Water (Special Measures) Bill [HL]

Lord Roborough Excerpts

Committee stage
Monday 4th November 2024 Lords Chamber

Moved by

[Lord Roborough]

70: Clause 6, page 10, line 35, at end insert—
“(8A) All fines imposed on the undertaker or its employees under this section by—(a) the Secretary of State,(b) the Welsh Ministers, or(c) another relevant authoritymust be gathered together and once per annum be used to reduce all customers’ bills by an equal amount per customer.(8B) Any reduction applied under subsection (8A) must be separately disclosed within the customer’s statement of account.”

[Lord Roborough (Con)]

My Lords, I welcome the noble Baroness, Lady Bakewell of Hardington Mandeville, back to her place. Her contributions have been missed on earlier days in Committee.

The main focus of the Bill is on improving the health of our rivers, and that aim will likely lead to a larger number of punishable offences. In its manifesto, Labour set out its plans to impose severe fines on water companies that failed to meet the expected standards, but it did not establish what would be done with that additional income. Amendment 70 seeks to put in place a system whereby the fines imposed on water companies and their employees—by this Government, the devolved Governments or, in fact, any other relevant authorities—are collected. Then, once a year, the income from these fines could be used to reduce customer bills.

In government we created the water restoration fund, which sees the money collected by the Treasury from fines and penalties and then channelled into improving the water environment. However, we sit here today with consumers facing pressure on their water bills as part of the inflationary environment that has created the cost of living crisis, as well as the cost of investing to improve water quality. It seems appropriate that fines and penalties should be returned to those consumers and identified by a separate line in their bills, making it clear that the regulator is taking action to punish wrongdoing and that money is returned to the consumer as a consequence.

An amendment such as this would benefit so many individuals and resolve how additional income from stricter fines is applied. It is not a subject that the Bill adequately addresses, as the noble Baroness, Lady Bakewell of Hardington Mandeville, has recognised in other amendments. Does the Minister agree that the money from the fines should be used to benefit the consumer through mechanisms such as the water restoration fund that we implemented when in government or by using the sum to reduce customer Bills, as this amendment suggests? As such, will the Minister confirm that the penalties will not return to the Treasury under this Government? I beg to move.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I apologise to the Committee and the Minister for my absence on the first and second days in Committee. I regret that an attack of Covid meant that I was confined to quarters and unable to travel to London. I did, however, watch the debate on both days on parliamentlive.tv and was therefore able to hear the nuances of the contributions, which you do not always get by reading Hansard. I thank the noble Lord, Lord Roborough, for his comments.

A seminar of all the devolved Administrations once a year, to discuss how to return all fines to the relevant customers, will do nothing to fix the problems of inadequate investment in crumbling and inadequate infrastructure. I am sympathetic to the need to keep customers’ bills to an acceptable level. Consumers should not have to pay for the inadequacies of the water boards to ensure that problems are fixed. I do not see why an annual gathering of the devolved Administrations or other authorities will be sufficient to refund bill payers in a timely fashion.

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

My Lords, I thank the noble Lord, Lord Roborough, for raising this important issue and tabling Amendment 70, which speaks to the administration of fines. I too welcome the noble Baroness, Lady Bakewell of Hardington Mandeville, back to her rightful place. I hope that she is now completely recovered, but I also congratulate the noble Earl, Lord Russell, on doing such a sterling job in her absence.

I emphasise that the money from civil penalties imposed by the Environment Agency and fines issued by the court go to the Government’s Consolidated Fund. This is in line with other enforcement regimes under the Regulatory Enforcement and Sanctions Act 2008. On the use of penalty funds, the water restoration fund, which launched in April this year, is reinvesting water companies’ environmental fines and penalties into projects to improve the water environment. Up to £11 million of funding from fines and penalties accrued since 2022 was made available on a competitive basis to support a range of water restoration projects. Defra is continuing to work with His Majesty’s Treasury regarding the reinvestment of water company penalties and fines, because while the Budget has of course now been announced, decisions have not yet been taken on all departmental spending.

I assure noble Lords that there are existing procedures in place to ensure that customers are reimbursed for poor performance. As the economic regulator, Ofwat sets specific performance targets for water companies and, where these are not met, companies must reimburse customers through lower water bills in the next financial year. I will give an example: as a result of Ofwat’s annual performance assessment process, it is requiring 13 companies to return £157 million to customers for underperformance in the financial year 2023-24.

Ofwat also has powers which ensure that companies return money to customers for failings related to specific breaches. For example, in 2019 Southern Water returned £123 million to its customers as a result of an Ofwat enforcement case. I hope that the noble Lord is therefore content that this amendment is not necessary, as we believe it would duplicate existing protections.

