are just dangling in mid-air, of neither use nor ornament.

Lord Roborough (Con)

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My Lords, I thank the noble Baroness, Lady Parminter, for introducing this group of amendments and for the strong case that she and the noble Duke, the Duke of Wellington, have made regarding the importance of publishing and, crucially, implementing pollution incident reduction plans, or PIRPs. I wholeheartedly support Amendment 31; I would have published our own equivalent had the noble Baroness, Lady Bakewell, not been so swift with her pen. Without a requirement to implement, a pollution incident reduction plan would, frankly, be of little use.

Moving on to Amendment 34A, and declaring my interest as a landowner within Dartmoor National Park, while I approve of the sentiment behind the amendment, I would be reluctant to make our national parks a special case. We treasure our entire country. My preference would be for the water companies to focus on the worst pollution incident risks, which I imagine will be a consequence of their pollution incident reporting plans, particularly if compliance with those plans becomes strengthened through this group of amendments. We are committed to decreasing the impact of pollution incidents, and in government we committed to creating the water restoration fund, which would have seen the money collected from fines and penalties directly channelled into improving the water environment. We proposed a plan to improve water systems and, as such, we recognise the importance of creating and adhering to these PIRPs.

Baroness Hayman of Ullock (Lab)

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My Lords, once again I thank noble Lords for their amendments and for taking part in this debate. I start by emphasising that we expect all water companies to reduce all pollution incidents, in line with their legal duties.

I turn first to Amendment 30, tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, which seeks to apply the duty to produce pollution incident reduction plans to water-only companies. Initially, it might be useful to explain why our focus has been on water and sewerage companies only. This is because most pollution incidents arise from sewage incidents, not water supply incidents. We were concerned that, by widening the scope, we could end up diluting the focus of the plans, so that actions were not tailored to the most serious pollution incidents. That is the thinking: the Government want to keep the focus of these plans on sewage incidents, which is why we are not accepting the amendment. Having said that, there have been some very interesting comments around this and I would be very interested to hear some wider thoughts on Amendment 30. Clearly, the noble Baroness is unwell at the moment and is not in her place, but I hope that other noble Lords will go back to her and see whether she would be happy to meet to discuss this further: I think it is something we could pick up, following Committee.

I move now to Amendments 31 and 36, also tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, and Amendments 32, 39 and 40, tabled by the noble Baroness, Lady Parminter, which speak to the implementation of measures identified in pollution incident reduction plans. I thank the noble Baroness for her clear introduction and the noble Duke, the Duke of Wellington, and my noble friend Lady Young of Old Scone for their comments on this amendment.

Clearly, it is really important that we ensure water companies are taking decisive action to reduce pollution incidents. I want to highlight that the provision already requires water companies to report each year on progress made in implementing pollution incident reduction measures. This will create an unparalleled level of transparency that will further enable both regulators and the general public to hold water companies to account. Where pollution incident reduction plans do not meet the statutory criteria set out by legislation, the Environment Agency will be able to take enforcement action. This will include ensuring compliance with the duty for the plan to provide an assessment of progress in implementing the measures.

The noble Baroness, Lady Parminter, was trying to understand why this was not something that we accepted. I can reassure her that it has nothing to do with it being used as a bargaining chip—absolutely not. The big concern is that, if we introduce a duty to implement the measures in the pollution incident reduction plans, this could imply an unusual sub-delegation of powers to the water companies, whereby they would effectively be able to create enforceable duties on themselves. We are concerned that this would then have the perverse outcome of incentivising companies to produce less ambitious plans to mitigate the risk of enforcement action. That is one of the fundamental concerns in a nutshell, and it is why we are not going to accept these amendments. If the noble Baroness has any suggestions, I would be very happy to hear them.

I turn now to Amendment 34A, tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, which speaks to the important matter of waterways in national parks. The Government agree that national parks form a vital part of our environmental heritage. In line with this, the Government will seek to use the powers in the Levelling-Up and Regeneration Act 2023 —I still have the scars on my back—to ensure that relevant authorities, including water companies, deliver better outcomes in protected landscapes. We are in the preliminary stages of developing those regulations, to ensure that authorities deliver the better outcomes that we need. The idea is that they will provide a more holistic approach, conserving and enhancing the purposes and special qualities of our protected landscapes.

We have also set an expectation that Ofwat should challenge water companies to prioritise improvements in national parks. We are expecting considerable investment over the next price review period, to improve water and sewerage assets discharging into national parks. This, of course, will include the iconic Lake Windermere, which we have heard much about. United Utilities was mentioned in relation to this. Noble Lords might be interested to know that I met with a representative of UU last week and discussed issues around the environment and improving nature—so there is work going on with the water companies behind the scenes in this specific area.

However, the Government consider it important that pollution incident reduction plans should identify actions to address pollution incidents right across England and Wales; the noble Lord, Lord Roborough, made exactly this point. A statutory hierarchy of priority areas risks deprioritising pollution incident reduction plans in other areas, so we have to be very careful that we do not do that, because that bathing waters, for example, in other areas could be impacted. For this reason, the Government will not be accepting this amendment, but clearly I want to stress we do take our protected landscapes very seriously.

I turn now to Amendment 35 tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville. I fully recognise her desire to ensure that we see a reduction in the environmental risk posed by pollution incidents. This is why Clause 2 already requires water companies to address environmental risks in their pollution incident reduction plans. The clause requires water companies to set out the measures they will take to reduce the frequency and seriousness of pollution incidents.

Risk to the environment is already used, among other important factors, to determine the seriousness of a pollution incident in the Environment Agency’s incident categorisation process. This is the framework that water companies are required to refer to when they develop their plans. Therefore, by requiring water companies to report on plans to reduce the seriousness of pollution incidents, we are already requiring them to report on and develop measures to reduce the risk to the environment. While we understand the noble Baroness’s intention, the Government believe that because of the reasons I have just set out the amendment is not necessary.

Finally, I turn to Amendments 41 and 42 tabled by the noble Lord, Lord Roborough, which seek to impose requirements around reporting against pollution incident reduction plans. I reassure him that Clause 2 already requires water companies to publish an assessment of their progress in implementing previous plans. Requiring more frequent reporting would be unlikely to allow water companies sufficient time to implement the lessons learned from previous pollution incidents.

I also reiterate that we expect water companies to be fully accountable when developing their plans and implementing the proposals in them. If a plan does not adequately address the statutory provisions required by the Bill or by broader legal requirements, the Environment Agency will take appropriate enforcement action. The Government therefore do not propose to accept these amendments, but I thank the noble Lord for his suggestion.

I will clarify the strategic policy statement. The key point is that it is directed to Ofwat, not to the water companies. The Government’s strategic priorities for Ofwat include the need for companies to prioritise actions to reduce pollution and considerably improve their environmental performance. The SPS sets general strategic requirements for Ofwat and does not create specific measures, as we expect, under the pollution incident reduction plans.

I thank noble Lords for their input into this discussion and for their suggested amendments.

The Duke of Wellington (CB)

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As the noble Baroness sits down, I must say that I did not find her arguments for not accepting a duty to implement to be very convincing. I therefore wonder if she would at least be prepared to meet the noble Baroness, Lady Parminter, and me between now and Report to see if, between us, we can put together some amendment that might be acceptable to the Government.

Baroness Hayman of Ullock (Lab)

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I completely understand. This is not a straightforward area, and I would be absolutely delighted to meet the noble Lords to see if we can find a way forward.

Baroness Parminter (LD)

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I thank the Minister for her responses to the numerous amendments in this group on pollution incident reduction plans, which I think everyone in this Committee believes is one of the really valuable steps in the Bill. I will pass on her comments about a meeting to the noble Baroness, Lady Bakewell of Hardington Mandeville. Water-only companies are responsible for a number of pollution incidents, particularly around drinking water treatment, but I will leave that for that later discussion.

Like the noble Duke, the Duke of Wellington, I just did not find the Minister’s comments very convincing, but it was not just that. I am not a lawyer, so I did not really understand what a sub-delegation of powers was; I am humble theologian, so I will have to go away and think about that and take some advice from people who know about it. However, the offer made to talk about this further is an important step forward. She will have noticed that everyone across the Committee believes that these are important steps we need to take to ensure that the ambitions that the Government rightly have in this regard are carried out as fully as they need to be.

