Water (Special Measures) Bill [HL]

Baroness Hayman of Ullock Excerpts

2nd reading
Wednesday 9th October 2024 Lords Chamber

Moved by

[Baroness Hayman of Ullock]

That the Bill be now read a second time.

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

My Lords, I am delighted to begin the Second Reading of the Water (Special Measures) Bill. Improving water quality is a priority for this Government, and we have taken rapid action to ensure that water companies put customers and the environment at the centre of what they do. The Water (Special Measures) Bill is being introduced to drive rapid and meaningful improvements in the performance and culture of the water industry. The Bill not only delivers on the Government’s commitment to put water companies under special measures but is an important first step in enabling wider, transformative change across the water sector.

I am sure noble Lords will agree that there is a lack of public trust in the water industry, and widespread concerns about underinvestment in infrastructure, levels of pollution and failures to address spills of sewage. Between 2020 and 2023, water company executives paid themselves more than £41 million in bonuses, benefits and incentives, despite poor performance in the water sector, and only one-quarter of water company customers think that companies act in the interests of people and the environment. At the same time, the number of serious pollution incidents remains unacceptably high.

That is why this Government are taking swift action to turn around the performance of the water industry as a first step towards enabling long-term change. In his first week in post, the Secretary of State announced a set of immediate steps to improve the performance of the water industry. They include ring-fencing vital funding for infrastructure investment, placing customers and the environment at the heart of water company objectives, and working with Ofwat to strengthen protection for households and businesses when their basic water services are affected. However, this Government know that this is not enough to address the fundamental changes needed to the water system and that targeted legislative action is needed. This brings us to our consideration today of the Water (Special Measures) Bill.

Concerns about the performance of the water industry have risen right to the top of the public and political agenda in recent years. The water industry was privatised under the Water Act 1989. That Act was followed by the Water Industry Act 1991, which largely sets out the regulatory regime for the industry. The industry is regulated principally by the Environment Agency in England and Natural Resources Wales in Wales, along with the Water Services Regulation Authority—Ofwat—and the Drinking Water Inspectorate. The Bill makes new provisions to improve the regulation of water and sewerage companies and gives new and extended powers to these regulators.

I turn to the detail of the provisions. As I have noted, the core provisions of the Bill serve to strengthen the powers of the regulators to hold water companies to account for poor performance. The measures it introduces are intended to complement each other in a way that will ensure that the regulators are better equipped to identify and respond to water company failings. It will encourage behaviour change to ensure that water companies are delivering for their customers and the environment, from the start of the next water industry investment period that is due to begin in April 2025. Accordingly, the Bill provides Ofwat with a new power to establish rules for the water industry relating to governance and remuneration. This power will allow Ofwat to make rules around performance-related pay and the introduction of a fit and proper person test to ensure that water company bosses are not rewarded where performance is not up to scratch.

The Bill also includes provision to make obstruction of the general investigatory powers of the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate punishable by imprisonment and allows for executives to be held personally liable for obstruction where the offence has been committed with their consent, connivance or neglect. This will help the water industry regulators to carry out effective investigations and will bring criminal charges against persistent lawbreakers.

To further ensure that non-compliance is tackled, the Bill includes provisions to enable the Environment Agency and Natural Resources Wales to issue automatic and severe penalties for certain offences, as well as provisions to strengthen environmental civil sanctioning powers so that regulators can impose a penalty on the civil standard of proof for water industry offences. This will ensure that water companies face rapid repercussions where it is immediately clear that they have acted unlawfully, and that rapid enforcement action is taken against minor to moderate offences before they can become a more serious matter.

To ensure that the regulators are able to make full use of their expanded and new powers, the Bill also provides for enhanced cost-recovery powers for the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate to ensure that water companies bear the cost of non-compliance, in line with the “polluter pays” principle. In addition, the Bill contains provisions to ensure the independent monitoring of all water company outlets. These provisions place a requirement on water companies to publish discharge data at 100% of emergency overflows and publish data on discharges from emergency overflows in near-real time. The Bill also places annual pollution incident reduction plans on a statutory footing, increasing transparency around water company operations. The Bill will also bring forward provision to modernise the existing special administration regime for the water industry, to bring it in line with special administration regimes for other regulated sectors and to ensure that taxpayer money is protected in the event of a water industry special administration regime.

Collectively, these measures represent the most significant increase in enforcement powers in a decade. This will help to ensure that water companies are delivering for customers and the environment as we move towards the largest-ever investment period for the water industry, with an £88 billion spending package proposed for the next price review period.

I turn to delegated powers and devolution. The Government are committed to working closely with the devolved Governments to tackle shared problems, including the issues facing the privatised water industry. My officials have worked closely with Welsh counterparts during the development of the Bill, and I am delighted that most provisions in the Bill are expected to apply to both England and, at the request of Welsh Ministers, Wales. Although the Bill does not apply to Scotland or Northern Ireland, my officials have also engaged with these devolved Governments during the Bill’s development.

With regard to the Bill’s powers, it contains provisions both to amend primary legislation and to confer a limited number of delegated powers on regulators and the Secretary of State. To reflect the evolving nature of the issues facing the water industry and the changing expectations of customers, the Bill contains eight legislative and three non-legislative delegated powers. These provisions contain a mix of powers conferred directly on regulators—for example, the power to set rules in relation to remuneration and governance—and powers that will be enacted via the affirmative resolution procedure, such as the power to amend relevant environmental regulations. These delegated powers will enable government to keep pace with and react to developments in the water industry. I assure noble Lords that these powers will be subject to all appropriate scrutiny and safeguards.

Since the Bill’s introduction there has been some inaccurate reporting on the effects of its provisions. I would like to take the opportunity to correct some of these misconceptions, to ensure that we can have a fully informed and helpful debate.

First, it has been reported that some of the Bill’s measures—for example, those that will enable the banning of bonus payments and those that enable imprisonment for obstruction offences—already exist in law. Let me explain why this is not the case. Although it is possible for Ofwat to set expectations with regards to executive remuneration, it does not have the power to set legally binding rules. The Bill introduces such a power, meaning that Ofwat will be able to stop the payment of bonuses to executives where performance has not been up to scratch—for example, in the areas of consumer matters, environmental performance, financial resilience and criminal liability. Similarly, although the obstruction of regulators can be punished by imprisonment, that is currently possible only in extremely limited, emergency circumstances. The Bill strengthens the maximum penalty for all cases of obstruction to imprisonment for up to two years. It also makes that offence triable in the Crown Court and, importantly, ensures that executives can be held liable for wrongdoing, which is not currently the case.

Secondly, there have been reports around the use of special administration regimes to nationalise water companies and on the impact of the special administration regime clauses on customer bills. I want to be clear. Special administration is not a form of renationalisation. It is a tool to ensure that vital public services continue to be provided after a company fails. The Government would take no ownership or management of the company during a special administration regime. It would cost billions of pounds and take years to unpick the current ownership model; it would slow down our reforms, leave sewage pollution to get only worse and stall much- needed investment. There is a very high bar for the imposition of a special administration regime. The Government and Ofwat will always act to protect consumers as a priority, and any intervention that would increase customer bills would be considered very seriously and as a last resort.

Having spoken about what the Bill will do, it is important to note as well what it does not cover. This Bill focuses specifically on measures relating to the regulation of water companies, taking immediate action in response to the poor performance of the water industry in recent years. However, the Government are clear that the Bill alone will not be enough to fix our water system. It is an immediate down payment on the wider reform that is needed after years of failure and environmental damage. It is for this reason that the Government have also announced a review to fundamentally transform how our water system works and clean up our rivers, lakes and seas for good.

Through this review, we will examine holistically the framework that underpins our water sector; we will invite views from a range of experts and stakeholders; and we will hold a public consultation to ensure the proposals are robust and radical enough to meet the public’s appetite to clean up our polluted waterways. I am sure that many noble Lords here today will take a keen interest in the work of this review, and I have already had discussions with many in this House about wider issues facing the water sector. I look forward to working with noble Lords closely as the review progresses, and further detail on this will come forward later this autumn.

