Economic Growth (Regulatory Functions) (Amendment) Order 2024

Monday 15th April 2024 Lords Chamber

Motion to Approve (Continued)

19:02

[Lord Fox (LD)]

My Lords, the Minister is the latest government Minister to wade into the sewage debate, but having previously tried to crack a joke about wading into sewage, I will not do it again.

Having had that interlude, we have had a chance to reflect on some of the comments that the Minister made. Some of the tricks of good government are timing and self-awareness. Those two things are absent from the extremely maladroit introduction of this order. At the centre of it is the conflation of Ofgem, Ofcom and Ofwat. As we heard from the noble Duke, the Duke of Wellington, these are very different markets. The communications market and the energy market are distinctly different from the privatised regional monopoly system which is the water industry. Because of that, the role of the regulator is substantially different. The idea, for example, of causing competition in the water market is irrelevant—there is no competition in the water market. This puts into focus the problem that is central to this order: it is inappropriate in the markets that it is seeking to address. That is at the heart of what your Lordships have said today.

We look forward to the Minister’s White Paper on competition. When the Truss Administration had their brief flurry, a whole bunch of stuff was said about growth and the “anti-growth coalition”. I am sure the Minister is smarter than the people who were using that language then. The role of growth in amongst the role of regulation is an important issue; the Minister is right to have broached it. On its seeking to influence the water market at this time—coming back to timing—this is not the moment to seek to rein back on regulation. This is the moment when we need to target regulation in the places where it is quite clearly breaking down.

The Minister sought to calm us about the effect of growth on environmental enforcement. Again, the noble Duke gave the lie to that issue by very clearly pointing out what I was going to point out in this document: that the two are very much conflated.

I will suggest a hypothetical issue: I am a regulator. I am about to implement an environmental order. This will undoubtedly affect the growth prospects of some companies in the region. Am I now inhibited by this order? The answer is: it seems so. Moreover, can the companies that receive the downside of this environmental order take it to judicial review? I believe they can. The Minister can confirm that or otherwise. So, at the very least, the environmental order is delayed.

We do not have a problem with the water industry restricting growth; we have the opposite. I cite my home river, the River Wye, as evidence of that. The unrestrained growth of the poultry industry has killed part of that river—not polluted it or made it a little bit dirty but killed it biologically. That is the effect of unrestrained growth. We need the opposite of what the Minister is talking about.

With these thoughts, I am very pleased that my noble friend has brought this amendment, and I am pleased to hear the contributions of your Lordships today. I hope the Minister will stand up and say, “We will set this aside”. If he does not say that, I hope he will say that these rules will be rewritten to make sure that the number one priority for the water industry is to solve the environmental crisis that is currently in our midst.

[Lord Leong (Lab)]

My Lords, I thank the Minister for introducing the regulation and all noble Lords who have spoken. Every day, we hear of sewage dumping. On average, a sewage dumping event now takes place every two and a half minutes. The lack of investment in our water systems over the past 14 years is a scandal that is increasingly hard to ignore. Billions have been extracted in shareholder dividends and millions in bosses’ bonuses, all while delivering a deteriorating system.

During the passage of the Environment Act, Conservative MPs had the opportunity to support a Labour-backed amendment that would have brought an end to sewage dumping. Of course, they did not do so. We should be extracting sewage from water supplies, not extracting value in unjustified dividends and overleveraged debt. Let us imagine the economic growth, the skilled jobs and supply chains that could have been created if, instead, this money had been funnelled into developing creaking infrastructure, repairing and upgrading pipelines, and preparing for the predicted increase in demand and increasing rainfall.

The Labour Party has long been making the case for the increasingly urgent need to invest for the long term and to improve quality in the short and medium term. So on this issue we agree with the Government that bringing these three regulators within scope of the growth duty will help to ensure they consider how best to promote growth in their sectors.

However, making the changes required by this instrument will obviously require dedicated resources within Ofcom, Ofwat and Ofgem. As the amendment to the Motion makes clear, these regulators already have a lot on their plates, so can the Minister indicate how they are expected to juggle this as well? Are the Government confident that the regulators have the capacity to deliver to the full extent that the order demands?

Like the regulators, we want to support businesses and stimulate the vital investment needed to ensure a quality service to current and future consumers. For example, Labour’s plan to establish “GB Energy” would create half a million new skilled jobs in the industries of the future, rebuild the strength of our industrial heartlands and reduce energy costs and carbon pollution. Labour is already thinking ambitiously about the long-term future of this country.