[Lord Roborough (Con)]

My Lords, I am grateful for the comments from the Minister. It is perhaps not the fullest reassurance that I was looking for about the future destination for fines and penalties. Amendment 70 is, by its nature, a probing amendment and I look forward to further discussions with the Minister.

Amendment 70 withdrawn.

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[Lord Sikka (Lab)]

My Lords, I will speak to Amendments 97, 99 and 102. I congratulate the noble Baroness, Lady Jones of Moulsecoomb, on her speech. I fully support Amendment 97.

It is interesting that, following an article in the Telegraph, on 19 September, the Government issued a press release in which they said:

“These powers would never be used to pay bondholders, shareholders or creditors … we do not expect customers to pay the price for water companies’ mismanagement … The new measures in the Water Bill will protect taxpayers”.


At the same time, the Explanatory Notes state, on Clause 10, that the Secretary of State “may provide financial assistance” to companies. It is hard to see how these statements can be reconciled. I hope the Minister will tell us what kind of financial assistance the Government envisage providing to water companies while they are being restructured. Their being restructured means that they are already financially, environmentally and morally bankrupt, so why provide financial assistance?

In the debate last week, the Minister said that water companies are “private companies”. If they are, they should be fully exposed to the laws of capitalism, with absolutely no bailout of any kind. Why are we making these special provisions to indulge them and, presumably, write down some of the debt? This was a key assumption made by the last Government in what was code-named Project Timber. Information leaked out that it was talking about how the Government, presumably, may write the debt of Thames Water down to merely 40% of the amount owed.

Whenever we talk about not bailing out shareholders and bondholders, or refer to public ownership, the Government’s immediate response is to say that it will cost billions of pounds. I once again invite the Minister to show me the Government’s calculations—I will happily critique them for free and talk about whether those numbers make any sense. Will the Minister accept my challenge and please publish the numbers?

The Government also say that it would be hard to reintegrate the companies. We are doing it for railway companies, so why can we not do it for water companies? What exactly would be the hardship? Every day, there are numerous mergers and takeovers in the corporate sector, and they are easily integrated and rewired. I hope that the Minister will explain this. I would particularly like to see the calculations of what the cost of public ownership would be, so that we can then start looking at this and talking about the optimum solution.

I hope the Minister will not refer me, as she did previously, to the 2018 Social Market Foundation report. It fetched a number out of thin air and said it was worth about £90 billion—the following year, this was contradicted by Moody’s, which said it was only £14.5 billion. Since then, as we know, a lot of shares of water companies have become worthless and the debt has junk status, so it is easy to let the normal rules of capitalism apply.

I support the noble Baroness, Lady Jones, on Amendment 99. I will say a little more about Amendment 102. Currently, water companies can violate rules and legal limits on sewage dumping ad infinitum. They can easily do cost-benefit analyses and see that it is cheaper to pay fines for illegal practices than to invest in infrastructure and act responsibly. This boosts profits, dividends and executive pay, while the public picks up the cost of unplugged leaks, sewage dumping, health hazards, and the destruction of biodiversity and marine life. To some, such costs are just externalities, but the public sees this as abuse, as clearly shown by yesterday’s mass demonstration in London.

The puny financial penalties have not curbed the predatory practices. The Minister promises us that there will be more and says that the executives may be prosecuted—that is, if they can wait another 20 years to have their cases heard, as there is already a backlog of 60,000 cases in the Crown Court. The result is that the whole industry is now under the control of entities that have criminal convictions. Wastewater companies in England and Wales have been convicted 1,109 times since 1989. The dismal roll-call is as follows: United Utilities has 205 convictions, Thames Water has 187, South West Water has 174, Anglia Water has 128, Yorkshire Water has 125 and Southern Water has 119. Perhaps the Minister would care to name a pristine water company—never mind pristine water, just a pristine water company. That would be helpful.

There are no pristine, honourable, responsible or ethical water companies, but successive Governments continue to indulge them and give them monopolies in an essential public good. What would happen if 10 major food or medicine companies were convicted of 1,109 crimes that they knowingly committed? They would be shut down and consumers would sue them, but regulators in the water industry do no such thing. Indeed, Ministers make excuses, and successive Ministers have done nothing.

My amendment requires that habitual offenders be placed into special administration, if two or more criminal convictions are secured in a five-year period. This is akin to yellow and red cards in football. The first yellow card is a warning, effectively saying, “Don’t do it again. Mend your ways. Clean up your act”. If no heed is taken, the second yellow card, which is effectively a red card, would follow, and the companies would be placed into special administration.

