Water (Special Measures) Bill [HL]

Lord Cromwell Excerpts

Report stage
Wednesday 20th November 2024 Lords Chamber

[Lord Remnant (Con)]

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. I chaired the board’s remuneration committee for that time.

I thank the Minister for taking the time to meet me last week to discuss my concerns about key aspects of this Bill. I am only sorry that her apparent sympathy for at least some of my arguments has not translated into accepting any of my amendments. I have three amendments in this first group. I will be as brief as I can, but each addresses a completely separate issue.

I will take them in order. My first is Amendment 4. New Section 35B(2)(a) addresses performance-related pay. The rules will set standards that companies will have to meet in a financial year in order to be able to make awards of performance-related pay to chief executives and directors for that year. However, the Bill extends the scope of this section, in new subsection (5)(c), to holders of such other description of role with the water company as Ofwat may specify.

My Amendment 4 would remove this extended application to individuals below board level. This extension will 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 general remuneration under the corporate governance rules for listed companies, which do not extend to individuals below board level. 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.

As the noble Duke, the Duke of Wellington, has just said, those in this House are better qualified than Ofwat in certain aspects, and this is one of them: to decide on how far down the management chain these rules should apply. My amendment draws the appropriate and proportionate line in balancing the objectives of the Bill with the interests of those most directly impacted by it.

I appreciate that Ofwat is consulting on the scope of the Bill and its application to individuals. It asserts that it is minded to apply the rule to any executive director who is a member of the regulated company board in receipt of performance-related pay, because that is where ultimate accountability and leadership responsibilities lie. I look forward to the Minister’s response to my concerns in tabling this amendment. In particular, I would be interested to know whether she agrees with Ofwat’s current stance that only executive directors should be brought within the scope of the performance-related pay prohibition, and, if so, whether she will communicate that view to Ofwat.

Amendment 7 is my second amendment and very much relates to what the noble Duke, the Duke of Wellington, has just been talking about: the duty for water companies to have arrangements in place to involve consumers in decisions. New subsection (6) in Clause 1 allows this in regard for

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

as we have heard. My amendment adds a sentence which ensures that it is for the boards of water companies, not Ofwat—for very much the reasons that the noble Duke raised—to decide on which of those three forums best suits their own requirements. I am grateful to him for adding his name to this amendment, and I agree with all his arguments in support of it and his own amendment. The Minister commented at Second Reading that it always pains her to disagree with him on anything, so I am working on the assumption that she will wish to spare herself further agony by accepting this amendment. I fully support strengthening the voice of consumers. This can be achieved in a number of different ways, as the Bill accepts, but each company in the sector is best placed to judge what is most appropriate for its own circumstances.

I was surprised to read in the Explanatory Notes to the Bill, in the overview prepared by Defra, that one of its provisions is to

“ensure consumer representation on water company boards”.

I should be grateful, when the Minister responds, if she could confirm that this is not indeed the position of the Government, irrespective of the choices which this Bill purports to give and the consultation exercise to be conducted by Ofwat.

There should be no highly prescriptive one-size-fits-all approach. Those best equipped to represent consumer interest may not wish to, or be equipped to, sit on corporate boards, with all the responsibilities and liabilities that entails. For Ofwat even to be given the option of this route risks alienating such experts and losing completely their valuable contribution. Nowhere in its consultation document does Ofwat point to the disadvantages of consumers sitting on boards, to which I have drawn your Lordships’ attention. I am therefore concerned that prospective respondents to the consultation may be being given an unbalanced view of the options.

We should not give Ofwat the power to require companies to appoint representatives of the consumer interest to their boards. Maybe some companies would opt for this route, but equally they may feel that stakeholder interest would be better served through the mechanism of panels or committees. My amendment would ensure that it was the boards of water companies which made that decision, not Ofwat. It would be helpful if the Minister, in her reply, could confirm not only that all identified options are, in reality, properly on the table, but that she recognises the disadvantages of board representation in this regard, which would represent a very suboptimal solution.

My final amendment in this group is Amendment 10. Clause 1(4) provides that the rules about performance-related pay can be applied in respect of the financial year beginning 1 April 2024 and for subsequent years. In effect, they can be applied retroactively. My amendment would change that date from 2024 to 2025 so that they would first be applied from the financial year beginning 1 April 2025. If we do something today, we believe that the law applying to it should be the law enforced today, not tomorrow’s backward adjustment of it. I would argue that the application of these rules retroactively is even more egregious.