To conclude, I know that there is considerable support, both within Parliament and among the public, for this Bill. I hope that Members of your Lordship’s House will agree on the importance of working together to reset and transform the water sector through these first crucial steps and the work to come. I look forward to what I am sure is going to be a passionate debate; I would expect nothing less for a Bill of this importance and I am greatly looking forward to hearing noble Lords’ contributions. I hope that your Lordships will support the Bill and ensure that we work together to strengthen our regulators and hold water companies to account.

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[Baroness Hayman of Ullock (Lab)]

My Lords, this has been a very interesting and worthwhile debate. I thank all noble Lords who have spoken for their thoughtful, informative and constructive comments.

As we have heard, the Bill is going to be used to drive meaningful improvements in the performance and culture of the water industry, as part of our wider efforts to ensure water companies deliver both for customers and for the environment. Many campaign groups, as well as parliamentarians, have called for measures to hold water companies to account. We also know that there is huge public support for the Government to do something. There is clear and broad recognition of the need for action. Let me now take the opportunity to address some of the points and questions raised during the debate.

First, I would like to stress that the Bill goes beyond the previous Government’s ambition. It is not true that the Bill does not contain anything further than measures put in place by the previous Government. For example, the Bill will go beyond the current regulatory framework. To give a couple of examples, it will provide legal powers to ban bonuses—currently, you can only set expectations—and it will also require water companies to report in near real time on discharges from emergency overflows, which are at present largely unmonitored.

The noble Duke, the Duke of Wellington, the noble Earl, Lord Russell, the noble Lord, Lord Blencathra, my noble friend Lady Young of Old Scone, the noble Earl, Lord Devon, and many other noble Lords were particularly interested in what exactly the review is going to do. As I said, the Bill alone is not enough to fix our water system; it is only an immediate down payment on the wider reform that is needed after many years of failure and environmental damage. As I mentioned, the review is going to be carried out to fundamentally transform how our water system works so that we clean up our rivers, lakes and seas for good. We will invite views from a range of experts, covering areas such as the environment, public health, consumers, investors, engineering and economics. We will have a public consultation to test that any proposals are robust and ambitious enough to clean up the pollution from our waterways. Through our review, we will look at long-term wider reform of the water sector as a whole, including considering and clarifying the roles of regulators. We expect this work to culminate in shaping further legislation and intend to set up further details about the review later this autumn. It is also really important that specific measures are consulted on during the passage of the Bill, and we will be looking to do so.

The noble Baroness, Lady Jones, and my noble friend Lord Sikka particularly asked about nationalising water companies. As I have said previously, the Government have no intention to nationalise the water companies. We are focusing on improving the performance of the water industry as an urgent priority. The measures in the Bill are designed to do exactly that.

As we have said, it will cost billions of pounds and take years to unpick the current ownership model, during which time underinvestment in infrastructure and sewage pollution will only get worse. Research that has been commissioned by the Consumer Council for Water, which we have heard about—

[Lord Sikka (Lab)]

First, can the Minister say how many billions of pounds, and can she publish that calculation? Secondly, she says it will take a long time, but the Government are going to integrate the newly created companies to manage the railways, and there are numerous mergers and takeovers everywhere where new entities are accommodated. Could the Government publish a paper to see what the complications would be? Although I recognise some of the complications, I do not think that any of this is insurmountable.

[Baroness Hayman of Ullock (Lab)]

Rather than get into a discussion around this, as I have a lot of questions to answer, I suggest that perhaps the noble Lord and I—and the noble Baroness, if she so wishes—take this away into another meeting and discuss it further when we have more time.

The noble Baroness, Lady Jones of Moulsecoomb, asked about the special administration regime, as did other noble Lords, and she asked particularly about profits for shareholders and creditors. The special administration regime is there to enable a seriously underperforming or insolvent water company to be put into special administration, with the requirement that vital public services—that is, water and wastewater—are continued to be provided pending a rescue package and transfer to new owners. This contrasts with normal administrations, where the appointed administrator is focused on the creditors’ interests only.

A number of noble Lords—the noble Duke, the Duke of Wellington, the noble Baronesses, Lady Parminter, Lady Pinnock and Lady Bakewell, and my noble friend Lady Young of Old Scone, in particular—asked why the Bill is not being used to reform Ofwat or the Environment Agency. The Bill introduces the most significant increase in enforcement powers for the water industry regulators in a decade and is designed to give them the teeth they need to take tougher action against water companies in the next investment period. However, we want to go further. Through the review, as I mentioned, we will look at the regulators in order to carefully consider their roles and responsibilities and how we can ensure that they operate as effectively as possible. So that will be part of the review.

The noble Lord, Lord Douglas-Miller, asked whether the regulators were adequately resourced to implement all the new provisions in the Bill. Through the new cost recovery power in the Bill, we will enable the Environment Agency to fully recover costs for the full extent of its water company enforcement activities. That will include prosecutions and civil sanctions, revocation notices of permits, and pollution incidents. In addition, the EA is already recruiting up to 500 additional staff for inspections, enforcement and stronger regulation, increasing compliance checks and quadrupling the number of water company inspections by March next year. This will be fully funded by around £55 million per year through increased grant in aid funding from Defra and additional funding from water quality permit charges levied on water companies. I hope that helps to answer the noble Lord’s question.

There were also questions around the detail of Ofwat’s rules. The noble Lords, Lord Blencathra and Lord Remnant, mentioned this. We feel that it is more appropriate for Ofwat, as the independent regulator, to determine the specific performance metrics that should be considered when setting the rules. Allowing Ofwat to set out in the rules the performance metrics to be applied will also enable those standards to be more easily amended—subject to the relevant procedural requirements, of course—where or when it is appropriate to do so in the future. Ofwat would need to consult with relevant persons, including the Secretary of State, Welsh Ministers, the Consumer Council for Water and others, before such rules were finalised. I also reassure noble Lords that Ofwat will issue a policy consultation in October on the scope of the rules.

Consumers were mentioned a number of times. First, on representation on boards, as we go through the Bill, we will look at this in more detail, but the idea behind the Bill is that Ofwat will be required to issue rules on consumer representation. Customers largely foot the bills for water company decisions, so we believe it is right that they have a say where their interests are at stake. Ofwat will need to consult with relevant persons, including the Consumer Council for Water, before finalising the rules on performance-related pay, and fitness and propriety and customer representation. I think my noble friend Lord Whitty asked about some of those issues.

The noble Lord, Lord Roborough, asked in his speech just now about further increases to customer bills. Where increased costs are a result of penalties being issued by the regulators—for example, under the new automatic penalties regime—the penalties will come out of water company profits and not from customers. Where costs are unrelated to penalties—for example, where they will fund new and improved infrastructure—we are working closely with the water industry regulators to see how we can best minimise the impact of measures introduced by the new legislation on customer bills. We do not want to see the customers bearing the brunt of these new actions.

A number of noble Lords, including the noble Lords, Lord Remnant, Lord Douglas-Miller and Lord Cromwell, and the noble Earl, Lord Devon, asked about investor confidence. Private sector investment is at the core of how we grow our economy. The Government are committed to establishing a strategic framework in order to deliver long-term stability, and which is conducive to attracting the sustained investment in the sector that we need. The Bill will deliver a clear and consistent regulatory framework for the water industry and its investors. I do not think anyone would think that investors have a lot of confidence in much of the water industry as it stands. On 10 September, Defra and Treasury Ministers held a round table with investors where they outlined how the Government will work in partnership to attract the billions in private sector investment that we desperately need to be able to clean up our rivers, lakes and seas.

