Water Industry (Special Administration) Regulations 2024

Baroness Bakewell of Hardington Mandeville Excerpts

Monday 19th February 2024 Grand Committee

With those few remarks, I support the instruments before us this afternoon.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I thank the Minister for his introduction to these two SIs, which make provision for the continuation of water supply to households should a water company be teetering on the verge of insolvency. I welcome this move to protect householders and businesses if that happens.

A special administration regime—SAR—allows the Government to prepare for all eventualities to ensure uninterrupted provision of this vital public sector service. Each service SAR is unique. Those governing the water industry—the WISAR—are distinct and come into play when a water industry company becomes insolvent. This is obviously a serious matter. I ask the Minister: how many of the country’s water companies are on the verge of bankruptcy? Is it a couple or is the prediction in double figures? Is the number of water companies struggling confined to England or are there similar threats of insolvency in Wales, Scotland, and Northern Ireland?

Paragraph 7.5 of the Explanatory Memorandum indicates that the High Court will appoint a person to manage the affected water company and that this will be on the recommendation of Ofwat or a Defra Minister. I would like an assurance from the Minister that this person will not be someone who has previously been involved in the running of the water company under consideration, nor someone who has been involved in the running of another insolvent water company. This must be someone who is completely independent in every sense of the word.

Apparently, the Flood and Water Management Act 2010 (Commencement No. 10) Order 2024 covers the arrangements for hive down provisions, which the Minister referred to. The Explanatory Memorandum states:

“This will allow otherwise viable water industry companies to enter a special administration, restructure its debts and then exit the SAR as a going concern”.


Not being a legal expert, I searched for the meaning of a hive down. I found this:

“A hive down is the transfer of all or part of the assets or business of a company to a subsidiary—usually a new subsidiary”.


Paragraph 7.6 of the Explanatory Memorandum indicates that this would allow the new subsidiary

“to benefit from potential tax savings”.

The process allows new owners to acquire a “clean” water industry company that has no existing liabilities. This is exactly what the current water companies inherited at the point of acquisition in the 1980s.

I sometimes despair at the way in which we as a country conduct ourselves. It seems to me that a water company facing insolvency would welcome the chance to create a subsidiary company, get rid of its debts—or restructure them, as the Explanatory Memorandum euphemistically calls it—and start again, delivering the same lack of investment and poor repair service. Unless I have missed it, there is nothing in the Explanatory Memorandum that prevents previous CEOs or directors carrying on their inefficient ways from the insolvent water company into the new subsidiary. Can the Minister comment on the likelihood of this happening under the proposals for a hive down?

I understand that the SAR rescue purpose applies only where the special administration was based on economic insolvency grounds, not performance grounds, but I am not sure that that is what the Minister said. Can he give more information on poor performance and not meeting the government-set vital environmental targets and say whether this is also a consideration? Will violation of environmental law constitute a failure to fulfil statutory duty, under the terms of Chapter II of the Water Industry Act? Do the Government commit to applying for a special administration order where a company shows consistent and flagrant breaches of its environmental duties?

Paragraph 7.12 gives a lot of detail about the process with a list of modification orders. These modifications indicate that only the Secretary of State or a Welsh Minister can make an application for a water industry company to go into administration. It further states that the interests of the customer should always be considered. I would have assumed it would be a given that the customer would always be the first to be considered.

There is also a section in the EM, at Paragraph 7.18, indicating that the appointed special administrator’s conduct may be challenged by the relevant Minister or Ofwat. Can the Minister give an example of what kind of conduct might qualify for a challenge by the Minister or Ofwat?

There is reference in paragraph 7.21 of the EM to paragraph 91 and the power of the sponsors to apply to the court for the replacement of the special administrator. Since it is necessary to put this information in the EM, this would indicate that it is not a one-off occurrence and is something that has happened in the past. Would the Minister care to comment?

The changes that the Government are proposing will also enhance the ability of special administrators to dispose of fixed-charge property without the consent of the charge holder. In this case, the fixed-charge holder receives only “appropriate value” rather than the standard test of “market value”. Can the Minister say whether this will lead to an increase in valuation disputes in challenges to the administration of sales of water company fixed-charge assets?

There has, as usual, been no guidance to accompany this instrument and no impact assessment. The reason given for no impact assessment is that the impact is alleged to be minimal, with the net present value of the SI over a 10-year evaluation period likely to be less than £55,000. Is this £55,000 a one-off or annually? If the latter, that is more than half a million pounds. Can the Minister say whether this figure includes the bankruptcy costs? If the debt is to be restructured so that the new water company can continue debt free, there will surely be some impact on the creditors of the water company at the point of insolvency. Can the Minister comment?