In making that point, I particularly thank the noble Lord, Lord Roborough, for his comments. His phrase—that the Bill in this area does not ask enough of water companies to deliver on the ambition of pollution incident reduction plans—was absolutely spot on, so I thank him for that.

I hope that my noble friend Lady Bakewell of Hardington Mandeville will be reassured by the Minister’s comments about the Government taking pollution seriously in national parks. I am sure that if she has any further matters to discuss with the Minister when she is well—next week, I hope—she will be in a position to come to the Minister’s door, which we all know is an open door, and we thank her for that. I beg leave to withdraw the amendment.

Baroness McIntosh of Pickering (Con)

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My Lords, I am pleased to speak to the amendments in this group in my name: Amendments 34, 38, 53 and 93. I look forward to the discussion on Amendment 51 in the name of the noble Duke, the Duke of Wellington, and Amendments 54 and 88 in the name of my noble friend Lady Browning; I am delighted to have co-signed Amendment 88, but I look forward to hearing her own words.

Amendments 34 and 38 relate to the opportunity to

“require consideration of opportunities to retain water through natural solutions to prevent sewage mixing in combined sewers with excess rainfall, causing pollution incidents”.

I am delighted to have been associated with such a project at the latter stages. I rather naughtily took full credit for the Slowing the Flow at Pickering scheme, although it was my then honourable friend John Greenway who did most of the work, but we were both involved in this successful project. It is important to notice, as I am sure the Minister will agree, that we need not overengineered projects but natural solutions to flood prevention and to prevent excess sewage going into waterways. They could be natural solutions such as soakaways, culverts or, in the case of Slowing the Flow at Pickering, creating dams, planting trees and, apparently, introducing beavers, with mixed success—and they must involve all partners.

In particular, I am keen to see partnership funding, not just from public partners, which were primarily those involved in Slowing the Flow at Pickering, but from private partners. In that regard, I pay tribute to the role that water companies play in preventing flooding upstream in a catchment area, and I applaud the work of companies such as Yorkshire Water and United Utilities, which have good track records in that regard.

My question to the Minister is: if she is not minded to approve these amendments, how do the Government expect to encourage the role of water companies, farmers and others to undertake such flood prevention measures? I urge her to consider that. In Amendment 38, I specifically refer to the preparation of a pollution incident reduction plan, noting that

“a sewerage undertaker must consult with farmers, local authorities and others to identify natural flood prevention solutions to prevent pollution incidents”

occurring. I did not speak to the previous group, but I felt sympathy with many of its amendments, particularly seeing the damage to lakes such as Lake Windermere. It is important to note that this is not always the fault of water companies.

Amendment 53 builds on the amendments to which I referred and requests a report on implementation. Assuming that we have implemented Schedule 3 to the Flood and Water Management Act 2010 as part of this Bill—I am ever optimistic—I request that we have a six-month review in which the Secretary of State or the Minister would

“lay before each House of Parliament a report on the effect of this Act on the implementation of Schedule 3 of”

the Act.

Before I turn to Amendment 93, I note that the Minister, in summing up on the first day in Committee, said her catchphrase. I will repeat it for good measure; noble Lords should be alarmed when we hear this phrase in future. She said that the department is considering with the Ministry of Housing, Communities and Local Government

“how best to implement their ambitions on sustainable drainage”—

here is the killer quote we must be mindful of—

“while also being mindful of the cumulative impact of the new regulatory burdens on the development sector”.

She concludes:

“At this stage, I do not want to pre-empt the outcome of that process”.—[Official Report, 28/10/24; col. 1009.]


I should be obliged if the Minister could give us a little more meat on cumulative impact. She will recall that, at Second Reading, I set out that this was a wonderful one-off opportunity in the Bill to plug the gap and fill the loophole—the gap in responsibilities between planners, investors and housebuilders—and to recognise the responsibility of others, such as highway authorities, which contribute to road surface water runoff entering the combined sewers and storm drains, without currently having any responsibility to prevent this form of pollution. That is very costly and we have already discussed on both days of debate on the Bill the damage that is caused. I repeat what I said on Monday: it is not within the responsibility of water companies where it is the fault of developers and highways authorities in this regard.

I turn to Amendment 93 in my name. Again, I am asking for a review of water reuse and existing regulations within 12 months of the day on which this Bill is passed, whereby the Secretary of State should publish a review of the existing regulations related to water wholesomeness and water companies’ ability to encourage water reuse. A report on the findings must be laid before Parliament. The purpose of this amendment is to the effect that, currently, water wholesomeness excludes from the responsibility of water companies the encouragement of water efficiency measures such as the use of grey water, reuse of water from a shower and other such water efficiency measures, as they are not covered by the definition of “wholesome water”. If that is the case, are the Minister and the department minded to review the definition of wholesome water. There are other amendments on clean water to which I think this also might apply. Currently, it seems bizarre that wholesome water would exclude such water efficiency measures.

The Government are aware that there are already a number of government regulations. This Government announced in September that they intended to roll out a mandatory water efficiency label in which appliances, including toilets, sinks and washing machines would be sold with information about their water usage to help customers reduce their use and save themselves money. That is very welcome. However, for such a system to be effective, surely labels must be tied to a mandatory minimum standard that could be reviewed and possibly tightened over time. If that is outwith the scope of this Bill, is this something to which the Government might return?

I understand that, under current building regulations, this matter could be revisited. Part G of the Building Regulations 2010 seeks to end the system whereby local authorities are given discretion between two water efficiency standards—the optional, albeit achievable, 110 litres per day mandate and the mandatory 125 litres per day standard. Would it not be better if Part G of those building regulations contained one standard only, possibly the lower standard of 110 litres per day, which, in the long term, could be reviewed and tightened, if that were the case? If such a labelling system were carried out and the Government were minded to do so, they could actually save £300 by introducing water efficiency into homes at the time of construction.

I hope that the Minister will look favourably on these amendments. Perhaps, if she does not like them, then, using the parliamentary draftsmen that she and her department have at her disposal, she could come up with a better alternative. But I hope she will find these amendments attractive. I beg to move.

The Duke of Wellington (CB)

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My Lords, Amendment 51 in my name has been put in this group even though it relates to a different clause. Clause 3 deals with emergency overflows and seeks to define an emergency overflow. It also includes within Clause 3 what is in effect a let-out for the water companies, in that, where an overflow occurs as a result of an electrical power failure, that is permitted. I must admit that I find that surprising. I am grateful to the Minister, who allowed me to come and discuss this point with her and her officials a few weeks ago. However, I cannot for the life of me understand how failure to have sufficient electrical power generation capacity in a sewerage works is sufficient reason to allow an overflow to occur.

I remember that, just before or during the passage of the Environment Act, there was a major overflow by Thames Water in London, and the reason given at the time was, “Oh, sorry, there’s been a power failure”. That really does not seem good enough. Nobody running a hospital would be able to plead lack of power as a reason to close down all operations under way in the hospital at that moment. It seems to me that a sewerage works is a place where there must be sufficient emergency power generation through generators in case of a power failure.

This is a simple amendment; I hope the Government will take it seriously. It simply would delete, in effect, in new Section 141G(2)(a),

“electrical power failure at sewage disposal works”

as a reason for permitting an emergency overflow. That is my argument and I hope the Minister will take it seriously.

Baroness Browning (Con)

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My Lords, I am very pleased for the first time to be able to contribute to Committee on the Bill. I will speak to the two amendments in my name in this group, Amendments 54 and 88. The Minister will already be aware of my enthusiasm for the use of grey water and its importance in new-build domestic construction. I support my noble friend Lady Pickering in what she has just said on this group.

The Committee has already drawn attention to increasing problems of safe disposal of sewage from buildings and the challenge going forward to adequate supplies of domestic drinking water. The fact that the existing system cannot cope with either does not augur well for the Government’s planned housebuilding target, which will include mandatory planning targets set out in the National Planning Policy Framework.

The Minister will know from Second Reading that I support her endeavours in the Bill, but the two amendments in this group tabled in my name seek to mitigate what could quickly become a standoff between the Department for Environment, Food and Rural Affairs and the Ministry for Housing, Communities and Local Government. I urge the Minister to take some action through these two amendments to prevent this, if nothing else.

I am very grateful for the assistance and legal advice given to me on these two amendments by the lawyers at WildFish, a charity involved in the protection of all wild fish in watercourses.