On that issue, there was also discussion around attracting talent. A number of noble Lords talked about the fact that it is more stick than carrot and asked how we are going to attract people into this. We believe it is right that companies and their executives are held to account for basic and fundamental performance requirements. Should companies meet their performance expectations, we believe that executives should rightly be rewarded, and there are also previous and existing examples of similar rules in other sectors. I will give a couple of examples. The financial services sector previously had a set cap on the level of bonuses—somebody mentioned that; I am sorry but I cannot remember who it was—and fit and proper person tests are also conducted by the Financial Conduct Authority and the Prudential Regulation Authority in that sector. Those sectors have continued to attract talent.

The noble Earl, Lord Devon, asked about ensuring that water companies invest sufficiently when considering pressures such as climate change and population growth, and about ring-fencing money for improvements. In July, Ofwat announced in its draft determinations a proposed £88 billion worth of expenditure between 2025 and 2030, which will be the largest investment in infrastructure that has ever been made by the water industry. We hope that that investment will deliver much of the work needed to achieve the issues that the noble Earl referred to.

The pollution incident reduction plans were discussed by many noble Lords during the debate. One question was: why have we not included a duty to implement the plans rather than just publish them? I think the noble Baroness, Lady Parminter, in particular talked about this. We say that these plans should be seen as part of the broader package of powers for regulators which exist and which are strengthened through the Bill to reduce pollution incidents.

The Environment Agency already has access to a range of tools to enforce against pollution incidents and this Bill is designed to supplement this with its provisions for automatic penalties and for Ofwat to ban bonuses when water companies have not met environmental standards. Water companies will also be required to report on overall progress on the actions that were set out in the previous plans. A specific duty to implement the plan would make enforcement more difficult, we believe, as it would cut across the wider legal requirements for pollution reduction.

The noble Baronesses, Lady McIntosh, Lady Browning and Lady Pinnock, all talked about sustainable drainage systems—SUDS. This is a complex issue. Existing planning policy requires that SUDS are included in all new major developments unless there is clear evidence that that would be inappropriate. This is in addition to requirements that SUDS should be given priority in new developments in flood-risk areas. However, I am aware of the issue around the previous legislation that has been sitting in front of us for 14 years, so I want to assure noble Lords that the Government are currently assessing how best to implement their ambitions on SUDS, while also being mindful of the cumulative impact of new regulatory burdens on the development sector. We are having regular discussions and trying to co-ordinate joint work with MHCLG officials on this issue. We want to move this forward.

The impact assessment was mentioned. There is an impact assessment for the Bill—I am sure noble Lords will be delighted to hear that—but it is currently with the Regulatory Policy Committee. We will publish it as soon as it has concluded its review. We are hoping that will be fairly soon.

The timeline for implementation was mentioned. Our ambition is to implement the provisions to give the regulators the powers they need to take tougher action against water companies for the next investment period, which is due to start in April next year.

The use of delegated powers was mentioned by the noble Duke, the Duke of Wellington, the noble Lord, Lord Sandhurst, and my noble friend Lady Young of Old Scone. I want to reiterate the reassurances I made in my opening speech that the provision of delegated powers will be subject to appropriate scrutiny and safeguards. We believe the powers are necessary to ensure that the provisions in the Bill keep pace with the changing requirements on the water industry and the changing expectations of customers. A full justification for the inclusion of delegated powers in the Bill is available through the delegated powers memorandum which has just been published.

On the statutory instruments for new penalties, we will be consulting on whether new automatic penalties can be used. Parliament will debate and vote on secondary legislation before any changes are made, so we intend to bring that before the House.

A few noble Lords mentioned local issues. The noble Earl, Lord Devon, talked about Devon, not unexpectedly, and my noble friend Lord Lipsey talked about the River Wye. I was impressed that he got away with that word. When I was in the other place and we had a similar debate, I got ticked off and had to change what I had said. But we are concerned about the issue of poo in the River Wye and he is right to raise it. There are also issues in Cumbria, where I live, around Lake Windermere and the other lakes, as mentioned by the noble Lord, Lord Inglewood. This is something that I personally feel we need to sort out. Our national parks are hugely important. They should be peaceful, beautiful places, not places that have been damaged by sewage overspills and other pollution. I reassure noble Lords that cleaning up iconic sites such as the River Wye and Lake Windermere is a top government priority. We want to get this sorted. The 2024 price review package that I mentioned earlier will include funding for improvement projects at priority sites and we are also working closely with the Welsh Government, particularly on the issues around the River Wye.

I am just about out of time. If I have missed anything that I should have answered, we will of course check Hansard and I will get back to people in writing, but once again I thank all noble Lords who have spoken today for their valuable contributions. It is clear that we agree on the importance of addressing issues in the water sector swiftly and decisively and that there is a consensus on the core aims of the Bill. The water industry really does need an overhaul, so I look forward to continuing constructive engagement with noble Lords. My door is always open. I commend the Water (Special Measures) Bill to the House and beg to move.

Bill read a second time and committed to a Committee of the Whole House.

Water (Special Measures) Bill [HL]

Baroness Hayman of Ullock Excerpts

Committee stage
Monday 28th October 2024 Lords Chamber

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

My Lords, I thank the noble Baroness, Lady Willis of Summertown, for her interest in and general support for the Bill. I am sure that, despite missing Second Reading, she will make a very valuable contribution to Committee.

As I set out at Second Reading, the purpose of this Bill is deliberately narrow in order to improve water industry performance as an urgent priority. On her Amendment 1, I agree with the noble Baroness that addressing the wider issue of river pollution arising from water and sewerage companies’ operations is of critical importance, as of course is meeting our biodiversity targets. The noble Baroness, Lady Parminter, said that she hoped I was not going to just refer to the review, and I am sure she will be delighted to know that I am not.

The noble Baroness, Lady McIntosh of Pickering, made the important point that we already have commitments in law on this; we already have targets that we need to be meeting on biodiversity and the wider environment. It is important to stress that we must have regard to the Climate Change Act in this space. The Government are already required to meet the legally binding targets under the Environment Act 2021 and the Climate Change Act 2008, and to set out their plans to adapt to the impacts of the changing climate.

As the noble Lord, Lord Blencathra, just mentioned, we are doing a rapid review of the environmental improvement plan. This is because we are serious about meeting the Environment Act’s biodiversity targets. We did not feel that it was fit for purpose to meet those targets, which is why we are doing this review—to protect and restore our natural environment and come up with a delivery focus to help meet very ambitious targets.

Ofwat—I think the noble Baroness, Lady McIntosh, mentioned this—has a core duty under Section 2A of the Water Industry Act 1991 to work towards strengthening resilience. This duty ensures that Ofwat is already required to promote long-term planning for water companies to adapt to environmental pressures, including climate change. I take on board the comments of my noble friend Lady Young of Old Scone, who felt that Ofwat at some point lost the plot. This is why we need to look at the role of regulators through the review—I am afraid I will be mentioning the review from time to time today.

I hope that the noble Baroness, Lady Willis, is reassured that the Government share her ambition to tackle the wider issues of river pollution, biodiversity and climate change. I hope she understands that, because we feel we are already acting in this space through legislation that is in place, we will not accept Amendment 1.

Amendment 91 was also tabled by the noble Baroness, Lady Willis. In addition to the duty under Section 2A, Ofwat has a core duty under the Water Industry Act to work to ensure the long-term resilience of water companies’ supply and sewerage systems. Furthermore, on 23 October the Government announced the independent commission into the water sector and its regulation. This is intended to be the largest review of the industry since it was privatised, and part of the development of further legislation, not just a review. We want it to have a positive end in tackling the problems we see in our water industry. The objectives of this independent commission will include ensuring that the water industry regulatory framework delivers long-term stability to restore our rivers, lakes and seas to good health, to meet the challenges of the future and drive economic growth.

I hope the disappointment of the noble Lord, Lord Blencathra, will be replaced with excitement when he sees that these will form the basis of this further legislation to attract long-term investment and set out recommendations to deliver a collaborative, strategic and, importantly, catchment approach to managing water, tackling pollution and restoring nature.

The noble Baroness, Lady McIntosh, made a specific point about the impact assessment. I do not have the assessment in front of me, so I am not entirely sure what section she was referring to. I hope she and I can catch up following Committee and discuss this, so I can answer her questions in more detail.