It is often claimed that shareholders are passive. The threat of special administration for abusive practices would encourage them to actively invigilate companies and their boards and take an interest in their governance. For far too long, companies have got away with abuses; my amendment would ensure that there were serious consequences for them. If the Minister does not accept my amendment, can she say how many convictions water companies need before they are considered unfit and improper to own crucial infrastructure?

[Lord Roborough (Con)]

My Lords, I shall speak to Amendment 73, moved by the noble Earl, Lord Russell. I thank the noble Earl, the noble Lord, Lord Sikka, and the noble Baroness, Lady Jones of Moulsecoomb, for their contributions.

On these Benches, we have grave concerns about these amendments. While it is important that the water sector operates with integrity, we fear the amendments may have unintended consequences that could destabilise the industry and ultimately be detrimental to the public and the environment.

On Amendment 73, the power to revoke a water company’s licence is one of great consequence and must be exercised judiciously. An abrupt removal of a licence, without sufficient consideration of the ramifications for infrastructure and service continuity, could leave customers vulnerable and lead to service interruptions. It would also be a very substantial barrier to private sector investment. Investors must be able to have confidence that they will be able to enjoy returns on their investments without elevated risk of loss of licence. Should such an amendment be included in this Bill, it would lead to a much higher cost of capital for the industry and higher consumer bills as a consequence. While we appreciate the intent to hold companies accountable, we suggest exploring whether there are more balanced approaches to achieving compliance, without risking instability.

Amendment 97 raises further concerns. The possibility of cancelling debt in the event of special administration proceedings could create moral hazard. This amendment, while aiming to protect consumers from the fallout of financial mismanagement, might inadvertently incentivise risky financial behaviour by companies under the impression that their debts could be forgiven in times of crisis. The bankruptcy route already allows debt to be repaid in part or renegotiated in an orderly manner, respecting the contractual rights of all creditors. This would not be desirable.

As for Amendment 98, this is a matter of significant complexity. We must not overlook the potential costs and operational challenges associated with such transfers. The water industry requires immense resources, infrastructure investment and technical expertise. A shift to public ownership would strain government resources and create operational challenges. We support the Government in not wishing to see a return to public ownership of the industry.

I wish to address Amendments 99 and 102. These amendments would empower the Government to put companies into special administration if they breached certain environmental conditions or held criminal convictions. While we wholeheartedly support stringent environmental standards and rigorous compliance, it is essential that these mechanisms do not inadvertently undermine the ability of water companies to continue their core operations. The amendments could place companies in special administration for relatively minor infractions, which may not warrant such a severe response.

We must be careful not to adopt measures that could disproportionately impact employees, customers and investors who depend on the water industry. I thank noble Lords for tabling these amendments and regret that we cannot support them—and could not even before the noble Baroness, Lady Jones, gave her views on my party.

[Baroness Hayman of Ullock (Lab)]

I thank noble Lords for the suggested amendment in relation to water company ownership.

I come first to Amendment 73, in the name of the noble Earl, Lord Russell. The intention of the amendment is to provide Ofwat with the power to remove a water supply or sewerage licence with six months’ notice. I want to emphasise that the Government’s priority is to ensure that customers have a safe and stable supply of water. We are concerned that the proposed amendment could jeopardise this.

There are already established measures to replace an existing sewerage undertaker, by way of licence removal, under certain scenarios. For example, while it is true that an undertaker’s appointment is made for a period of at least 25 years, I can reassure noble Lords that it is not true that appointments cannot be terminated until 25 years have passed. If an undertaker cannot carry out its functions, Ofwat has powers to terminate the appointment, provided that a replacement can be identified and that the undertaker consents.

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Debate on whether Clause 10 should stand part of the Bill.

[Lord Roborough (Con)]

My Lords, Clause 10 risks unfairly burdening consumers with costs likely stemming from earlier regulatory and management failures. Involving consumers to compensate for governmental losses would turn customers into de facto guarantors for companies, which contradicts consumer protection principles. As my noble friend Lord Remnant argued earlier in Committee:

“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”.—[Official Report, 28/10/24; col. 1000.]


My noble friend addressed his comments to concerns over the impact on other companies in the sector, with which we agree. My concerns today are with the impact on consumers.