Given that the Government’s order is about long-term growth, could the Minister explain over what timeline they expect to see the benefits of the change, and over what timeline they will be reviewing its impact?

As far as Ofcom is concerned, the growth duty will also not apply to its regulatory functions under Part 3 of the Enterprise Act 2002, which concern mergers. In particular, it will ensure that Ofcom is not required to consider other factors when providing advice to the Secretary of State on the public interest considerations on media merger cases. Can the Minister explain the reasoning for that very specific exception?

In this regulator’s sector in particular, many noble Lords will know that I am passionately interested in the enormous potential for growth in our telecoms industry, especially in AI, but the world will not wait for us. We risk missing out on exploiting the potential commercial benefits from our world-leading research base if we do not have a clear industrial strategy, if we do not encourage and invest in tech start-ups and scale-ups, and if we do not develop a serious regulatory presence alongside the USA and the EU as global standards are being established.

To conclude, we support bringing the three regulators within the scope of the growth duty, but we regret—who could not?—the failure of the Government to prioritise the sanctioning of polluters and the cleanliness of waterways. Just last month, rowers in the world-famous boat race, some of the fittest people in the nation, fell sick because of their exposure to the water in the Thames. I would be hard pushed to invent a metaphor more apt to sum up why this Government have so comprehensively failed—on regulation, on public health, for young people today and in investing in their tomorrows. Labour stands ready to deliver the decade of national renewal that this country self-evidently needs.

While we support the regulation, we acknowledge the amendment to the Motion tabled by the noble Baroness, Lady Bakewell. We must address the sanctions needed against short-term profiteering by the CEOs of utility companies enriching themselves. I look forward to the Minister’s response.

[The Minister of State, Department for Business and Trade (Lord Johnson of Lainston) (Con)]

My Lords, I am extremely grateful to all noble Lords for their participation in this debate. I particularly congratulate the noble Lord, Lord Leong, on what I thought was an excellent example of good rhetoric in terms of his parallels.

I shall cover some of the points in turn. I am happy to have further conversations with noble Lords about this important statutory instrument. I am grateful for the undertone of what I think the noble Lord, Lord Fox, was suggesting and the overtone of what the noble Lord, Lord Leong, was suggesting. Unfortunately, I did not hear a great deal of support from any other Member of the House; I am sorry to see that on my own Benches the enthusiasts of better regulation seem to have deserted me today.

Ultimately, the statutory guidance, which I will be happy to touch on in a few moments, is an important and useful document to help regulators by refreshing the statutory guidance that we already have. If noble Lords read the original document, as I suggested at the beginning of this debate, and compare it to what we have now, they will see that if you care about the economy, the environment and better outcomes then this is a far better document in terms of directing the regulators in how they perform and enact.

I also said—because this is a particular passion of mine—that this will enable us to have better regulation, not less regulation. This is about regulating in a better way for businesses, for the economy, for consumers and for this nation’s future growth. I said to my officials that I would like to avoid the topic of water and Ofwat and focus on the other 52 regulators and the opportunities this presents—but it is absolutely right, when we are looking at this broad waterfront of how we run our economy and how we regulate for our own safety, for trust in markets, for the consumer and for the environment, that we have this debate.

19:15

I would like to touch on the most important points relating to some of the issues raised around Ofwat. It is relevant to note that the Environment Agency has concluded 60 prosecutions, securing record fines of over £150 million against water companies. Ofwat is requiring 13 companies to return £193 million for underperformance over 2022-23. This money goes back to customers via their bills for 2023-24. The Environment Minister continues to meet underperforming water companies and there has been a great deal of press coverage of his statements over the last few weeks.

This is important. Since 2015, as I say, the Environment Agency has concluded 60 prosecutions, with fines of over £150 million. The regulators, a combination of the Environment Agency and Ofwat, have launched the largest ever criminal and civil investigations into water company sewage discharges at over 2,200 treatment works, following new data from increased monitoring. The Environment Agency can now use new powers to impose unlimited penalties for a wider range of offences.

This may surprise some noble Lords here, but the Environment Agency has been subject to the growth duty since 2015 and the guidelines since 2017. This is a very important point to note. This growth duty does not derogate the power of the regulator to issue fines and to manage the industry it operates in. I want to emphasise that. Again, we are very aware of the importance of stressing this point because, if the general public and the body politic feel that this will in some way result in a bonfire of regulations, a deregulatory agenda, less regulation and fewer controls, it will not have the necessary popular support I want it to have. This is about better regulation, smarter regulation and empowering regulators to take into account the growth of the economy overall, which includes, as I said at the beginning of this debate, the strength of the environment, the power of the consumer, the broadness of choice and the principles of international trade. All these other drivers are not protective, necessarily, to a single company.

