Water (Special Measures) Bill [HL]

Debate between Lord Remnant and Baroness McIntosh of Pickering

Consideration of Commons amendments
Wednesday 5th February 2025 Lords Chamber

[Lord Remnant (Con)]

I declare my interest, 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 during that time.

I support Motion 2A in the name of my noble friend Lord Blencathra and will address the reasons given by the Minister in the other place, and essentially repeated just now by the Minister, for objecting to the clauses this Motion this seeks to reinsert. Those reasons are that the additional process of requiring an SI risks compromising Ofwat’s independence, that it would represent significant government interference in the independent regulatory process, and that that kind of interference could have adverse effects on investor confidence.

These arguments have little merit. Ofwat is a government department, and the Secretary of State is responsible for appointing, and has the power to remove, the chair and members of the board. In no way is Ofwat independent of government; nor can the Government escape association with and responsibility for the rules generated by Ofwat, and their consequences. Ofwat is directly accountable to Parliament. If that is so, why should it not account to us for these rules when drafted?

In any event, independence is a red herring when considering the impact on investor confidence. Investors will focus on the rules themselves and their effect on the ability to attract and retain management, and so on the investability of the water sector. In this, they have legitimate cause for concern. The Government are choosing to abrogate their responsibility in this area to Ofwat—an economic regulator, the core competence of which is certainly not the setting of rules on remuneration, and for which it is unsuited.

There are already signs that Ofwat’s approach will be unduly punitive, particularly regarding its retrospective application. However, I thank the Minister for her letter to me at the end of last November following Report, when she confirmed that Ofwat would look closely at the impact retrospectivity has on long-term incentive plans, but the intent was for the provision to cover performance for the 2024-25 financial year onwards only.

None the less, taken as a whole, these rules may discourage the best people from working in the industry, restricting water companies in rewarding good performance and, which is just as important, penalising poor performance. They are likely to force companies away from bonuses and long-term incentive schemes linked to performance, towards a compensating increase in fixed pay. Thames Water has already indicated that this is the line it is likely to take, and others will surely follow. Is this really the result we want to achieve? At the very least, Parliament should have the opportunity to consider the proposed rules and assess for itself the potentially damaging impact on future investment in the sector.

The scale of investment required to clean up our waterways and rebuild our broken water infrastructure is unprecedented. Institutions have a choice of where they invest. In such a heavily regulated sector, they will make a critical assessment of the quality of management tasked with the delivery of the financial plans underpinning that essential capital programme. If Ofwat gets it wrong, it risks starving the water sector of the investment it desperately requires and which all noble Lords wish to see. At best, it will increase the returns investors demand, with the cost inevitably passed on to consumers.

Given the stakes, it must surely be right that Parliament has the opportunity to scrutinise and approve the relevant rules before they come into effect, so I am very much in favour of Motion 2A, tabled by my noble friend Lord Blencathra. I have listened closely to what the Minister has said this evening, but the opportunity for noble Lords to ask questions in a drop-in session is a poor substitute for further parliamentary scrutiny.

[Baroness McIntosh of Pickering (Con)]

My Lords, I congratulate the noble Lord, Lord Cromwell, on his work. I will briefly lend my support to my noble friend Lord Blencathra and put a question to the Minister in regard to the letter that she sent to us on 31 January, where she says that she wishes

“to give parliamentarians the opportunity to engage with Ofwat”,

but she prefers “alternative, non-legislative means”. It is more appropriate to put this in the Bill, as in our original amendment. I urge the Minister to respond favourably, in that regard, to Motion 2A.