Some developers argue that, because of the legal obligations on sewerage undertakers to treat wastewater, the question of sewer and sewage treatment capacity is not a material consideration in planning. There is therefore a reluctance among planning authorities to impose conditions to protect the environment from sewage pollution, partly because of the case of Barratt Homes v Dŵr Cymru 2009, where the Supreme Court confirmed that Section 106 of the Water Industry Act 1991 provided a right for householders to connect to the sewer network and that only in narrow circumstances could the water company refuse such a connection.

Baroness Young of Old Scone (Lab)

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My Lords, I support Amendment 53 in the name of the noble Baroness, Lady McIntosh of Pickering. It gives the Secretary of State six months to report on the implementation of Schedule 3 to the Flood and Water Management Act 2010, which covers sustainable drainage. The Act is what it says on the tin: enacted in 2010—but, if I understand it correctly, Schedule 3, which we slaved over in your Lordships’ House, has never been formally commenced. There is no point in legislating if it is not brought into effect. What is the point of us being here if the legislation we meticulously pore over and pass is never implemented?

This is an important issue of sustainable drainage. The noble Baroness has already outlined how it impacts on housing development and other developments. It has a big impact on river and water body quality, so I look forward to hearing how the Government intend to deal with this issue.

Baroness Pinnock (LD)

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My Lords, the amendments from the noble Baronesses, Lady McIntosh of Pickering and Lady Browning, and the noble Duke, the Duke of Wellington, are, in their varied ways, interesting.

The amendment of the noble Baroness, Lady McIntosh, urges the Government to give greater consideration to encouraging water companies to use nature to slow down excessive water flows, particularly in rivers, because that would reduce the impact on combined sewers, which take both sewage and rainfall through the sewerage system. The noble Baroness gave the example of Pickering, which was discussed when I was on the board of Yorkshire Water some years ago. I was very pleased to hear that that approach has worked so well.

There is another interesting example, in Somerset. A group of environmentalists—not a water company—encouraged a river to return from a driven channel to its natural meandering state. That has benefited nature in many ways, but it has also reduced the speed of the water flow, thereby bringing about the benefits the noble Baroness described. The Government could encourage such approaches—not much more is needed. The Pickering scheme was supported by the board of Yorkshire Water because it was a lot less expensive and had many environmental pluses, among which was the reduced carbon cost of not having to use huge amounts of concrete, adopting a nature-driven approach instead.

I hope the Minister will take on board what has been said. The water companies, with a bit of oomph behind them, could be encouraged to experiment and use these ways to reduce water flows and therefore flooding, to reduce excessive water in the system, and to reduce storm water overflow pollution incidents. This would have a huge benefit.

The next issue, which we discussed on Monday, is the failure to implement SUDS. That was supposed to happen this year and has not, but it ought to. On the plus side, although the Government have not implemented it, in my experience planning authorities are already insisting on new planning applications having a SUDS scheme, because of the capacity issues raised by the noble Baroness, Lady Browning. In any major housing development scheme, the sewerage undertaker is required to commentate on the scheme and may say, “Guess what? There’s not enough capacity in the system”. A SUDS scheme is then applied, which reduces the highways rainfall flow so that it goes not into the sewerage system but, via attenuation tanks, into a neighbouring water course.

In some ways these things are already happening, but I agree with the noble Baroness, Lady Browning, about the importance of considering the capacity of the sewerage system and water resource availability. We know that in some parts of the country, particularly the south-east, housing developments do not happen because there is insufficient water supply. I heard what the Minister said earlier—that in the price review to be signed off by the end of this year, sufficient capital was agreed for nine new reservoirs. That is important, but we also need to think about using water more efficiently, as was said earlier. The volume of water that each of us uses compared to even 10 years ago is quite concerning. We need to think carefully about water efficiency, so that we use what is a precious resource more carefully.

I urge the Government to think again about a national water grid. Water is connected across the country, but the water resources are owned by individual water companies. There is quite a lot of water in the north and not anywhere near enough in the south of the country. Water is currently pushed from one part of a company’s resources to the neighbouring water company. For instance, Yorkshire Water regularly pushes water to whatever the neighbouring authority is in the Midlands. The Government should think about using the water in the north—I am sure that we who live in Yorkshire would be willing to sell it at a good price to those of you in the south who do not have enough.

On that basis, we support what has been proposed by the noble Baronesses, Lady McIntosh and Lady Browning, and we look forward to the Minister’s response to those concerns.

Lord Roborough (Con)

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My Lords, I thank my noble friend Lady McIntosh of Pickering for moving her amendment. I am glad that she has tabled amendments that address some of the underlying causes of sewage spills, such as excess rainwater run-off overwhelming sewerage systems. My noble friend is right to look at the root of the problems faced by this industry in order to ensure that the legislation deals with underlying causes, rather than just surface-level symptoms.

Baroness Hayman of Ullock (Lab)

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My Lords, I thank all those who have taken part for their interest in the important topic of sustainable water usage and sewerage infrastructure. I shall start by speaking to Amendments 34 and 38, proposed by the noble Baroness, Lady McIntosh of Pickering, and spoken to by other noble Lords. The noble Baroness, Lady Pinnock, gave some examples around this. The Government agree that nature-based solutions, including natural flood prevention solutions, are a useful tool for tackling the root causes of sewage pollution while delivering wide ecological benefits.

Noble Lords who took part in the progress of the levelling-up Act will remember that this was debated in Committee on that Bill and that I spoke against the proposals that preferred the cheapest option because we were concerned about the amount of concrete that this could lead to rather than the best solutions for the environment.

The Government’s strategic policy statement includes Ofwat’s proposal to allow more than £2 billion of investment in nature-based solutions at its draft determinations for price review 24. This includes £1.6 billion to reduce storm overflow spills through catchments and nature-based solutions, and further funding is proposed for nature-based solutions such as reedbeds and wetlands for nutrient removal. The Government have supported water companies trialling nature-based solutions for groundwater-induced storm overflows. This is, of course, subject to the final determinations to be made in December but, if approved, will allow for greater understanding around effectiveness and suitability and enable greater uptake at future price reviews.

Nature-based solutions may feature in pollution incident reduction plans, but we believe it would be inappropriate to mandate their inclusion because they may not necessarily be effective in every circumstance. These plans are intended to ensure that water companies implement mitigations to reduce pollution incidents. Each year, the single biggest source of pollution incidents is issues such as blockages or mechanical failures within the foul sewer water system. These issues are best addressed via monitoring and maintenance measures, such as the detection of bursts, checking pumps and relining sewers. This is important work that needs to take place alongside. It is for these reasons that the Government are not supporting these amendments. However, I reassure the noble Baroness and other noble Lords that the Government remain extremely supportive of using nature-based solutions to tackle the underlying causes of pollution incidents, and I look forward to discussing this topic with her further alongside colleagues from MHCLG in the coming weeks.

I turn to Amendment 51, tabled by the noble Duke, the Duke of Wellington, about the use of back-up generators at emergency overflows. The Government agree that measures should be put in place to reduce discharges from emergency overflows caused by electrical power failures. However, water companies are already required to implement measures to reduce the likelihood of a discharge occurring due to an electrical power failure through conditions in their environmental permits. In particular, water companies must demonstrate that they have back-up systems in place, such as generators or alternative power supplies, to secure the emergency overflow permit. Ultimately, emergency overflows may still be required to operate as a last resort to protect the sewerage infrastructure and prevent upstream properties flooding.

The near real-time reporting of information required by Clause 3 will enable increased transparency around the use of emergency overflows and will better enable resource to be quickly directed to investigate and address any cause of such a discharge. I thank the noble Duke for meeting me previously to discuss his concerns and his amendment. I am not sure that he will be reassured, but those are the reasons we do not believe an amendment in this space is necessary.

Amendment 53 from the noble Baroness, Lady McIntosh of Pickering, is on the important issue of SUDS, which we also discussed on Monday, and to which my noble friend Lady Young of Old Scone and the noble Baroness, Lady Pinnock, also spoke. As I have noted and discussed with the noble Baroness, this Government are strongly committed to requiring standardised sustainable drainage systems in new developments. We are actively considering whether improvements in the delivery of SUDS, which we all wish to see—14 years is far too long to wait for the implementation of legislation—may be better achieved through mechanisms other than Schedule 3 to the Flood and Water Management Act 2010.