The commission’s terms of reference do include environmental aspects. The commission’s objectives include to “support best value delivery” of environmental outcomes, and to:

“Rationalise and clarify requirements on water companies”


to achieve better environmental outcomes. Furthermore, under “approach and deliverables”, it says that the chair

“will invite views from an advisory group of nominated experts, covering areas including the environment”,

and

“will also seek views from wider groups of stakeholders, including environmental campaigners”.

Therefore, we are trying to make sure that, as well as meeting the targets already in legislation, we put the environment at the heart of what we are doing.

I hope that the noble Baroness, Lady Willis, is reassured that these two new Clauses are unnecessary as they overlap with existing government requirements, Ofwat’s core duties and our ambitions for the future. I hope she will take an active part in what we are trying to achieve with the commission, and I thank noble Lords for their engagement on these important matters.

[Baroness Willis of Summertown (CB)]

I thank the Minister and everybody else who has contributed to this discussion on my amendment. I am not going to repeat the valid and important points that have been made, but I will respond to the noble Baroness, Lady McIntosh, on the term “caution on costs”. There is a lot of debate about costs, and nature-based solutions can often be much cheaper while also elevating biodiversity. For the last 20 years we have been told to be cautious about costs and on-costs, and as a result our species targets have gone down and down. The time has come to redress that balance, and I look forward to debating this another time.

On the commission, I appreciate the Minister’s comment that we already have commitments to the environment in the Environment Act and the Climate Change Act. However, I was shocked when I discovered over the weekend that, according to the list of protected species that we want to stop the decline of by 2030—not 2035—25% of plants and birds and 100% of freshwater invertebrate species rely on clean rivers. Therefore, while I am delighted about the commission and will absolutely get behind it and join in, it is going to be too slow and too late to achieve the biodiversity targets we set out in the Environment Act. I look forward to picking up this issue on Report, but for now I beg leave to withdraw the amendment.

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Once again, I thank the noble Baroness, Lady Bakewell, for leading this group, and the noble Earl, Lord Russell, for taking her place in this debate. I hope that the Minister can address noble Lords’ concerns in her response.

[Baroness Hayman of Ullock (Lab)]

My Lords, clearly, public trust in the water sector has been severely damaged and the number of serious pollution incidents is increasing, as we heard very clearly from my noble friend Lord Sikka when he introduced his amendments. At the same time, companies have been paying out millions in bonuses. To rebuild public trust, the Bill enables Ofwat to issue new rules on remuneration and governance to ensure that companies and executives are subject to robust oversight and held accountable for failure. I thank the noble Lords who have tabled amendments relating to the application of these rules.

I will start with Amendment 2, tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville. I thank the noble Earl, Lord Russell, for introducing it on the noble Baroness’s behalf and wish her all the best from these Benches. I also listened with interest to the suggestions made by the noble Duke, the Duke of Wellington. Clearly, he and the noble Earl, Lord Russell, had different opinions on the wording. Our approach is intended to strike a balance between the approaches suggested by the noble Lords, to give Ofwat some flexibility while ensuring that it issues rules in relation to our priority areas.

However, I emphasise that the provisions in the Bill state that Ofwat must exercise its power to set rules in relation to performance-related pay, fitness and propriety, and customer representation. Ofwat may also make rules about other remuneration and governance arrangements at its discretion, but it must take action regarding the specific matters referred to in the Bill. We are pleased that Ofwat is already taking action to implement these rules through the publication of its consultation announced on 22 October. This was referred to by number of noble Lords, including the noble Lord, Lord Remnant. I hope the noble Earl will tell the noble Baroness that we hope that this has reassured her that her amendment is unnecessary.

I turn to Amendment 3, tabled by the noble Lord, Lord Remnant. Ofwat has a range of primary duties, including acting to protect the interests of consumers, ensuring that companies properly carry out their functions, and securing that companies are able to finance the delivery of their statutory obligations. I assure the noble Lord that Defra has worked to assure agreement with companies to update their articles of association to place customers and the environment at the heart of business decisions which impact on consumers.

The noble Lord is correct that I am going to say that Ofwat’s existing duties are already consistent with the outcomes that this amendment aims to ensure. This includes ensuring due consideration of the human and capital needs of the sector. He also raised concerns about influencing Ofwat. The current consultation that I have referred to is an initial policy consultation which has been launched with the express purpose of inviting views early. This will be followed up with further statutory consultations, which will also take into account the views shared through this initial policy consultation.

I thank the noble Lord for bringing his knowledge and experience to the development of this legislation. It is very valuable to hear his contributions. However, I hope that he is reassured that, in setting the rules about remuneration and governance, Ofwat will continue to act in accordance with its core duties and understands that it is for this reason that the Government will not accept the amendment.

Amendment 25, tabled by my noble friend Lord Sikka, and Amendment 27, tabled by the noble Lord, Lord Roborough, relate to the timing and process for setting the rules for remuneration and governance. My noble friend took the opportunity to lay out clearly the many concerns around the behaviour of water companies and the ability of regulators to hold them to account. Ofwat is required to undertake statutory consultation with the relevant persons, which includes the Secretary of State, before any rules are finalised. Allowing Ofwat to set rules in this way, rather than through legislation, will enable those standards to be more easily amended, subject to the relevant procedural requirements, where it is appropriate to do so in the future. The Government and Ofwat agree that the rules should be in place as soon as possible after Royal Assent, and Ofwat intends to implement them following its statutory consultation, which, as I previously mentioned, has already been launched. I hope the noble Lords are therefore reassured their amendments are not necessary.

Finally, Amendment 101, tabled by my noble friend Lord Sikka, relates to dividend payments. Sustained investment in the water industry will continue only if the shareholders of companies can expect a fair return. Ofwat already has the power to stop the payment of dividends if they would risk the company’s financial resilience and to take enforcement action if companies do not link dividends to performance for consumers and the environment. The amendment risks deterring much needed investment in the sector. I highlight that the Government’s new independent water commission will look at how we can improve the regulatory framework to attract investment and support financial resilience for water companies. I hope this is helpful in explaining to my noble friend why the Government will not accept his amendment.

A few noble Lords talked about the importance of investor confidence and the impact that we could have on this and talent in the water industry. While we believe it is right that companies and their executives are held to account for basic and fundamental performance requirements, it is important that, should companies meet their performance expectations, executives can still be rewarded. The proposed £88 billion in investment under PR24 is the largest ever in the water sector and has the potential to create up to 30,000 new jobs. It is crucial that the sector can recruit the talent it needs to deliver the PR24 proposals, because improving the performance of the water industry will help the industry attract and retain talent. Private sector investment is also at the core of how we grow the economy, and the Bill is designed to deliver a clear and consistent regulatory framework for the water industry and its investors. Noble Lords may be interested to know that on 10 September Defra and Treasury Ministers held a round table with investors where they outlined how the Government will work in partnership to attract the billions of pounds in private sector investment that are desperately needed if we are going to clean up Britain’s rivers, lakes and seas.

Finally, I assure the noble Lord, Lord Roborough, that I always try to get on well and work constructively with everybody, including Ofwat. I once again thank the noble Lords for their suggestions and input to this discussion on the general application of the rules for remuneration and governance.

[Earl Russell (LD)]

My Lords, I thank the Minister for her comments. The noble Duke, the Duke of Wellington, put forward an interesting idea on issuing guidance, and it is one that I will take back to my noble friend for further consideration. The noble Lord, Lord Remnant, talked about the lack of ability to scrutinise the rules, the need to attract talent and the carrot and stick approach. The noble Lord, Lord Sikka, talked about broken trust, the poverty of regulations and the level of convictions in the water industry. His Amendment 101 would curb excessive dividends, financial engineering practices and practices inflating the worth of companies. The noble Lord, Lord Roborough, n his amendment said that rules must be published within six months and he talked about the powers of Ofwat being unchecked.