One might at least expect your Lordships to know precisely what it is that they are passing and the resultant retrospective impact, but that is not the case. We are delegating the power to make such rules under this legislation to a third party, Ofwat, and I have already expressed severe reservations about its expertise in doing so, given that this is outside the core competence of an economic regulator. We know not what the rules will be, how they will be applied and what impact they will have. Further, it is not intended that they be subject to further scrutiny by this House before being brought into force, as I say, with retrospective effect.

The retroactive application of rules yet to be drafted will undermine investment and increase the cost of capital, raising prices for consumers. Over the next five years, the sector needs to raise £20 billion of new finance, much of it equity, to deliver the largest investment programme in the sector’s history. Investors are already nervous and can earn better returns in other sectors and in other countries. We need to provide confidence that the UK is open for business. Retrospective action destroys that by creating uncertainty about how their investments will be treated.

It will undermine new talent and the sector clearly needs talented individuals to deliver the amount of improvement we all want. Retroactive changes of this sort will undermine employees’ trust in a career. Why choose water when other sectors do not face this risk? If we cannot attract the best people into the water sector, we will not see best performance.

This Water (Special Measures) Bill is designed to drive better future performance. It is too late to change performance by applying rules to a year when two-thirds of it is already over. The water sector is characterised by assets, with 100-year asset lives and performance challenges that require multiyear investment programmes. That is what we should be concentrating on and incentivising management to achieve, not changing the rules of the game retrospectively as punishment for perceived failings. Many noble Lords, including the Minister herself, have made the point that not all water companies are the same—there are good ones and bad ones. I am concerned that the effect of these rules, when drawn up, will draw no such distinction.

Amendment 10 is about as simple as it gets. It requires the replacement of the number 4 with the number 5 so that the performance-related pay provisions come into effect for the beginning of the next financial year, 1 April 2025, and not the beginning of the current financial year, 1 April 2024. Can the noble Baroness confirm whether these rules are intended to apply to three-year LTIPs, not only those beginning in 2024 but also those beginning as far back as 2022 and 2023, of which 2024 is a part? Her reply on this will be important to me. I urge the Minister to accept this amendment. If she does not, I am minded to test the opinion of the House.

[Lord Cromwell (CB)]

I will speak to Amendment 2 in my name, and I am most grateful to the noble Baroness, Lady Jones of Moulsecoomb, and the noble Lords, Lord Roborough and Lord Sikka, for adding their names to it. I will speak also to Amendment 8 in my name, and again I am most grateful to the noble Baroness, Lady Jones of Moulsecoomb, for adding her name to this amendment. Finally, I am sincerely thankful to the Minister and her officials for discussing with me these amendments and the two other amendments in my name, which will come up later.

Probably the most fundamental failure in our water industry is that the regulator either did not understand or was unwilling to investigate sufficiently the financial structuring of the water companies: how these structures and indebtedness were altered over time beyond all recognition from the original enterprises, and what the risks and impacts would be. If anyone is in any doubt about the results, they need only look at Thames Water, which is now all but drowning in fetid pools of ever more expensive debt, adding to its existing £16 billion of net debt so as to limp along from day to day and racking up huge future interest liabilities in addition to the principal £3 billion it is seeking.

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Moved by

[Lord Cromwell]

2: Clause 1, page 2, line 3, at end insert—
“(d) requiring a relevant undertaker to report not less than annually to the Authority on actual or planned financial structuring or restructuring of the undertaker, including debt levels, commercial strategy and any associated risks, including to the long-term sustainability of the undertaking.”Member’s explanatory statement
The amendment requires that financial engineering becomes a regular focus area for timely reporting in order to assist in regulators’ understanding and alert them in good time to risks or distortions in a water company.

[Lord Cromwell (CB)]

I very much appreciate the Minister’s comments, but as she will expect, I am unable to agree. She said that Ofwat is closely monitoring water company finances. Well, we are nearing panto season and all I can say is, “Oh no it isn’t!” I have had numerous meetings with Ofwat in committee and frankly, I do not think it even really understood them. What is required by this amendment is a potentially very short report that simply outlines what financial restructuring has happened and what new debt has been taken on. It is a modest but vital amendment to make transparent the financial engineering and prevent the shenanigans of the past. I therefore wish to test the opinion of the House.

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Moved by

[Lord Cromwell]

39: Clause 3, page 6, line 18, at end insert—
“(e) the date by which an explanation of reasons why the discharge occurred is expected to be made publicly available.”