I say to the noble Baroness that I have never had a catchphrase before. I was rather hoping for something a little more exciting—suggestions on a postcard. I am sorry to disappoint, but I am not going to use that catchphrase now. I look forward to meeting the noble Baroness alongside my colleagues in MHCLG. There are certain things that we need to discuss to see how we can move things on in this area.

On Amendment 54, I agree with the noble Baroness, Lady Browning, about the importance of having a drainage and sewerage system that can meet current and future demand. I always appreciate her enthusiasm on these matters.

As part of the Environment Act 2021, a duty has been created for water and sewerage companies in England to produce drainage and wastewater management plans. These plans set out how a company intends to improve their drainage and wastewater systems over the next 25 years, accounting for factors including a growing population and changing environmental circumstances. Taking a strategic approach to drainage and wastewater management will help to identify and mitigate issues related to insufficient network capacity.

The Environment Agency has a role as a statutory consultee for local planning authority decisions for certain types of developments that are made under Part III of the Town and Country Planning Act 1990 to help ensure that matters of wastewater and treatment, work capacity and water resource matters are considered as part of key planning decisions.

The Government appreciate the intent behind the amendment but have concerns about how it could operate in practice. That is because it could potentially give sewerage undertakers the right to refuse connections based on their own predictions of capacity without reference to agreed standards. Furthermore, legislation already permits undertakers to refuse connections where they would be prejudicial to their sewerage systems. Where disputes arise, the matter can and should be referred to the independent regulator, which in this case is Ofwat. However, I am happy to look more closely at capacity issues, as the noble Baroness suggests.

On Amendment 88, also from the noble Baroness, Lady Browning, the Government recognise the importance of ensuring the availability of sustainable water supplies to help meet our target of delivering 1 million new homes in this Parliament while protecting the environment. Under existing powers, water companies should ensure that they have sufficient water resources available to supply new homes, in line with the water resources planning guidance. In addition, Natural England and the Environment Agency are required to assess the impact of water company plans on protected sites.

Amendment 93, in the name of the noble Baroness, Lady McIntosh of Pickering, follows on from those amendments. I agree with the noble Baroness and understand the need for increased water efficiency and water reuse. Looking at all these amendments as a whole, I have to say it is completely bonkers that in this country we use drinking water to flush our toilets. That does not happen elsewhere. For that reason, we are already reviewing the relevant regulations. We intend to publish in the new year a consultation on how we could revise those regulations, with the aim of increasing water reuse.

The reuse of water through rainwater harvesting and grey water reuse may have important benefits for the environment because it is part of reducing our reliance on water abstraction. Water reuse systems have a wide range of benefits, such as reduced demand on water infrastructure, reduced carbon emissions and flood protection.

On the noble Baroness’s particular question about the mandatory water efficiency labels that we are introducing, we are completely committed to that but we have not yet made a decision on the minimum standards.

I hope this reassures the noble Baroness that the proposed new clause will not be needed as we are already taking significant steps in this space. I once again thank noble Lords for their important contributions and suggested amendments around sustainable water usage and sewerage infrastructure.

Baroness McIntosh of Pickering (Con)

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My Lords, I am grateful to the Minister and others who have spoken in this debate. I am a little concerned, because I understood the Minister to say that they may seek to achieve sustainable drains through other means than Schedule 3.

Baroness Hayman of Ullock (Lab)

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To clarify, we are not suggesting that we do not do that, but we want to look at all the different options so that we can look at how we can practically move forward.

Baroness McIntosh of Pickering (Con)

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I just say that I am extremely disappointed. I know this is not necessarily within the gift of the Minister but, as we heard from the noble Baroness, Lady Pinnock, this was meant to be the year that we implemented Schedule 3, and there are only two months left. While I welcome the fact that we are going to meet before Report, I will look to bring something like that back.

I am grateful to my noble friend Lady Browning, who, in mentioning capacity, has underlined the need to end the automatic right to connect and to establish water companies as statutory consultees in all future planning applications. If there is no capacity, I do not see how we can expect water companies to make false connections that will lead to further sewage spills in future.

Baroness Jones of Moulsecoomb

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My Lords, it is a pleasure to open the debate on this group of amendments, which are focused on nature-based solutions to reduce pollution.

We know that nature is incredible and complex. Every living organism is nigh impossible for humans to replicate, and when those organisms all come together in an ecosystem they are even more complex—the complexity increases by many more degrees of magnitude. Human industrial processes, by comparison, are very crude. Unlike nature’s cycles and interactions, which have evolved over millennia, industrial processes are inefficient and almost always create some kind of waste product. So, while humans still struggle to comprehend the intricacy of those natural processes and cannot replicate them, it is much easier for us to mimic the natural world with nature-based solutions.

The fact is that it is better to protect what we have than to try to reproduce it. While I absolutely support rewilding and restoration projects, making sure that we do not do any more damage is of primary importance. Reed beds are a simple example: not only do they provide a wonderful home for wildlife—they are a priority habitat for nature conservation in the UK—but they are great at cleaning water, filtering out sediment, and buffering against pollutants from industry and agriculture. They also offer some protection from rising sea levels. Slimbridge Wetland Centre is a great demonstration site of that water treatment in action. It is a self-sufficient water treatment system that removes phosphates, nitrates and sediment, leaving just clean, fresh water for the nature reserve. It sounds like a dream.

I do not really need to rehearse all the arguments for nature-based solutions because, in the almost 11 years that I have been here, I heard Labour Peers calling on the then Government to put these solutions into action. Now the issues are the same but the Government are different, and so it is Conservative Peers who are lobbying on these issues and pointing out why it is so urgent for the Government to work with nature. I acknowledge that many Conservative Peers have said that in the past, but now their voices have the opportunity to be heard a little more loudly.

The Committee will probably support the whole concept of nature-based solutions. In that cross-party spirit, I hope the Minister will set out the Government’s plan to put these nature-based solutions at the heart of the recovery plan for our toxic and polluted riverways.

Earl Russell (LD)

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My Lords, I will speak to Amendments 55 and 74. I have added my name to Amendment 55 in the name of my noble friend Lady Bakewell and I thank the noble Baroness, Lady Willis of Summertown, for also adding her name in support. This amendment would require water companies to adhere to and deliver stronger environmental objectives and duties within national parks and the Broads, so as to protect waterways across national parks from sewage. The amendment would give the Secretary of State regulation-making power to extend protections to specific bodies of water, such as Lake Windermere.

Our national parks are very special places with national emotional importance, but the sad reality is that the areas that are the most important have some of the weakest environmental protections and this needs to change. There were 377 sewage releases from storm overflows within the boundaries of national parks in England and Wales in 2022, totalling 176,000 hours, equivalent to more than 7,300 days. I am confident that the Minister, like me, will find this as unacceptable as I am sure do all noble Lords present. This amendment seeks to bring forward measures that will help to correct this and return the ecological status of our national parks to a level that we can again be proud of. As we heard in the previous debate, there is not even a single river within a national park that has good ecological health.

It is not just sewage which is causing the problem. The University of York found there was also widespread toxic chemical pollution within some national parks. In many ways this is much more worrying indeed. With huge influxes of seasonal visitors and often old and not-fit-for-purpose sewerage infrastructure, during the summer months especially the systems cannot cope and we have regular sewage spills. This infrastructure needs updating. I want to thank the Minister here. She said on the previous group that she had been meeting United Utilities and that is welcome.

In addition, it is ironic that we have far lower standards for the operation of sewage works in our national parks that we do in our urban equivalents. Proposed new Section 4A(1) in Amendment 55 gives details of how the relevant undertaker must secure high ecological status, enhance wildlife and natural beauty, and reduce total phosphorous discharges into freshwaters within areas of national parks by 2028. Subsection (2) indicates what will happen if this does not happen and calls for the relevant undertaker to be put in special administration and not be eligible for further licences if it fails to demonstrate an adequate process each year and meet the targets in subsection (1). Subsection (3) gives a time limit of one year for the Secretary of State to lay a report on the undertakers’ implementation of the environmental duties in subsections (1) and (2) before Parliament. Subsection (7) of the proposed new section explains exactly what type of environment is covered by this section.