I know some statements were made about whether a regulator can adjudge on a decision that might affect a company on account of a regulation that comes into force. Of course it must, and it should: that is what regulators are doing. As I say, the Environment Agency has been subject to this—as have many agencies, including Natural England and, I believe, 48 other agencies, many of which are involved in significant specific regulation and ensuring that companies within their domain are properly managed. But there has been no comment raised about their ability to perform their functions since that date. I am very comfortable about that.

I also draw noble Lords’ attention briefly again to the statutory guidance, which I think for a guidance document on regulation is a rather wonderful thing. I will point out a few key points. The first is continually mentioned throughout the document. This is at my insistence and that of my Conservative ministerial colleagues in the Department for Business and Trade—with, of course, a high degree of collaboration with officials from Defra and other departments. It is essential to point out that the first paragraph says:

“It is a regulator’s responsibility to design rules that set a level playing field between businesses and to ensure adequate protections for consumers and the environment”.

I am very grateful to the noble Lord, Lord Fox, for mentioning the White Paper, which will, I hope, come to noble Lords’ attention over the next month. I see in this whole process a quadrille of the investor—by the way, we need huge investment in the water industry; we have had billions of pounds of it, and we want more—and the businesses themselves. Businesses face issues dealing with regulation. I want to touch briefly on some of the ways we can help ameliorate that. There is also the consumer. Regulation is, in most instances, about the consumer and ensuring that they are protected, treated fairly and that vulnerable consumers are properly looked after. They should have a choice, at the right price, that allows them to live the lives that we as Governments and politicians want them to live.

Then there is the more holistic principle of the broader environment. I stress again as a businessperson—many of us in this House have been investors and businesspeople—that at no point do we believe that a derogated environment is good for business. As the Investment Minister—I think it is important that all sides of the House hear this—my investors say very clearly to me that they do not want to invest in companies that break the rules, behave badly and get fined. They do not want to invest in companies that mistreat their consumers or have bad reputations. I am dealing with some of the best investors in the world. These are public funds that have a true ethical spirit to their activity; for example, the Canadian pension funds, or the AustralianSuper. It is not in the interests of any investor to have a poor investment in terms of how that company performs in the broader environment. That quadrille has to come together.

If you go through this document, you will continually see the principle of how the growth duty does not legitimise non-compliance with other duties or objectives. On page four it says that

“its purpose is not to achieve or pursue economic growth at the expense of necessary protections”.

To have a good, functioning market, we need strong protections to create the trust that allows the market to function. On almost every page—without being guilty of hyperbole, which sometimes I can be—is a reference to the importance of a healthy population and environment, or to the consumer and the broader environment.

[Lord Bellingham (Con)]

I am grateful to the Minister for giving way, as I understand that it is not normal practice for Ministers to give way in a debate like this. I would be grateful if he would look again at the point made by the noble Lord, Lord Fox. I know a bit about the Wye Valley and the damage that has been done by the excessive number of nitrates going into the river. It was not so much that all those poultry producers were breaking the law; it was the sheer scale of those operations that was having such an impact. Could the Minister comment on that particular point?

[Lord Johnson of Lainston (Con)]

I am grateful to my noble friend for the intervention. I did not realise I did not have to give way; my newness to the House probably insisted that I did so.

What is important is that we were discussing the guidance on growth for 52 or 53 regulators. This is not a debate about the Wye Valley. I have heard what the noble Lord, Lord Fox, said about that situation. I understand that the Government have announced this week an action plan and full review. I am delighted that this is a good example of where there is cause and consequence.

I want to bring us back to the guidelines. It is important that a functioning economy allows all stakeholders to operate in it. Clearly, that is the whole principle. If there is one stakeholder that is dominating its universe through its own actions, that is unacceptable in terms of creating the trust and framework we need in the market.

I return, in conclusion, to what has been a very important debate. I hope it will continue to be an important debate. I stress again that in four years we will have a full review of the growth duty so that we can see how it has been successful. One of the questions asked was: how soon will we know whether it has been successful? I hope it will start to show economic growth, in some of the points I will come to in a moment, immediately. We will certainly do a review after four years. There will be an explicit focus on ensuring that areas such as the derogation of consumer rights, the environment, or whatever it may be, will clearly be included in this.