[Lord Cromwell (CB)]

My Lords, I shall speak to both Amendments 39 and 40 in my name. I am grateful for the kind support of the noble Baroness, Lady Browning, on Amendment 39 and of the noble Baroness, Lady Jones of Moulsecoomb, on Amendments 39 and 40.

I am told that Amendment 39 is unwelcome because it is hard to determine when explanations can be expected. As the Minister knows, my catchphrase in Committee was “modest and proportionate”. I think that this very small amendment is modest and proportionate, but it is my further understanding from discussions that management plans will, once a year, give explanations of such discharges as part of their pollution plans. With numerous discharges happening across the year, that annual document will be a mighty task to compile and to read through. More importantly, it seems that people living with the discharges might have to wait 12 months or more simply to find out why a discharge has occurred and, presumably, what has been done to deal with it and prevent a recurrence. This invites not only discontent but accusations that nothing is being done and that people are being kept in the dark. Can the Minister take this away and see whether a government amendment can do better in addressing the concerns and rights to information of the public?

Amendment 40 in my name is essentially about trying to get information all in one place so that anybody from the public can access it. Since tabling this amendment, I have been advised by the Minister that Water UK, the body that represents the water companies, is to create a map of discharges that can be accessed by the public. That is very welcome, but unless the mapping is presented and run in a comprehensive and timely way, is sufficiently detailed to provide meaningful information and is periodically assessed for its quality of delivery, it will be of little use.

I have a number of questions which I would be very grateful if the Minister can address, either from the Dispatch Box or by letter. There are six of them—brace yourselves. Can the Minister clarify what information exactly this map will show? When will it be up and running? At that start date, will all future discharges be shown in close to real time? Who will have the responsibility for ensuring that Water UK receives the necessary information in real time? What will be the penalties for failure to supply the information and doing so in good time? Who will have the responsibility for auditing the online mapping performance of Water UK over time? Somebody needs to watch the watchers to ensure that this potentially rather colourful and enjoyable map is accurate, sufficiently detailed and up to date in real time.

[Baroness Jones of Moulsecoomb (GP)]

I support these amendments. It is obvious that the public have a right to know when sewage is being dumped. Would the noble Duke, the Duke of Wellington, like to speak to his amendment first? If not, I shall carry on.

The water companies have this as real-time data and there is no reason why they cannot publish it in real time so that the public know whether the waterways are clean enough to swim in, paddle in, kayak in or even let their dogs run in. I simply do not understand why the water companies cannot provide that information. Well, I do know why—they will fight this tooth and nail because the true level of leaks of sewage discharges is so ridiculously high.

[Lord Cromwell (CB)]

I thank the noble Baroness for supporting my amendment. To be clear, it requires an explanation of why the discharge has occurred, not that it has. The Minister pointed out that that might take quite a long time to establish.

[Baroness Jones of Moulsecoomb]

In that case, the noble Lord’s amendment is not radical enough for me, but I hope it passes anyway.

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[Baroness Hayman of Ullock (Lab)]

I thank the noble Lord, Lord Cromwell, and the noble Duke, the Duke of Wellington, for tabling their Amendments 39, 40 and 41, which speak to the publication of data from monitoring networks and emergency outflow permits. I also thank the noble Lord and the noble Duke for the time they took to meet with me between Committee and Report to discuss these topics and the wider industry that they were concerned about.

Amendment 39 in the name of the noble Lord, Lord Cromwell, was supported by the noble Baronesses, Lady Browning and Lady Jones of Moulsecoomb. We agree that it is essential for companies and the regulators to have a clear understanding of the cause of discharges from emergency overflows. That information is important to ensure that the regulators can assess the compliance of emergency overflows and for companies to invest in the right improvements to prevent discharges from reoccurring.

It is important to note that all discharges from emergency overflows should be reported as pollution incidents. Once the Environment Agency has been notified of a pollution incident, it will request follow-up information as to the cause of the incident and any remedial action being taken.

For some discharges, establishing the cause may be straightforward. However, for more complex or more serious incidents it may take longer to identify the cause. When more serious incidents occur, the Environment Agency may need to complete on-site visits and investigations into the cause of the discharges. Since it will not necessarily be known at the time of the incident occurring how long these investigations will take, it is not practical to set a date by which the cause will be identified.

Furthermore, Clause 2 will also require companies to provide information on the causes of pollution incidents annually, as the noble Lord referred to from our discussions, as part of their pollution incident reduction plans. That is to ensure that water companies are transparent about the causes of pollution incidents and the measures they have taken to reduce the likelihood of further incidents.