The clause provides no substantial safeguards to prevent excessive or unjustified charge increases. It grants broad powers to the Secretary of State to implement

“such amounts as may be determined”,

without clearly defined criteria or caps on those amounts. This vagueness opens the door to unlimited increases in bills for consumers at a time when cost of living pressures are high. Consumers rely on water services as a fundamental utility and trust is paramount in sectors with limited provider choice. By involving consumers in recovering losses associated with government interventions, the clause risks eroding public trust in the water industry. Why should the Government be able to depart from a consumer pricing model that the regulator has determined to be adequate for providing the service? Why should the consumer face surcharges due to the fault of others?

Clause 10 lacks clarity on how funds raised from consumers will be used or justified beyond the broad purpose of offsetting special administration order loss. Consumers have a right to transparency in any additional costs that they face, particularly when those costs arise from governmental action rather than direct service improvements. Without a clear, transparent breakdown of how these funds will be applied, consumers may view these measures as an arbitrary tax rather than a justified expense.

Permitting the Secretary of State to intervene in pricing to recoup government-incurred costs sets a disturbing precedent. It also highlights the importance of this debate in that the Government feel able to set themselves undefined and unaccountable pricing powers that are not available to the private sector. Is this not why the sector must remain privately owned and accountable rather than in the hands of government or some mysterious public benefit structure?

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[Baroness Hayman of Ullock (Lab)]

My Lords, I thank the noble Lord, Lord Roborough, for his interest in Clauses 10 and 11 and also thank the noble Baroness, Lady Bakewell, for her support for them standing part. A special administration regime—or SAR—enables a company that provides vital public services to be put into administration in certain circumstances to ensure that the public service will continue to be provided pending rescue or transfer to new owners. An SAR would be required only when there is evidence that a company is insolvent or in serious breach of its statutory duties. It is the ultimate enforcement tool in Ofwat’s regulatory toolkit and, as such, as I said in the last debate, the bar is set high.

Although government has had the powers to place water companies into special administration for over three decades, it is important that we regularly update legislation to reflect modernisation of law and experiences in other sectors. If a SAR occurs, government funding would be required to cover the costs of a special administration, including both operational and capital expenditure—for example, ensuring that statutory environmental obligations were met, as well as for paying the cost of the special administrator.

In the unlikely event that the proceeds of a sale or the repayments agreed as part of a rescue at the end of a SAR are insufficient to cover repaying government funding, there is a risk of a funding shortfall. Clauses 10 and 11 introduce a flexible power, allowing the Secretary of State and Welsh Ministers to recover any shortfall in funding in a manner that is appropriate to the circumstances. They allow for modification of water company licences to recover any shortfall in financial assistance provided in a water industry SAR. These clauses will align the water industry SAR regime with the energy sector. Without this power, there is a risk that taxpayers will foot the bill for the water industry SAR.

The Secretary of State and Welsh Ministers will be able to decide whether or not they should use this power and the rate at which the shortfall should be recovered from customers. This will include which group of customers it should be recovered from—for example, all water company customers, a subset of the sector, or only customers whose water company went into a SAR.

Although the power is flexible, the design of a recovery mechanism will be subject to consultation with all relevant sector stakeholders. The Government must consider these views and explain our approach accordingly. If a SAR occurs and this power is ever required, this will allow a decision to be made, and be consulted upon, on what the fairest cost recovery option is, based on the evidence and circumstances at the time.

I reiterate that the shortfall recovery mechanism does not mean that customers end up paying for water companies’ failures. Any intervention that would increase customer bills would be considered very seriously and as a last resort. In the first instance, the Government would seek to recoup all the funds spent on financing the SAR through the sale or rescue of the water company after the administrators’ conclusion. This new power would be utilised only if it were not possible to recover what the Government spent funding the administration. If there was a shortfall, Ministers would then decide whether they felt that it was appropriate to exercise this power.

This power would allow the Secretary of State to decide, subject to consultation, the rate at which the shortfall should be recovered from customers and which group of customers it should be recovered from, as I just mentioned. This will ensure that the shortfall recovery mechanism is always implemented in a way that ensures that costs are recovered fairly. I hope that noble Lords agree that this power is essential to protect taxpayers’ money in the event of a SAR, and that these clauses should stand part of the Bill.

[Lord Roborough (Con)]

My Lords, the noble Baroness, Lady Bakewell of Hardington Mandeville, may have misunderstood me. Far from speaking in favour of the water industry, I am seeking additional protection for the consumer and companies that have not fallen into a SAR.

The Minister has not fully reassured me that the powers in this clause are necessary. The Government perhaps should stand as guarantor, not the innocent. That this measure is very unlikely to be used is not in itself reassuring to me, but at this stage I will not press my opposition to the clauses standing part.

Clause 10 agreed.