I will not repeat the remarks made about Amendment 34A in group two, but it is worth noting that Lake Windermere is a UNESCO world heritage site which has inspired Beatrix Potter, William Wordsworth and Arthur Ransom and that it contributes over £1 billion a year to the UK national economy. This site is particularly sensitive and I guess that everybody in this House wants to see improvements made to it. I hope other noble Lords can support this amendment and the Minister can support it as well. It might be that the Minister has other ways of doing these things, possibly through statutory instruments, but I look forward to her response.

Finally in this group, Amendment 74 is in my name and I am very grateful to the noble Baroness, Lady Browning, for adding her name in support. This amendment aims to provide “high ecological status” to our chalk streams. To be clear, “high ecological status” is the closest wording the Table Office said was in scope for blue flag status. What I am trying to do is have a conversation with the Minister about putting forward blue flag status for our chalk streams. That is the point of the amendment.

As we have heard, England’s chalk streams are of global significance and are a source of great national pride. They are unique waterways, found particularly in the south of England and Yorkshire. They have been referred to as the “rainforests of England” for their special qualities, the diversity and range of the habitats they provide and the iconic species, from invertebrates to kingfishers, that dwell within them. I confess that I spend quite a lot of my spare time mountain-biking and quite a lot of that is done on the South Downs, so places such as the River Meon are very special to me and I am sure other noble Lords have experiences with other chalk streams.

Research undertaken by my party found that, according to Environment Agency data, in 2022 chalk streams were subject to 14,000 hours of sewage discharges. This is devastating to these very valuable but fragile ecosystems. Wessex Water was guilty of 1,013 separate sewage discharges across the west of England. The worst chalk stream sewage discharge lasted for nearly 3,000 hours in the River Till, a tributary of the Hampshire Avon. Thames Water discharged sewage into the Misbourne in Buckinghamshire for 1,206 hours last year and Southern Water’s 62 discharges into the River Meon last year lasted over 1,000 hours. The figures may have been even higher than that as a number of monitors are not working; I would argue that the true scale of the discharges into these rivers is not properly known, which is also a worry.

I am very grateful for the support for this amendment and I hope the Minister can lend some support to it from the Government. It might be that there is a possibility of further conversations or some kind of compromise around these issues. It might be that the Minister or the Government feel that blue flag status is not quite the appropriate means to help give further protection to these chalk streams. I am open to ideas. I am open to other ways that we could work collectively to try to increase protection for these very fragile systems.

Baroness Browning (Con)

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My Lords, I am delighted to have been able to add my name to this very important amendment. I live on the Dorset/Hampshire border and chalk streams are really important in my part of the world.

We have heard from the noble Earl, Lord Russell, of the importance of these chalk streams, which have been managed in England since Roman times. There is the real danger of contamination of the water course itself from sewage and agricultural run-off, but one of the key features of a healthy chalk stream is the water flow. Not all chalk streams are particularly deep but, so long as the water flows regularly, fish can spawn and the other flora and fauna which are so important to them can survive. Once the streams slow down, for whatever reason, particularly from excessive abstraction, that immediately has an impact on all the wildlife that we associate with chalk streams. So I am very pleased to add my name to this very important amendment.

Amendment 90 in this group, which is in my name, is on the general duty to deliver measures set out in water resources management plans. I was a bit concerned whether it is in the right group, but I guess that it is—it is associated. It is all very well to legislate but unless you can enforce legislation, it seems to us legislators all a bit pointless. As far as water resources management plans are concerned, this is about tightening up the regulations to make more sense of them.

Lord Gascoigne (Con)

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My Lords, I declare that I am a member of Peers for the Planet and have been a long-time supporter and member of the Conservative Environment Network. It is a great pleasure to speak on this set of amendments, led by the phenomenal noble Baroness, Lady Jones of Moulsecoomb, and to speak to Amendment 104, which is in my name as well as that of my noble friend Lord Roborough and the noble Baroness. I thank them both for their support, especially my noble friend on the Front Bench who has, both in government and opposition, been on the receiving end of my incessant and often incoherent rants about all things nature and the environment, as well as much else besides. I thank Wildlife and Countryside Link, the Rivers Trust, CEN and others who have provided helpful information for this debate.

The Committee will be pleased to know that I am not going to spend too long on why we are looking at the Bill. We all know that, collectively, the industry needs to improve and, truth be told, that it is not the water companies alone which are at fault here. We know the sad circumstances we are fighting to fix in wildlife, nature, biodiversity and water quality, because when a report this year from the Rivers Trust notes that not a single stretch of river in England is in good overall health, something has to change.

There are many great amendments in this group, all of which seek to ensure that water companies give more care to delivering a better environment in using their resources. My amendment builds on Amendment 37 in the name of the noble Baroness, Lady Jones—which, it goes without saying, I support—to focus on nature. If we look across the entirety of the Committee, many amendments seek to place greater emphasis on the importance of the environment. Some amendments ensure the inclusion of nature-based solutions when drawing up a pollution incident reduction plan; some address the industry, as well as regulators; some seek to ensure the delivery of existing pollution reduction plans. Amendment 104 seeks to build on them all by starting at the beginning: to deliver change by putting nature recovery front and centre, inserting nature at the outset and ensuring that licences cannot be granted or proceed unless companies look first at nature-based solutions targeted at reducing flood risk, improving water quality and benefiting nature restoration.

The second part of the amendment—if I may so, it chimes with what was so eloquently articulated by the noble Baroness, Lady Young of Old Scone, on Monday and today by the noble Baroness, Lady Parminter—looks to the regulators to ensure that they too give regard to nature-based solutions and do not penalise or discourage companies that seek to invest in them if they so wish and feel that is right for them. From a purely nature point of view, we cannot achieve our goals without private support and investment.

Turning to the rationale, some may say that this is all pie in the sky—we have heard similar voices in this House—that nice-to-have yet not essential schemes would cost the company itself, and that bills would have to go up just for some nice cuddly green notion. What evidence is there that it works and why do we care? We just want lower bills and clean water.

We have covered the importance of nature so much in this stage of the Bill. The noble Baroness, Lady Willis of Summertown, fired the starting gun in Committee with a superb rallying cry for her amendment on nature and biodiversity. I will not repeat what has been said by others far better qualified than me about why nature matters. I will focus more on why there are wider benefits to both the consumer and the company, beyond helping nature alone. As the noble Baroness, Lady Parminter, said at Second Reading, nature-based solutions do not just help with things such as overflows; there are wider benefits to society too.

Turning to the costs, a few years ago research from across the pond suggested that nature-based solutions could be up to 50% cheaper yet provide around 30% better value for money. While we still have a low uptake to prove that, there are some successes. I was reading the other day about a scheme a water company funded using wetlands to filter water in a natural way. They do not require as much infrastructure and energy but also reduce costs. As good as all that is, it is now a new habitat for native trees, plants and wildlife.

Another company, as noted at Second Reading by the noble Earl, Lord Devon, who is not in his place, does incredible work restoring peatlands, which help to filter and hold water, as well as planting trees and building ponds. Another uses wetlands for wastewater treatment and has shown that to cost 35% less than building a conventional treatment solution; its operational costs are 40% lower too.

In giving these examples—there are others—I am not saying that it is now all perfect. It clearly is not, but they show that some are trying and, crucially, some show that it works, but much more needs to be done. My amendment does not state that nature is the only solution. It insists that it should be considered and be part of the solution, working alongside modern infrastructure, not just to tackle water quality and purification but to help tackle floods and restore nature. We can get there; we just need to give it a kick start.

Before I conclude, I want to make one general point. It has been noted that the Bill is focused on punishments for bad behaviour and past digressions. I respect the revolutionary zeal of some in this House—I really do —and often have to pull myself back from the barricades whenever I think about this issue. As right as it is to punish when things go wrong, we must also bring about regime change from the outset by ensuring, first, that the water companies come up with plans to mitigate and to improve nature and the environment; and, secondly, that the regulators give them the ability to pursue those plans. Even today, the Chancellor talked of pollution in rivers in her Budget Statement. This amendment seeks to tackle that.

As we have said, this country’s population is going only one way. We need to build more homes and put in the infrastructure, and to work with the industry and the private sector to make changes to ensure that the environment is improved. This amendment does not wreck the Bill; it works with the spirit of it. It is not about when something goes wrong but how to prevent it in the first place. With respect, we do not need to wait for the commission to report, either. I know that the Minister cares deeply about nature and we are told that the Government do, too. They have the power, so let us make it happen. I hope that the Government will support this amendment.