Requiring water companies to publish a date by which they would inform the public of the cause of an individual discharge would likely result in water companies either rushing investigations to meet an arbitrary deadline or setting themselves lengthy timelines that they know would be achievable. Following our discussions and what I have said now, I hope that the noble Lord understands why we consider the amendment unnecessary and that he will be content to withdraw it. I am of course always happy to discuss matters with him further.

[Lord Cromwell (CB)]

I am sympathetic to the reasoning given, but will the Minister take on board that this means the citizenry may not know for a year why there was a spillage in their area?

[Baroness Hayman of Ullock (Lab)]

I am happy to take that on board and back to the team for further discussion.

I turn to Amendment 40, also in the name of the noble Lord, Lord Cromwell, and supported by the noble Baroness, Lady Jones of Moulsecoomb. I thank him for proposing it, as the Government agree that it is important that water companies make information about emergency overflow discharges as easy to access as possible.

Clause 3 explicitly states that information on discharges from emergency overflows will need to be both readily accessible and understandable to the public. That duty will be enforceable by Ofwat, which will be able to access the underpinning raw data from emergency overflows to inform its enforcement responsibilities under the Water Industry Act.

Water companies have already begun to publish information on storm overflow discharges in near real time, ahead of the Water Industry Act duty coming into force in January next year. Furthermore, Water UK, in collaboration with water companies, is shortly due to publish a new centralised map of storm overflows—as referred to by the noble Lord from our discussions—which is designed to present real-time discharge data from all storm overflows in England on one website. I am sure that he will be delighted to hear that we are making good progress on this. The Minister for Water received a demonstration of the website only yesterday, and the Government understand that it is due to be published shortly.

A similar approach is intended to be followed for monitoring data for emergency overflows to meet Clause 3 requirements. In addition, if needed, guidance could be issued from the Government or the regulator to the sector to further support the implementation of the emergency overflow publishing duty. Therefore, since the industry is already planning to centralise data on sewage discharges on one website, the Government do not believe that an amendment to mandate publication on a centralised website is necessary.

The noble Lord asked a number of very specific questions. If I have not answered any of them, I am happy to come back to him in writing with more detail.

Amendment 41 is in the name of the noble Duke, the Duke of Wellington. I thank him for raising this important issue. The Government are clear that emergency overflows should be used only as an absolute last resort. We are talking about emergency overflows here, not storm overflows. Emergency overflows are different from storm overflows. They operate in response to an emergency event at a sewage pumping station, whereas storm overflows are designed to operate in combined sewer systems during heavy storm events. Discharges from emergency overflows should therefore only occur in much more limited circumstances.

As previously explained, environmental permits for emergency overflows already require companies to put in place strict protection measures to prevent, as far as possible, discharges due to power failure. That can include back-up generators or duplicate power supplies.

The Environment Agency will consider enforcement action if a company operates an emergency overflow and it can be proven that the discharge could have been avoided if the company had complied with the protection measures set out in its permits. Electrical power failure is an acceptable reason to discharge only when it is fully—I repeat, fully—outside the water company’s control and not due to any failure on its part to maintain protection measures.

The unintended impact of the amendment could be that we fail to provide for discharges that are outside a company’s control and that are necessary to protect upstream homes from flooding—for example, if a back-up generator failed or did not last long enough. For these reasons, we do not believe this amendment is necessary and are concerned about the unintended consequences.

Having said that, I appreciate that the noble Duke feels strongly on this point, so I extend an invitation to him that I hope he will take me up on. I offer him to join me on a visit to see some of the overflows in person, to enable him to look at the varied scale and types of infrastructure and protections that are already in place, to help him understand and, I hope, to put his mind at rest. I am sure that the noble Duke has never had an invitation from a noble Baroness to look at a sewage plant before and that this is an exciting first for him.

I once again thank noble Lords for their constructive engagement on the important matters of data transparency across water industry monitoring networks and the permitting of emergency overflows.

[Lord Cromwell (CB)]

The Minister is right that I am delighted to hear about the centralised provision of information, and I eagerly anticipate her reply to my six questions. I am bitterly disappointed that I have not also been invited to go with her to a sewage farm. What has the noble Duke got that I have not? I do not know and I do not want to know. Anyway, I wish them joy. I thank the Minister, and I beg leave to withdraw the amendment.

Amendment 39 withdrawn.