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[Baroness Hayman of Ullock (Lab)]

I thank noble Lords for their interest in the rules relating to performance-related pay. The public have been clear that they expect to see change in the performance of the water industry and, where performance is poor, that executives should not receive bonuses.

I turn to the amendments in this group: Amendment 4 from my noble friend Lord Sikka and Amendment 18 from the noble Lord, Lord Remnant. I thank them for their introductions and their unexpected agreement. I also thank the noble Baroness, Lady Pinnock, for sharing her experience of working with Yorkshire Water; these shared experiences are important as we develop the legislation going forward.

In line with the general principles of regulatory independence, Ofwat will rightly be responsible for developing and enforcing the rules on remuneration in governance, including determining the individuals in scope. As I mentioned in the previous group, Ofwat published its policy consultation on 22 October, and this will run through to 19 November. This consultation is to design the rules that are outlined in the Bill.

In response to the noble Lord, Lord Roborough, I will say that the consultation sets out Ofwat’s intention to apply rules on performance-related pay only to executive directors who are members of the regulated company board and receive performance-related pay. Ofwat has also stated in its policy consultation that it intends for the rules relating to fitness and propriety to apply in the first instance to chief executives and individuals appointed as directors to the board, and that would include both executive and non-executive directors. But Ofwat may consider extending the rules to other senior management roles in the future.

Allowing Ofwat to set out in the rules the performance metrics to be applied will also enable those standards to be more easily amended, subject to the relevant procedural requirements, where or when it is appropriate to do so in the future. Ofwat will of course need to consult with the relevant persons, and this will include the Secretary of State, Welsh Ministers, the Consumer Council for Water and other stakeholders, before these rules are finalised.

In conclusion, the Government will therefore not be accepting these amendments, because we need to ensure that Ofwat can retain the flexibility to expand the group of persons covered by the rules in future if appropriate.

[Lord Sikka (Lab)]

My Lords, I thank all noble Lords for their contributions to this debate and I am sure that some of the issues will return. Perhaps I may just clarify a point. The Bill also holds out the possibility of criminal sanctions against directors. Are we to assume that non-executive directors will never be charged with anything? The Post Office scandal shows that non-executive directors were culpable, so there appears to be a case for including them in some of these considerations. I am sure I will read Hansard with considerable interest and possibly return next time. For the time being, I beg leave to withdraw the amendment.

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[Baroness Hayman of Ullock (Lab)]

My Lords, I am grateful to noble Lords for their suggestions regarding matters we need to be considering in the rules for performance-related pay. As I previously noted, to rebuild public trust we are creating a new framework for supporting accountability. As part of this, Ofwat will be issuing new rules on bonuses, including standards relating to environmental performance.

I turn to Amendment 5, tabled by my noble friend Lord Sikka. In recent years, public concern has been focused on water company bonuses, particularly in the instances where performance has been poor. Companies must work to regain their customers’ trust, including by holding those in senior roles accountable so that their remuneration better reflects the service that customers rightly expect. We are giving Ofwat new powers to issue rules on remuneration and governance to ensure that companies and executives are held accountable for failure and to drive improvements in performance. We are requiring Ofwat to exercise these powers to prioritise making rules to prohibit bonuses for underperforming companies.

Ofwat already sets expectations on executives’ performance-related pay. This measure will strengthen its existing powers to ensure that bonuses are not paid in any financial year in which standards are not met. Ofwat’s rules on remuneration will cover both financial bonuses and bonuses in kind, limiting any potential loopholes in the policy. We believe that performance-related pay can be an effective tool within the overall remuneration package and will incentivise leaders to focus on improvements that can transform performance. Remuneration committees for each water company independently determine the appropriate level of remuneration for their executives. We therefore do not propose to amend the requirement on Ofwat to make rules to cover total remuneration.

Amendments 6 and 28 were tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, and ably introduced by the noble Earl, Lord Russell. These relate to the consideration of environmental standards in the rules for remuneration and governance. In line with the general principles of regulatory independence, Ofwat will rightly be responsible for developing and enforcing these rules. However, the Government are clear that environmental standards are a vital component. Ofwat must, following consultation, provide that environmental standards have to be met by companies if performance-related pay is to be given to persons holding senior roles. Ofwat’s policy consultation, which we have previously discussed, proposes that bonuses will be prohibited if a company has had a serious category 1 or 2 pollution incident in the preceding calendar year.

The noble Lord, Earl Russell, asked for some figures. I can tell him that, since 2015, enforcement action by the EA and Ofwat has resulted in over £400 million in fines to water companies or money back for customers. I hope that noble Earl is therefore reassured that this new clause is unnecessary, noting that Ofwat must already include environmental criteria when designing the rules in relation to performance-related pay.

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[Lord Blencathra (Con)]

My Lords, I thank my noble friend Lady McIntosh of Pickering for moving this important amendment, which has caused a little bit of welcome excitement in the Committee. Both Amendments 7 and 8 seek to ensure that senior executives do not receive a financial penalty for failures that were not their fault or within their control, and we on these Benches feel that the noble Baroness’s amendments merit consideration by Ministers. The intervention by the noble Lord, Lord Cromwell, at the end also merits some consideration.

It is right that the Government should take steps to ensure that, when a water company fails to meet the standards set by Ofwat, the responsible executive is held to account. While it is right that company directors take responsibility for the successes and failures of a business, under the Bill, other senior officers, who may not be members of the board of directors, could be penalised under these rules. The argument that the relevant senior executive is held responsible, rather than an officer of the company who was not responsible for the decision, is a simple one. Rather than applying financial penalties to all senior executives, including those below board level, these rules should penalise only those who are responsible for the company’s conduct.

It is quite a long time since I last worked in industry, but I do not think that much has changed to this day. Who is responsible depends on the level of direct supervision by a more senior officer. At lower levels of a company, it is quite straightforward: the supervisor or the foreman has minute-by-minute relationships with the team under him or her, so they could be held responsible for faulty work or bad behaviour by their workers. But that is at the lower level. As you get higher up a company, the whole ethos changes. Executives are supposed to set objectives and delegate to their other officers how it is done. The CEO, or directors, tell officers under their command, “Here are your legal duties and these are the company objectives. Here are your own personal targets and objectives—report to me weekly, monthly or whatever on how you are progressing. Now, just get on with it”.

There is no direct day-to-day supervision, and the CEO has to trust that the senior officers below him or her obey the law, behave properly and do not cause the breaches that we are concerned about. It would be wrong to blame and reduce the pay of CEOs or directors based on a mistake by a person under him or her where they have no direct control. Of course, the exception would be in the extraordinary circumstances in which the CEO or executive director gave instructions to the worker to break the law or not to care about the rules. That would be a different matter.

Without these amendments, we are concerned that it may prove difficult to find professionals willing to take on senior roles at water companies if there is a risk they will suffer an unfair loss of performance-related earnings through no fault of their own. It is a basic principle of performance-based pay for employees below board level that it should be tied to their performance as an employee within a team. It would not be an effective incentive scheme if one individual or team were deprived of their performance-related benefits because of the behaviours of failures of another individual below board level. As we discussed at Second Reading, arbitrary punishment will not improve performance; it will only encourage people to seek employment outside the water sector.

If we are to deliver the improvements to the water sector that the British people rightly expect, we must attract more talent to the sector through a fair incentives and penalties regime. The Bill is a bit too broad and could permit rules to be applied to the sector by Ofwat that are unfair and ineffective. Furthermore, when a current bonus scheme, or contractual bonus, provides for the bonus to be payable on the achievement of certain performance conditions, and the performance conditions have been met, an employer is, in effect, obliged to award the bonus. In cases where an employer may grant discretionary bonuses, employers are required to exercise this discretion honestly and in good faith, not to exercise it in an arbitrary, capricious or irrational way, and not to breach the implied term of trust and confidence.