Baroness Boycott (CB)

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I rise briefly to support the amendment in the name of the noble Lord, Lord Gascoigne, on the use of nature-based solutions. The noble Baroness, Lady Pinnock, mentioned a river in Somerset. I am quite connected with a group which is changing the path of the River Exe as it goes into Tiverton, where it floods every year. They became a group because of a scheme Defra ran about three years ago offering money. The point about these schemes is that they absolutely depend on communities; they have to start from the ground up. My friends have had to liaise with all the farmers in the valley and have finally got them all to agree to give one or two fields so that the river can meander—and there are plenty of beavers involved. The result will be to help the school their kids go to in Tiverton, which floods every year. They have spent a lot of their own money working out what it will actually do. It will reduce the flooding in Tiverton by around 50% to 60%. At the same time, the farmers will get money from biodiversity net gain, and it will help them fill in the forms.

My plea to the Government is: wherever the money comes from—from Defra or the water companies—make sure there are channels for it to get back to the communities that make these schemes happen. They cannot just be legislated for; they have to happen from a group of people who really care.

Lord Cromwell (CB)

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I also support Amendment 37, which is, like its proposer, both modest and proportionate. It is obvious that this needs to be taken into account by the Minister. It is about nature-based solutions. If we are declaring our interests, I should say that as a schoolboy I used to work at Slimbridge, I am a farmer at home, I have had a lifelong involvement with environment schemes, and a previous Minister even referred to me rather flatteringly as an environmental warrior.

I will just sound two notes of caution. When we had a committee looking into nature-based solutions, it was very hard to get an idea of the size of the prize. They have a place in the system, as the noble Lord, Lord Gascoigne, has made very clear. However, for a large pollution or sewage outflow from a city, it is hard to envisage nature-based solutions having sufficient impact.

The other note of caution I urge is that, having tried to get a river catchment project together in the past, I learned one thing: how many of the riparian owners up that river had feuds with one another and absolutely refused to co-operate. That was capped off by the Natural England adviser telling me it was all far too complicated and asking if I was sure I wanted to do it.

There is plenty of work to do here, but I support this amendment. It is essential. It is a modest amendment that simply says that nature-based solutions should be considered, and that is completely correct.

Lord Roborough (Con)

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My Lords, I thank the noble Baroness, Lady Jones of Moulsecoomb, for moving her amendment. I am pleased she has tabled this amendment, which rightly seeks to include a greater focus on nature-based solutions within this industry. She and I share the objective of restoring nature—unusually, perhaps she thinks for a Conservative Member of this House—and biodiversity. Having seen that she also supports my noble friend Lord Gascoigne’s amendment, I hope we can share some of the means of achieving that objective.

I first remind the Committee of my interests set out in the register as a farmer and land manager, as well as an investor in various natural capital businesses and developer of carbon-enabled forestry and restoring peatlands. I should have also declared in the previous group that I share my lands with a beaver.

I agree with the principle of Amendment 37. However, I fear that, in its current form, it is too loose an obligation that is being created, and it would be too easy for water companies to pay lip service to.

Amendment 55 in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, and Amendment 74 in the name of the noble Earl, Lord Russell, both seek to put water companies under additional obligations towards national parks and chalk streams. I do not believe that it benefits this Bill or industry to prioritise these more glamorous and beautiful natural environments over less high-profile environments that may be in much worse condition. Of course pollution incidents in Lake Windermere or the River Misbourne are heartbreaking, but are they worse than what is routinely happening elsewhere in this country’s lakes, rivers and beaches?

I also believe that special administration as a punishment for non-compliance in national parks is a very extreme measure and may have more to do with the Liberal Democrat position of wanting all companies under government control rather than being a fair penalty.

Baroness Hayman of Ullock (Lab)

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My Lords, I thank noble Lords for their amendments and for a very interesting discussion. Clearly, it is very passionately felt as well. I thank the noble Baroness, Lady Jones, for introducing her Amendment 37. I would also like to discuss Amendment 104 tabled by the noble Lord Gascoigne, because they are both about nature-based solutions.

As I mentioned on the previous group, the Government agree that nature-based solutions are an important tool for tackling the root causes of sewage pollution and addressing flood risk, while delivering wide ecological benefits. In line with this, I am pleased that Ofwat has proposed an allowance of over £2 billion for investments in nature-based solutions in PR24. I was pleased that the amendment from the noble Lord, Lord Gascoigne, refers to catchments, because catchment and nature-based solutions are part of that £2 billion investment, and £1.6 billion is looking to reduce storm overflow spills through those solutions.

Ofwat has made it clear in its guidance for PR24 that it expects water companies to adopt more nature-based solutions. The noble Baroness, Lady Jones, mentioned reed beds, and it is important to say that the further funding includes money for reed beds and wetlands for nutrient removal. The Government are also supporting water companies with trialling different nature-based solutions. As I mentioned, this is obviously subject to the final determinations in December, but we hope to move forward in these areas.

At the same time, we need to recognise that nature-based solutions may not always be the most appropriate or effective means of improving water quality or flood risk. We need to ensure that water companies and Ofwat have sufficient flexibility to develop the right solution to deliver the best outcomes for customers and the environment. In a similar vein, although nature-based solutions may feature in pollution incident reduction plans, it is important to recognise that these may not be the most effective or available response to pollution incidents in every circumstance.

Having said that, we will not support the amendments, but I reassure the noble Baroness and the noble Lord that we take this seriously. I am happy to have further discussions on this particular amendment, if that is helpful.

I turn to Amendment 55, tabled by the noble Baroness, Lady Bakewell of Hardington-Mandeville. It is important to draw our attention to the impact of sewage pollution in our national parks. The Government agree that our national parks—Lake Windermere in the Lake District and the Broads have had particular attention regarding this matter—are a vital part of our environmental heritage, and everyone agrees that they must be protected better. For this reason, the Government will seek to use the powers in the Levelling-up and Regeneration Act to ensure that relevant authorities, including water companies, deliver better outcomes in protected landscapes.

I reassure noble Lords that existing plans are in place to protect high-priority sites from sewage pollution, including the Storm Overflows Discharge Reduction Plan. As part of that reduction plan, we expect water companies to tackle overflows discharging to high-priority sites by 2035. These sites include designated bathing waters, SSSIs, special areas of conservation and chalk streams. However, completely eradicating sewage discharges is not possible without a costly redesign of the whole sewerage system.

Similar issues may arise in relation to the proposed requirement for all water bodies in national parks to achieve “high” ecological status. Under the Water Environment (Water Framework Directive) (England and Wales) Regulations, most surface water bodies have an objective to reach “good” ecological status, except where it is technically infeasible or disproportionately costly. I stress that “good” ecological status is a very high standard to achieve, and represents a thriving aquatic environment with only minor disturbance from natural conditions. In this way, it supports a diverse group of aquatic invertebrates, fish, mammals and birds.

“High” ecological status equates to water almost entirely undisturbed from its natural conditions, with almost no impact from human activity. Requiring this very high status would have wide-ranging impacts on any future planning developments and human interaction with national parks—that would include farming and fishing. The requirement would place achieving this demanding objective on only water companies, regardless of the pressures and sectors that are actually impacting on water bodies within the protected landscapes. It would also not allow for the consideration of costs, which would ultimately be borne by water bill payers, and any technical feasibility around this.

It is clearly important to reduce phosphorus levels— I have seen the damage that phosphorus can cause in the lakes near where I live. A reduction of phosphorus levels by 90% by 2028 goes significantly beyond the Environment Act target to reduce phosphorus loading by 80% by 2038—that is assuming that the baseline is at 2020 levels. This would require an extremely expensive and immediate increase to the number of phosphorus improvement schemes planned in the price review of 2024. We are concerned that that is a big jump, with a big extra investment that would immediately be passed on to bill payers. We do not want to risk the delivery of any wider environmental improvements through the price review of 2024.

Amendment 74 was tabled by the noble Earl, Lord Russell. I confirm that the Government are absolutely committed to the protection and restoration of our cherished chalk streams. We recognise that these unique water bodies are not just vital ecosystems but a symbol of our national heritage: we in this country have by far the majority of chalk streams. This requirement would have significant implications for existing legal frameworks’ operational delivery, and would not necessarily result in environmental improvement for chalk streams. As discussed in relation to Amendment 55, requiring “high” ecological status would have the wide-ranging impacts that I mentioned.