I will touch on two final points because it is good to have this on the record. Regulators should have regard to medium- and long-term growth—not necessarily short-term growth or the profitability of the actions of any one company—by ensuring that key policy decisions and strategic choices are informed by consideration of key drivers of economic growth. This may include, but is not limited to, innovation, infrastructure and investment, competition, skills, efficiency and productivity, trade, and environmental sustainability, which I have touched on before. That is very important because, if you are running a business, you want to produce phenomenal products for the future of our nation. All too often we have had issues with regulators and the Government being slow to regulate on the innovative products we need to make this economy successful, both for our health and the economy around that.

How many times have businesses come to noble Lords—not all of your Lordships will have been approached by businesses, but many will—to complain about the lack of transparency around the regulator’s decision-making or the timeliness of its response on permitting, or to suggest that international standards could be used or that our own standards could be improved on, or to ask for more skills in regulators or for regulators to help them be skilful? It is so important that we respond to this. I am aware of the comments made around the water industry, and I hope that, to some extent, I have reassured noble Lords that this in no way derogates our responsibilities and abilities to act.

[The Duke of Wellington (CB)]

The Minister has many times referred to the wording in the draft statutory guidance refresh, which I assume can still be amended. Therefore, I ask the Minister to comment on page 26, which I quoted earlier, where it says that

“certain enforcement actions … can be particularly damaging to the growth. These include, for example … financial sanctions; and publicity”.

Surely the Minister would agree, in view of what he said, very persuasively, that those words should be looked at again. They certainly will inhibit a regulator from enforcing financial sanctions.

[Lord Johnson of Lainston (Con)]

I am grateful to the noble Duke for those points. The relationship between the draft document and the formal document is a matter of moments before we finish the debate, so I do not think that is a possibility—but I am happy to be corrected by someone with better procedural knowledge of the House. I will deal with that in a moment, but I do not want to spend too much longer on this because I know that we want to move on.

I return to what this is about. As I say, there are 50 or so regulators covered by the statutory instrument. This is a refresh, so only three new regulators are affected, though there may be other smaller regulators that come into scope; fundamentally, it will be the main economic regulators that we have talked about. The rest of the regulators are covered by the existing statutory guidance, and the refresh improves on that. It is a very good thing, and I hope noble Lords will support us in this quest.

It is right that regulators—even the water regulator—should be pro-innovation, skilled and capable, business aware, proportionate, effective and responsive, and collaborative. I have had a number of businesses represent to me that too many regulators cross over each other and cause a great deal of confusion. They should be internationally aware, and they should be consistent, transparent and accountable. I do not see how any of us in this Chamber can suggest that these ambitions for the regulatory environment are not good. They should be reinforced. If we are to have a strong economy, we have to apply those decent, sensible, long-term economic criteria to the three main regulators.

I am happy to have further discussions as we head towards the White Paper around this. I am also happy to flag other points that noble Lords think will help in constructing a better regulatory framework to enable companies to flourish, consumers and the environment to be protected, and the overall economy of the country to see the necessary growth for the strength and wealth needed to protect our environment in the long term. I am grateful to all noble Lords for their contributions to the debate, and I commend the SI.

19:30

[Baroness Bakewell of Hardington Mandeville (LD)]

I thank the Minister for his response and all noble Lords for their contributions, especially the noble Duke, the Duke of Wellington, who has long been a champion of dealing with sewage overflow discharges and getting the water companies into a decent state. The economic growth of water companies will be achieved only when they invest in improving sewage overflows, ensuring developers separate surface water from foul wastewater, and when Ofwat is empowered to take stringent action against polluting water companies.

As I said earlier, my main purpose was to press for this order to be withdrawn—that was not successful—and then for the accompanying draft guidance to be significantly amended, especially as the noble Duke, the Duke of Wellington, has indicated. Growth in the water industry has a place, but regulators, especially Ofwat, must be able to take action against those water companies.

The Minister has mentioned the millions that have been returned to water customers as a result of fines, but this is paltry in comparison to the billions that have been paid to directors and shareholders of water companies, with no account taken of the sewage discharges into our waterways, instead of investing in improvements in infrastructure.

I and my colleagues on these Benches are naturally disappointed that the Minister is unable to agree to our reasonable request, and I feel certain that the public and others will be similarly disappointed. This is a matter about which I feel extremely strongly—so strongly that were it not for the fact that this is the first day back after the Recess, and that there are important votes tomorrow, I would have wished to divide the Chamber. However, I feel certain that we will be return to this issue before too long, perhaps when the White Paper is published. In the meantime, I beg leave to withdraw my regret amendment.

Amendment to the Motion withdrawn.

Motion agreed.