It concerns me that, should the Government choose not to include these amendments in the Bill, and individuals’ performance-related pay was docked for actions or responsibilities beyond their control or remit, it would put the employer in a position of complying with the requirements of rules created by Ofwat under this Bill but then acting contrary to these common-law and contractual requirements. That leads to a concern that this scenario could result in costly and time-consuming litigation, thus diverting funds which would otherwise be better spent improving our water and sewage systems. Therefore, I encourage the Government to accept these amendments so that, should a water company fail to meet the standards set by Ofwat, only the relevant executives are held responsible. However, if the Government are unwilling to put this on a statutory footing, we hope that Ofwat would be willing to enact these principles under its rules, which could be overseen by the House under Amendment 27 as an affirmative instrument.

I want to comment on the points made by my noble friend Lady McIntosh of Pickering on surface water. I put it this way: if we were starting again from scratch a couple of hundred years ago, we would have designed a system whereby we never had rainwater from gutters or car parks running off into Mr Bazalgette’s sewage system—but we are where we are now. In an ideal world, two pipes would come into every house and, as the noble Lord suggested earlier, one would have clean water for drinking and the other water for flushing the toilet or for hose pipes. We cannot go back and do that now—but what we can do is look at new developments, and I hope that the Government will consider the suggestion from the noble Lord, Lord Cromwell, in that regard.

I understood that it is possible if one is building a car park, before one puts in the hardcore, to lay a whole series of ooze pipes and then collect all the rainwater run-off, so it replenishes the underground stream by putting the water back into the subsoil. That should be possible. Whatever it is, we need to look at new developments to ensure that surface water is not unnecessarily going into our sewage system. I hope that the Minister will carefully consider what my noble friend Lady McIntosh of Pickering has said.

[Baroness Hayman of Ullock (Lab)]

My Lords, through provisions introduced by Clause 1, Ofwat will be able to issue new rules on remuneration and governance to ensure that companies and executives are subject to robust oversight and held accountable for failure. Among other things, these rules will ensure that executives will no longer be able to take bonuses where companies fail to meet standards on environmental performance, financial resilience, customer outcomes or criminal liability.

Amendments 7 and 8, introduced by the noble Baroness, Lady McIntosh of Pickering, seek to ensure that these rules apply only in instances where the failure to meet the required standards is due to a failing by that individual and not another person. I start by reassuring the noble Baroness that, should companies meet their performance expectations, executives will rightly be rewarded. However, the changes proposed through Amendment 7, in particular, would make it more difficult for Ofwat to implement the rules on remuneration and governance in a meaningful way. This is because it would introduce an additional test to be met before the bonus ban could be applied, where a link between the specific actions of an individual senior leader and the performance failings of a company as a whole might be difficult to demonstrate.

Senior executives are also collectively responsible for the actions of the company and therefore should be held responsible for poor performance. However, having said that, Ofwat has stated, in the policy consultation it published last week, that, while it intends for the rules to apply to most performance-related pay decisions by water companies,

“there may be … exceptional circumstances where a payment should not be prohibited”.

For example, if an incident leading to a rule breach was clearly and demonstrably beyond the control of the company, this could be grounds for an exemption from the ban.

Considering the changes proposed by Amendment 8, we also consider it unlikely that individuals in senior roles will fail to meet Ofwat’s future standards of “fitness and propriety” due to a failing on the part of another person. The potential criteria proposed by Ofwat in its consultation to measure “fitness and propriety” include character, previous conduct, and knowledge. These criteria are specific to the individual, rather than the performance of the company, and do not obviously relate to acts by other persons.

I just want to mention an issue that the debate moved on to, around drainage and SUDS. We are going to be discussing SUDS further in group 8, so we shall talk about that then, but I want to assure the noble Baroness that we are engaging with officials in MHCLG, because it is really important that we have a proper discussion around planning and drainage as we move forward with development. I am very aware of the problems that surface water can cause in new development if it is not thought through properly.

The noble Lord, Lord Cromwell, drew the Committee’s notice to the commission and asked whether it would be discussed there. I will draw the Committee’s attention, for interest, to part of the scope of the commission:

“Where housing, planning, agriculture and drainage interlink with strategic planning for the water system, these are in scope. ... The commission should have regard to how the water sector regulatory system provides the certainty around the provision of water infrastructure needed to underpin development plans, housing growth and sustainable development, while strategically protecting and enhancing the environment. This should include how regulation and planning for water infrastructure and for residential and commercial development can work together more effectively to anticipate and invest to provide for future growth, to quickly resolve and prevent issues where water and wastewater capacity constraints may otherwise inhibit necessary development (such as through their impact on requirements for water and nutrient neutrality)”.


So, although it is not entirely dealing with the issue around SUDS, I think it is something we need to explore further with the housing department, for example, and with local government. There is an opportunity to look at development and water within the scope of the commission. I hope that is helpful for noble Lords to understand.

I hope I have reassured the noble Baroness that the rules will be applied to individuals in a proportionate manner, and made clear why the Government consider these amendments to be unnecessary.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am grateful for the opportunity to debate in some depth these two amendments. I just clarify that the automatic right to connect is very different from SUDS and I do not think the noble Baroness addressed that point. I still have reservations, because I believe it is inappropriate in terms of Clause 2 to speak about pollution incident reduction plans when so many of the sewage discharges can self-evidently be found not to be the responsibility of water companies at all. As the noble Lord, Lord Cromwell, so eloquently and appropriately recorded, these incidents are only going to increase as we see the number of major new developments of four-bedroom and five-bedroom houses increase.

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[Lord Roborough (Con)]

My Lords, I thank the noble Earl, Lord Russell, for moving the amendment. I want to speak in support of Amendment 22, from my noble friend Lord Remnant, as well as Amendments 21 and 23 tabled by the noble Duke, the Duke of Wellington.

My noble friend is right to note that the decision whether to be on a board, panel or committee is the job of the company rather than any kind of external regulator. By allowing the company to make that decision, it can decide based on its own business needs. If this was left to Ofwat, not only could it lead to a situation where the board, panel or committee did not fit well into the company structure but it might harm relationships between those forums and the board of the company.

It seems unlikely that a regulator would ever have access to all the information needed to make decisions on how a company’s decision-making systems should be structured, and it is surely the responsibility of the company itself to ensure that it has the right processes in place to make the correct decisions according to its needs. Indeed, as we have heard from many noble Lords, it is clear that the regulator has failed to get important decisions right in the past, to the detriment not only of companies but of the environment. Yes, of course, the regulator should have its role in holding companies to account for their decisions, but the moment regulators are involved in decision-making, it surely takes some responsibility for those choices too.

We are concerned that having consumer representatives on the board or their being involved in any decision-making within the company creates a blurring of responsibility. There is already the risk of some confusion, given the role of regulators, but they are at least experts in the industry and well informed about their roles, acting within well-defined parameters.

I agree with the noble Duke, the Duke of Wellington, on sectional interests and the effective working of a board. Consumer representatives on a board lay themselves open to the responsibilities of being a company director and in some cases a director of a listed company. Do the Government really want such consumer directors to be open to fines or prosecution for failing to deliver accounts on time, trading while insolvent or even insider dealing? It is not clear to me as the Bill is drafted that those consumer representatives could not also be subject to fines or prosecution by the regulator. If a consumer representative proposed an action that led to penalties from the regulator, how could they not be responsible?

Turning this around to the perspective of the existing board and management, if consumers are part of decision-making, then it is conceivable that they could cause or prevent an action by the company that created regulatory breaches and punitive action. How would this coexist with the responsibilities and liabilities of professional managers and board directors? How could this not create liability for the consumer representative?

My comments about consumer representation apply equally, if not more, to the environmental experts proposed in Amendment 9 by the noble Earl, Lord Russell. I understand and applaud the sentiment behind the amendment, of environmental representatives representing the stakeholder that has no natural voice, the environment. However, environmental campaigners already have a strong voice. There are obligations already present for companies, and others may be imposed through amendments to the Bill. I also agree with the noble Duke, the Duke of Wellington, that environmental representatives, alongside consumer representatives, should be limited to panels.