The levelling-up Act brought in some protections for chalk streams. The independent water commission on the water sector regulatory system, already announced by the Secretary of State, is the appropriate vehicle for considering broader reforms, including to the current water system and overarching targets for the water sector. In the previous group we talked about better use of water and grey water. If we move forward with that through our review, that will reduce abstraction, which will help to support chalk streams better.

I hope the noble Earl therefore understands why the Government will not accept his amendment. However, he requested a meeting to discuss Blue Flag status as a possible way forward, and I am more than happy to offer him one.

Amendment 90 was tabled by the noble Baroness, Lady Browning. I am grateful to her for this amendment. We are clear that water companies must improve on their delivery of water resources management plans. The independent commission will help to transform how our water system works and will inform further legislation. It would be more appropriate at the moment to consider how we make improvements to the water resources management planning process as part of the independent commission. I note that there are already requirements for the review process in Section 37A of the Water Industry Act 1991. Water companies must also report to the Secretary of State on their reviews annually. Defra works closely with the EA and Ofwat to review water companies’ delivery of their plans, and the EA recently published a summary of assessments of water company delivery and the actions that they must take to deliver their plans.

We are concerned that, in practice, a duty on water companies to deliver all measures simply would not work. Many measures, such as new reservoirs, need further permissions, for example, before they can proceed, and a water company cannot guarantee that it will get those permissions. That is why we will not support that particular amendment. I thank noble Lords again for this interesting and helpful debate.

Baroness Jones of Moulsecoomb (GP)

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I thank the Minister for her reply. I do not think anyone in the Committee doubts her sincerity or her concern for nature—that is a given. I am afraid it is the Government I do not trust. I did not trust the last Government and I do not trust this one either—it must be something in my nature.

I supported two other amendments: Amendment 74 in the names of the noble Earl, Lord Russell, and the noble Baroness, Lady Browning, and Amendment 104 in the names of the noble Lords, Lord Gascoigne and Lord Roborough. Chalk streams, for example, are incredibly important; they are so rare. We have the most in the world and we trash them. The amendment of the noble Lord, Lord Gascoigne, goes much further than my modest amendment. The noble Lord, Lord Cromwell, has never called anything I have ever done modest, so I look forward to his signing this same amendment on Report to show that he is sincere.

The noble Baroness, Lady Boycott, talked about local engagement. Just this week, I hosted a group of 30 or 40 people from the Bengali community who are working on recovering mangrove forests in Sundarbans. They do it because they care about the local; they are losing culture, opportunities and so on. I really see that local activity is incredibly important, but the Government have to make that easy. This is the thing about the nature recovery schemes. They are obviously not the only way; they can be extremely effective, and sometimes quite cheap as well. It definitely engages the local community. I was up at Lake Windermere recently, and the local support there for cleaning up the lake was quite astonishingly broad.

Earl Russell (LD)

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My Lords, this group of amendments is about rules and requirements for monitoring and the publication of data. I apologise that this is a big group, as well as being the last group that we have to debate before our dinner hour; there are 15 separate amendments here.

Data, what we know, how we know it, how we use that information and how it is shared are all of crucial importance in monitoring what water companies are doing and also for protecting our environment. Knowledge is power, and I am reminded of the words of Ronald Reagan: “Trust, but verify”.

Amendment 43 in my name would quite simply require water companies to publish the volume and concentration of discharges from their emergency outflows. One area of the Government’s Bill that I personally particularly welcome is the plans to improve the real-time monitoring and sharing of data on emergency sewage overflows, introduced as new Section 141F. These measures are very much welcomed on these Benches. Can I clarify with the Minister that it is the Government’s intention to apply the monitoring regime as set out in the Bill to 100% of the outflows?

My amendment here is not a criticism of what is in place; instead, it is an attempt to see if there is scope to build on and slightly improve it, if possible, and explore with the Minister what some of the practical obstacles might be in place, if there are any at all. The measures set out in the Bill do not require transparency in terms of volume and type of discharge. I am fully aware, having done some work in other areas of monitoring and verification, that what I am asking for may well have far-reaching and possibly expensive implications. I am aware that this may involve different types of sensors being used and different information being captured, stored, and interpreted before going on to be shared. I would be interested to hear the Government’s position on these proposals, and what challenges such changes might present for them. Moving to a more robust and complete monitoring set of data is an essential journey that the Government need to take over time.

Amendment 47 in my name would require water companies to publish data on one website to increase transparency and ease of access for the public. This amend seeks to do what it says on the tin. It is relatively straightforward, so I will not speak to it for too long, but it is a quick and affordable improvement, which I hope will win government support. It is designed to strengthen and better enable the intentions of the Government to improve monitoring and the public’s access to the monitoring data. This is important not just to hold water companies to account and protect our environment but to help protect public health as best that we can. Where there are sewage spills, for whatever reason, it is very important that we all work to ensure the quick and smooth access to this information so that the public are aware of potential health risks and can take appropriate measures.

With many multiple water companies and water and sewage companies, and with all their websites having multiple pages and different tabs and set-ups, it would be easy for this information to all be published in full compliance with the Bill yet still leave it virtually impossible for the public to find it quickly and easily. That would defeat the spirit of the legislation, as I interpret it. My hope is that this amendment would have small associated costs but would bring strong associated benefits in transparency and accountability for what is actually happening but also as a means of deterrence. Water companies, I am sure, will think twice about their investment plans and clean-up operations when things go wrong, if they are aware that the public can monitor them easily in real time. It may be that this information is best hosted on either Defra’s or the Environment Agency’s website, and the wording of my amendment does not intend to rule that out as a possibility. I look forward to the response of the Minister to this practical suggestion.

Finally in this group, I come to Amendment 94 in my name. This amendment would require the Secretary of State to take steps to facilitate citizen science with regard to monitoring water companies. It is fair to say that none of us might be sitting or standing here debating the measures in this Bill were it not for the tireless work of concerned citizens and their passionate dedication and care for their local environment. In recent years, we have seen enforcement budgets for the Environment Agency cut almost in half, combined with a light-touch regulation regime, which has allowed water companies to self-monitor, as well as many no-flow incidents and other pressures. Much of the information, knowledge and drive to prevent sewage discharges and much of the information about what is happening out there in the real world has come as a direct result of citizen science and citizens who care about their local environment. It is really important that we as Lords pay tribute to their work as a thank you to them, because the rise of this issue up the national debate and the national consciousness is partly a direct result of the work that they have taken up. That is work where they have taken on roles that really should have been filled by the Government and regulatory agencies. For whatever reason, they did not have the capacity to do that. They are too many of these organisations to mention them all, but I acknowledge the Rivers Trust and its Big River Watch, which has worked for many years to build up a detailed knowledge of local environments, as well as the work of Thames21. I hope that other noble Lords will join me in offering them thanks.

With only 14% of our rivers in good ecological health and with budget pressures, improving citizen science is a win-win for everybody. It acts as another means of assessing the information that Ministers get from their regulators; it acts as a check on that and acts as a deterrent on what water companies are doing. They do not have as much of a relationship with the citizens doing this as they might do with the regulators, so it is a little bit left field in their context; they do not know what is being monitored where and when. It is an important deterrent and a check on the system—a check that it is working as intended. I encourage the Government to make better use of that resource and provide encouragement, support and training. It is also important that, by doing that, the Government help to make sure that the information being provided through these means is more reliable and using agreed baselines and methods, which in itself provides another important sense of information in all these debates.

There are lots of other really good amendments in this group, too many for me to go through them, but I beg to move.

Lord Cromwell (CB)

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My Lords, I will speak to three practical amendments in my name in this group: Amendments 44, 46 and 49. They are modest and proportionate—perhaps that is my catchphrase. I support and echo almost everything, I think, that the noble Earl, Lord Russell, said a few moments ago, especially about citizen science.

Public accountability and transparency need data that is both sufficient and timely. As currently drafted, I do not think that this Bill does that sufficiently. My Amendments 44 and 46 together would solve this. Amendment 44 provides for relevant information to be made publicly available and Amendment 46 recognises that this is not something that can always be provided immediately—I am trying to anticipate the Minister’s reply here. Amendment 46 would allow the water companies to indicate when the information would be available, rather than requiring them to produce it immediately. By including these questions in the Bill while allowing a reasonable approach to how soon it can be provided, the amendments would fill the information and accountability gap that is in the Bill currently.