I understand that if a water company is about to be insolvent, something has to be done to allow water and sewage services to be provided on a continual basis to domestic householders and businesses, some of whom use vast quantities of water every day. However, I remain concerned about this process. It seems to me that those who had been running the previous, now insolvent, water company can simply transfer to running the wholly-owned subsidiary which will be set up under the WISAR. I also remain concerned that the SI makes no reference to the sewage crisis. The noble Baroness, Lady McIntosh, referred to that. Can the Minister confirm that the special administrator will be able to discharge environmental duties as well as financial duties?

I realise that I have asked a number of questions, but I hope that the Minister will be able to answer them. The Liberal Democrat policy is to reform water companies into public benefit companies. While this may not solve all the problems of the ailing water industry, it would certainly bring a great deal more transparency to the issues. I am looking forward to the Minister giving considerable reassurance on this extraordinarily complex matter.

[Baroness Hayman of Ullock (Lab)]

My Lords, I start by thanking the Minister for his thorough introduction to these two SIs. As he said, the first one updates the special administration regime for water industry companies, looking at general insolvency issues. We welcome that; it needs to be looked at and sorted out.

The second SI is pretty technical. It allows part or all of a water company’s undertaking to be transferred to a wholly owned subsidiary, as we have heard, and for securities to be passed over to another water company. The noble Baroness, Lady Bakewell of Hardington Mandeville, talked about this to some extent, so I will not go into detail, but I stress the importance of minimising costs to the taxpayer if and when the companies need extra support, even if that is temporary.

We support these regulations because they give more security to people’s water provision. Clearly, it is essential that customers have a continuous provision of water services, irrespective of how the water company is performing. Water is needed for life, so this is important. However, I am sure that the Minister is extremely aware that further challenges face the water sector at present. Some pretty fundamental issues need to be tackled that clearly go beyond the SIs in front of us.

The fact that these legislative changes are necessary reflects the serious situation in which many water companies are not just failing to protect the environment but struggling financially. The noble Baroness, Lady Bakewell of Hardington Mandeville, asked about the number of water companies that are facing such problems. Of course, Thames Water is the one that has been in the media recently and there have been serious concerns about its solvency, but I also understand that Thames Water, Southern Water and South East Water have been using up to 25% of customer bills to service the huge debts that they have built up. Clearly, the customer should not be picking them up.

The noble Baroness, Lady McIntosh of Pickering, talked about the impact on consumers, picking up on paragraph 7.6 of the Explanatory Memorandum. I underlined the bit that she referred to specifically to ask the same questions that she did, so I would be grateful for a clear answer about that and the impact on consumers in this area, for example.

It is important that we have a radical rethink of how the water sector, regulators and Government all work together to ensure stability. I am sure the Minister would agree with me on this, but it would be good to get confirmation that the Government are looking more broadly at stability issues for water companies.

We know that the special administration order is intended to ensure that water services are not interrupted when a water company becomes unviable. The noble Baroness, Lady Bakewell of Hardington Mandeville, talked about environmental duties and impacts which could be interrupted when a company becomes insolvent. I am particularly concerned about that. When this was discussed in the other place, the Minister was asked whether

“the new regulations … guarantee that any special administrator will continue to discharge a company’s environmental obligations, including investment commitments under the water industry national environment programme, catchment plans and infrastructure upgrades”.

I remind the noble Lord of the Minister’s response during that debate. He said:

“Every water company is specifically regulated by the Environment Agency, as well as Ofwat. The Environment Agency will have powers if water companies are owned and operating under the regime they operate under now, or should they enter special administration”.—[Official Report, Commons, Fourth Delegated Legislation Committee, 6/2/24; cols. 5-9.]


I am not sure whether that answers the question, particularly asked by the noble Baroness, Lady Bakewell, about what those environmental obligations and duties would be if it is interrupted. You may potentially have a gap; how can we ensure that it is managed smoothly if it has been transferred across and who, outside the Environment Agency, is responsible for that? Someone has to report that to the Environment Agency and it has to go through that due process, but where does that environmental obligation sit during an insolvency, potentially with a move to a subsidiary? It may well be that the Environment Agency takes it away and manages that separately, but these things are normally done with Ofwat and all the water companies together. I just want clarity around that. In talking about clarity, I hope that I have made myself clear.