Allowing the company to decide the forum in which such representatives take part would benefit both sides of the agreement. If the company has taken this decision, then it becomes clear that the company, its managers and employees remain jointly responsible for decisions. I am not clear from the Bill exactly how the Government intend that its proposals should work. Both my noble friend Lord Remnant’s Amendment 22 and Amendments 21 and 23 from the noble Duke, the Duke of Wellington, have considerable merit. While there is a contradiction inherent between them, both are good solutions to creating the involvement of consumers that the Government want.

I thank all noble Lords for their involvement in this spirited debate. I ask the Minister to explain exactly how she sees consumer involvement working in practice under the Bill. I also ask that she give serious thought before Report to the amendments that I have addressed.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank noble Lords who have taken part in this debate. It has come across clearly that there is no agreement about who should sit on the boards. We want to rebuild trust in the water sector, and to do that we are giving Ofwat new powers to issue new rules on remuneration and governance.

I turn first to Amendment 9 in the name of the noble Earl, Lord Russell, and Amendment 21 in the name of the noble Duke, the Duke of Wellington. The powers on remuneration and governance outline a requirement for Ofwat to set rules on companies for including consumers in decision-making. We feel that it is appropriate for Ofwat, as the independent regulator, to determine how this is implemented. Water companies have a range of legal environmental obligations that they are required to meet, and actions related to these obligations will already be informed by specialists in the company.

We believe that introducing requirements to include environmental experts on company boards would take the focus away from involving consumers in water company decisions, which do not have the same level of legal requirements as the environment does. Environmental issues should already be a key consideration in water company decision-making. Importantly, my officials in Defra have worked to secure agreement with companies to update their articles of association, to place both customers and the environment at the heart of business decisions. I hope that this clarifies to noble Lords that the Bill ensures the prioritisation of consumer representation on company boards and that they feel able not to press their amendments.

Water (Special Measures) Bill [HL]

Baroness Hayman of Ullock Excerpts

Committee stage
Monday 28th October 2024 Lords Chamber

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

My Lords, I thank all noble Lords who have put forward amendments relating to the financial management of water companies. I will start with Amendment 10, tabled by the noble Lord, Lord Cromwell.

Ofwat has a core duty under Section 2 of the Water Industry Act 1991 to ensure that companies can finance the proper carrying out of their statutory obligations. Ofwat already monitors the financial position of water companies and can take action when companies need to strengthen their long-term financial resilience. However, we recognise that some companies will need to take further steps to strengthen that financial resilience. Ofwat has required further assurance from these companies about their financial resilience into 2025 to 2030 and beyond, and the annual monitoring financial resilience report is due to be published this autumn and will provide a publicly available assessment of the financial resilience of each water company. I say to the noble Lord, Lord Cromwell, that we met and discussed these concerns previously. Clearly, the commission that we have talked about a lot today will look at performance and resilience, but I am very happy to discuss this with him further as we move forward through the Bill.

Turning to Amendment 86, tabled by the noble Lord, Lord Remnant, I emphasise that there is a high bar for the introduction of a special administration regime and the Government do not expect to have to use this power. A special administration regime will be required only when there is evidence that a company is insolvent or in serious breach of its statutory duties. The noble Lord’s amendment is to Clause 10, and Clauses 10 and 11 are designed to introduce new powers for the Secretary of State and Welsh Ministers to modify water company licences to cover any shortfall that results from a SAR. Government funding may of course be required to cover the costs of a special administration, and these clauses mean that the Government will be able to recoup any taxpayer money spent during a SAR that cannot be covered upon exit from the SAR, either by rescue or by transfer. I wanted to make that clear. Of course, in the unlikely event that the power in the Bill is used, it allows the Secretary of State or Welsh Ministers to decide, subject to consultation, the rate at which the shortfall is recovered. I hope the noble Lord is therefore reassured that any intervention would be considered very seriously and as a last resort.

I turn now to Amendment 92, tabled by the noble Lord, Lord Roborough. Water companies are allowed to raise debt to fund the delivery of their services and it is for companies to decide their financial structure. At sensible levels—that is the key point—debt can be an appropriate way to fund essential investment. Sustained investment in the water industry will continue only if the shareholders of companies can expect a fair return. This amendment may therefore threaten the ability of companies to attract investment if limits on borrowing are imposed.

I reassure the noble Lord that Ofwat already has appropriate powers to prevent dividends where they would threaten financial resilience. I appreciate that the noble Lord has extensive experience in this area, but I hope he understands why we cannot accept this amendment, because it is vital that we ensure companies are able to finance their functions. If he would like to send in more information about this, I would be very happy to receive it and have a look.

Finally, I once again highlight that the new independent water commission, led by Sir Jon Cunliffe, the former Deputy Governor of the Bank of England, will review the current water industry regulatory framework to ensure that it attracts investment and supports financial resilience for water companies. I once again thank noble Lords for their suggestions and input into this discussion on the financial management of water companies.

[Lord Cromwell (CB)]

I thank everyone who has participated in this. I think we are all concerned about financial engineering of one sort or another. It is not only borrowing, but that is clearly an important part of it. I am sorry that the amendments have not passed muster, but I look forward very much to further discussions with the Minister, as she offered. I beg leave to withdraw the amendment.

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[Baroness Hayman of Ullock (Lab)]

My Lords, I thank the noble Baroness, Lady McIntosh of Pickering, for her amendments relating to Ofwat’s duties. I will take Amendments 11 and 12 together.

As I have previously noted, public trust in the water sector has been severely damaged, and the number of serious pollution incidents is increasing, yet companies are still paying out millions in bonuses. To rebuild public trust, we are creating a new framework to support accountability, including the new rules relating to remuneration and governance. As the independent economic regulator of the water industry, Ofwat will be responsible for developing these rules.

However, the Government are clear that environmental standards are a vital component of performance. As such, the Bill requires the forthcoming rules to include standards that relate to the environment. The noble Lord, Lord Blencathra, has mentioned the devastation that flooding can bring; I reassure him and other noble Lords that I completely understand why it is so important for us to tackle flooding. I live in a house that has been flooded—living in Cumbria, you are always aware of these issues.

With regard to the Flood and Water Management Act 2010 specifically, while the Act includes provisions relating to sustainable drainage, it does not prescribe or define any environmental standards capable of being applied in this context. It would therefore not be appropriate to include reference to standards in this legislation within Ofwat’s rules, as Ofwat does not have any functions or expertise in relation to the technical requirements prescribed under the Flood and Water Management Act 2010.

The noble Baroness, Lady McIntosh, suggested that Defra should take ownership of delivering this. The issue we have is that it also impacts directly on development and developers, which is why the Government are currently working with the Ministry of Housing, Communities and Local Government to assess how best to implement their ambitions on sustainable drainage, while also being mindful of the cumulative impact of the new regulatory burdens on the development sector. At this stage, I do not want to pre-empt the outcome of that process.

On this basis, the Government do not accept either of the amendments from the noble Baroness. However, I would like to say that the noble Baroness knows that I am very sympathetic to her concerns. As she said, we have discussed this previously. If she is willing, I suggest that we look to arrange a meeting between herself, myself and MHCLG, in order to discuss this further, where she can clearly explain her concerns to both departments—Defra and MHCLG—that have responsibility for moving forward on this.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am most grateful to all who have spoken, and in particular for the support of the noble Baroness, Lady Pinnock, and, from a sedentary position, the noble Baroness, Lady Parminter, as well as my noble friend Lord Blencathra. He referred to the flooding. I was actually a candidate—at a very early age—for Workington in 1987. I went back and visited as a shadow Minister during the severe floods of 2007 and 2009, so I am well acquainted with the pressures faced by Carlisle, Keswick and Cockermouth. It was very sad to see that many of the residents felt that they could not afford to take out insurance in those floods.

I will add that it is not just flooding that concerns me; it is the surface water going into the combined sewers taking the sewage from the new developments that do not have mandatory SUDS that is causing the problem.