To turn to Amendment 49, experience shows that allowing companies—we had this exact issue during the passage of the Modern Slavery Bill, by the way—to report things exclusively on their own websites results in difficulties such as differences in the information that is included, where it is shown, how easily it can be found and how fully it is reported. That makes it unnecessarily difficult for those seeking to monitor performance on a comparative or aggregated basis. As represented in my amendment, putting this into one place where it is accessible to everybody is not a large amount of work. It is simply a matter of the water company putting it on its own website and firing off a link to the authority, which can put it on its website. That is how it should be, and it would enable comparative measures of performance, which will be lacking if water companies bury this on their own websites and report it in different ways.

Baroness Young of Old Scone (Lab)

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My Lords, this is a large group of amendments and I am going to go on a bit; I apologise for that. I will speak first of all to my Amendment 45, which is a probing amendment. I should say, for the avoidance of doubt, that I declare no beavers. The Bill requires sewerage undertakers to publish a range of information when there is a discharge from an emergency overflow. My Amendment 45 would add a requirement that such monitoring and reporting should include whether what are known as “emerging contaminants” are present, including but not limited to per-fluoroalkyl and poly-fluoroalkyl substances—PFAS—and microplastics.

Let me explain why this is important. The noble Earl, Lord Russell, expressed worries about these sorts of chemicals in discharges in national parks, but it not just national parks; these discharges are happening everywhere. PFAS are serious pollutants and occur in entirely innocent-looking products and processes. They accumulate in our rivers and seas, they are persistent and cannot be extracted, and they harm both human and animal health. These PFAS are used in over 200 applications, and I felt pretty guilty when I was briefed on these applications by the Marine Stewardship Council, as I—and probably other noble Lords—use these harmful applications, day in, day out. PFAS are used in anything with Teflon, for example, including non-stick pots, in waterproof clothing, in stain-resisting products, in cosmetics, in firefighting foams, and even in Apple watchstraps. My daily slow-release pills that keep me alive in the face of ulcerative colitis send PFAS into the water environment straight from my gut. So I and all noble Lords are responsible for all of this.

PFAS are tricky to manage: they reach the water environment as particulates through storm or emergency overflows from sewage treatment works, but also from sewage sludge spread on the land or from being sprayed directly into the environment, as with firefighting foams. Once in our waters, they cause damage to wildlife and human health. Although some PFAS can be removed at sewage treatment works, the only secure way to deal with them is to ban those PFAS for which there is a viable alternative—there are a number of viable alternatives for many PFAS—and then seek to develop alternatives for those for which there are not yet alternatives.

Baroness McIntosh of Pickering (Con)

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My Lords, I have two amendments in this group. The first opposes Clause 3 standing part of the Bill, and the second is Amendment 75. I am grateful to the Minister and the Bill team for the meeting we had. The earlier amendment in the name of the noble Duke, the Duke of Wellington, and those in my name and others, possibly reflected the fact that the meaning of “emergency overflow” in Clause 3 is not quite as clear as it should be. This is simply an attempt to ask the Minister and, through her, the department, whether they are entirely convinced that the Bill is as clear as it might be in this regard.

I shall focus my remarks on Amendment 75. I am grateful that it has been included in this group, where it is most relevant. Doing so saves a separate debate on it at a later stage, where I felt it did not fit in. Subsection (2)(d), under the heading “meaning of ‘emergency overflow’”, concerns

“blockage of a sewer downstream of sewerage disposal works.”

That brought to mind the typical problem we encounter: fatbergs associated with restaurants and intense food production, which is very regrettable indeed. Are the Minister and the department minded to foresee an exemption from the provision for an emergency overflow and the conditions flowing therefrom? For example, such an issue is not within the power and authority of a sewerage undertaker or water company, which cannot be held responsible for fatbergs from cooking fat, wet wipes, et cetera. I welcome the fact that we have now banned wet wipes. That is a great development, but I do not know what the solution is to fatbergs entering downstream, causing these blockages and potentially leading to an emergency overflow. Does the Minister agree that it is very difficult to link that to the responsibility of a sewerage undertaker or water company, given that it really is not within their power to prevent it?

Lord Cameron of Dillington (CB)

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My Lords, my Amendment 59 follows on very neatly from those put forward by the noble Baroness, Lady Young. It too is very much a probing amendment and is largely designed to expose an issue or problem, and to alert the proposed industry review to possible solutions. It arises from a worry that I have had for many years: that we do not really know what is going on in our rivers. A decade or so ago, I remember hearing about a farmer who reportedly said that the chance of his small river being inspected by the Environment Agency was roughly one in 200 years, and thus he was not worried about what he or others might be doing to that river. This may have been an exaggeration, but the point he was making has a ring of truth to it even now, some 10 years later.

Then, the problem was that the Environment Agency had been starved of funds and, in many respects, chained to its desk. The number of staff deployed on the actual rivers had dropped away to the point of insignificance. However, the agency has always monitored our rivers, and certainly does nowadays. Specifically, it monitors downstream of major sewage works and CSOs, but it does so on a random basis. I should say at this point that it is a very skilled job taking a water sample and ensuring that it is a true sample and not contaminated either by the sampler—disturbing the river bed, for instance—or by some very localised issue in or near that point of the river.

Let us say that, in your sampling programme, you aim to take a sample once a month where it matters. That does not sound very much, but if noble Lords think about the hundreds of rivers in England and the literally thousands of sewage works and other licensed discharge points, even that would be a mammoth task for a whole regiment of inspectors. As a result, there is probably only a one in 100 chance of any sample being taken in any river which would coincide with the sort of event we need to know about.

The science of river quality shows—I am sure we all know this—that rivers are constantly changing. We all know the Chinese proverb: you can step into the same river only once. When we get a wet weather downpour, not only do we get overflows from sewers and CSOs, which can be very damaging to the aquatic environment; we also get discharges from urban run-off, often containing severe chemical pollution, including the possibility of persistent chemicals, mentioned by the noble Baroness, Lady Young, in her amendment. Of course, during this same wet weather incident we also get agricultural run-off and pollution, which I know, as a farmer, is as damaging as anything else to our biodiversity, particularly when it involves excess phosphate or silage effluent.

On the subject of biodiversity, I should say at this point that the UK Centre for Ecology and Hydrology— I declare an interest, as I am about to retire as its chair—reckons that since 1970 there has been an 83% decline in our freshwater populations, which is a pretty devastating figure.

As I say, the chances are in excess of one in 100 of any random river sample being taken immediately after one of these wet weather incidents, especially when it happens to be a night-time storm or incident, so we never really know the true condition of any of our rivers; nor can we calculate the short-term or long- term ecological consequences of all those wet weather discharges—except that there has been an 83% decline in our freshwater populations. But there is a solution: continuous monitoring using telemetry. Install a monitor in a river and it can record the state of that river every hour, or even every half hour. Before noble Lords think that hundreds of monitors reporting every half hour would provide an excessive amount of information that would overwhelm the watchers, I should say that these machines can be preset to produce an alarm only when a particular parameter is broken. In other words, you are woken up in the middle of the night only when, for example, there is a shortage of oxygen in the river or an excess of E. coli.

The real point is that we can find out more about the long-term state of our rivers from continuous monitoring in, say, two weeks than we would probably find out in many years of random sampling. But—and this is a big “but”, which is why this is very much a probing amendment—although this technology is developing fast, I am afraid it is still very expensive. The price goes up according to the number of pollutants being monitored. Each pollutant needs a different way of measuring, and each sensor, for each pollutant, can cost an average of about £10,000. If you want a machine that monitors and reports on just five key pollutants, it would currently cost about £50,000, while a machine that monitors almost everything would cost around £100,000.

That is an awful lot of money, especially if you think about our desperate need for hundreds of these machines. There is no doubt that, if we were to develop and order hundreds of them, the price would fall dramatically. I put the amendment out there largely for the new independent water review commission to consider. Bearing in mind

“The water sector needs a complete reset”,—[Official Report, Commons, 23/10/24; col. 279.]


it has to ask itself what price we put on the cleanliness of our rivers and our ability to truly monitor them.