I would like to take up the Minister’s offer. It would be good to have the meeting before Report, because I would be prepared to come back with these amendments then. Alternatively, if the department wish to come forward with even better amendments that achieve the same end, that would be very welcome.

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[Lord Remnant (Con)]

My Lords, I am delighted that Amendment 26 in my name falls into the same grouping as those in the name of my noble friends Lord Roborough and Lord Blencathra. Although I very much regret that your Lordships’ time is having to be spent on potentially amending proposed legislation that has retrospective effect, it gives me the opportunity very much to support the arguments advanced by my noble friend Lord Roborough in support of Amendments 14 and 15.

It cannot be right retrospectively to override contract law with respect to employment contracts freely entered into by company and individual in line with relevant legislation and regulations in force at the time. Similarly, to the extent that, today, pay can be recovered from senior individuals under malus and clawback provisions in listed companies’ remuneration policies, such a draconian power can rightly be exercised only in extremely limited circumstances known in advance by the individual. The proposed exercise of the pay prohibition in the Bill retroactively goes way beyond accepted remuneration practice, and unacceptably so.

On my own amendment, I will not repeat the general arguments made by my noble friend against the principle of retroactive or retrospective legislation. I am no lawyer, so I hope that your Lordships will forgive me if I perhaps erroneously use the terms interchangeably. The offending principle, though, remains the same. The general rule in this country, and indeed in most modern legal systems, is that legislative changes apply prospectively. If we do something today, we feel that the law applying to it should be the law in force today, not tomorrow’s backward adjustment of it.

The Bill proposes that the provisions about performance-related pay apply from the financial year beginning 1 April 2024. We are currently some seven months into that financial year, and the Bill will not be enacted for some months hence. In effect we are talking about backdating the provisions for the best part of a year. The remuneration arrangements entered into between senior individuals and their employer will have been agreed under remuneration policies agreed by shareholders well before April for them to take effect from 1 April 2024. It surely cannot be right, whatever the merits of the Bill, for its provisions subsequently to alter those arrangements and the remuneration paid, or to be paid, under them.

Few things concern investors more than retrospective legislation, and listed companies will need to consult with and seek approval from shareholders on changes to remuneration policies at their AGM. Requiring retrospective changes risks companies breaching shareholder-approved remuneration policies. More fundamentally, it will undermine investor confidence at a time when they are being asked to fund a record investment programme.

My amendment would simply change the date from which the performance-related pay provisions come into effect from a historic 1 April 2024 to a mildly prospective 1 April 2025. Is that really too much to ask, to avoid breaching a fundamental legal principle? I do not think so and I hope that the Minister will agree with me.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank all noble Lords who have stuck with us this evening and carried on the debate. We know that the public have been clear that they want to see change and that where performance is poor, executives should not receive large salaries or bonuses.

I will start with Amendments 14 and 15, tabled by the noble Lord, Lord Roborough. The conditions of existing employment contracts may not align with Ofwat’s new rules. Our concern is that Amendment 14 may prevent Ofwat being able to apply its rules even when performance has not met the required standards. On Amendment 15, it is also right that where companies breach Ofwat’s rules on performance-related pay, Ofwat should be able, if it considers it appropriate, to require the company to recover any payment made in breach of the rules. Linking pay to performance should incentivise decision-making, resulting in improved outcomes for customers in the environment. I reiterate what I said earlier: should companies meet their performance expectations, executives can still be rewarded. So I hope that the noble Lord will understand why we will not accept his amendments.

I turn to Amendment 26, tabled by the noble Lord, Lord Remnant. This legislation will ensure that Ofwat is able to implement rules on performance-related pay in the current financial year. However, I listened really carefully to the speech that the noble Lord just made introducing his amendment. I would really like to understand his concerns better, so I wonder whether he would welcome further discussion on this matter so that we can look at it in more detail. I would very much appreciate it if the noble Lord was prepared to do that. But currently we are not going to accept the amendments as we feel that they would prevent meaningful implementation of the rules.

[Lord Roborough (Con)]

My Lords, I am grateful for the Minister’s reply. We respect that this is an election manifesto commitment and therefore needs to be in the Bill in some form, but my noble friend Lord Remnant and I would both like to discuss further with the Minister, if possible, how we can help to improve this part of the Bill. In the meantime, I beg leave to withdraw my amendment.

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[Baroness Hayman of Ullock (Lab)]

My Lords, how nice to have a quick last group. I thank the noble Lord, Lord Roborough, for introducing the last group of today with his Amendment 19, which seeks to specify the criteria to be covered by the rules on fitness and propriety, ensuring that senior leaders meet the public’s expectations.

I have mentioned Ofwat’s consultation on remuneration and governance before, and I would just like to confirm to the noble Lord that this consultation references similar criteria to those proposed by his amendment. Ofwat’s consultation seeks views on whether it would be appropriate to include a concept of “ability” in the new test, defined as an individual having adequate knowledge and understanding of the duties of the undertaker. Ofwat has stated its intention to design a fit and proper person test with criteria that will improve public trust and company culture in the water sector, having considered how other sectors are regulated around these same principles. I hope this captures the noble Lord’s concern that standards of fitness and propriety will need to be relevant and encompass concepts of knowledge and understanding. Of course, we feel that Ofwat’s independence is an important part of the trust that companies have in the regulatory regime.

The noble Lord asked why we felt Ofwat should be setting these criteria. We think it is right that Ofwat has the opportunity to consult on these criteria and that companies then have the opportunity to respond and perhaps propose different criteria. It needs to be a situation where Ofwat can then tailor these fitness and propriety standards to the water industry, rather than having prescriptive standards set out within the primary legislation. It is important that Ofwat’s independence is clearly upheld, because it will support its ability to hold senior officials to account for their actions.

Ofwat also notes in its consultation that the 16 largest water companies have a licence condition that requires them to meet the four objectives of its board, which are leadership, transparency and the governance principles. These objectives include the requirement for boards and board committees to have the appropriate balance of skills, experience, independence and knowledge. I hope the noble Lord is content that this is already being looked at; I hope that he will look at the consultation and therefore see that his amendment is no longer necessary.

[Lord Roborough (Con)]

My Lords, I am grateful for the Minister’s reply, and it is certainly very helpful. Perhaps something I could have brought out more in my initial comments were the concerns over accountability. When I look at the FCA’s senior manager regime, and the fit and proper tests, none of that is here—nowhere is there any accountability to Parliament. We will take the Minister’s comments away and give this further thought. I beg leave to withdraw the amendment.

Water (Special Measures) Bill [HL]

Baroness Hayman of Ullock Excerpts

Committee stage
Wednesday 30th October 2024 Lords Chamber

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

My Lords, I thank everyone who has taken part in today’s first debate in Committee for their valuable contributions and for the amendments suggested regarding the duties and the running of the water regulators. The Government agree that strong and effective regulation is essential if we are to turn around the performance of the water industry. That is why the Bill contains the largest increase in enforcement powers for the water industry’s regulators in a decade.

I start by addressing Amendment 81 in the name of the noble Earl, Lord Russell, and Amendments 79 and 80 in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, which speak to the duties of Ofwat. As I have previously noted, the Bill is intended to drive improvements in the performance and culture of the water industry by strengthening the powers of the regulators to hold companies accountable. However, this Bill will not and cannot fix all the water sector’s problems.

There were a few particular issues. The noble Earl, Lord Russell, asked about drinking water. It is worth noting that Yale’s Environmental Performance Index ranks the drinking water in England and Wales as the best in the world, alongside 10 other countries—we are all on the same level—so we should celebrate that fact about our water industry.

The independent commission that was launched last week, which we heard a lot about on Monday and will, I am sure, continue to hear a lot about, is intended to facilitate the further development of what we need to do to sort out the water industry. As I have mentioned previously, it will be chaired by Sir Jon Cunliffe, who as a former deputy governor of the Bank of England has decades of experience in regulation and finance. The terms of reference for the commission have been published, clarifying its scope and objectives. It will be broad-ranging and make recommendations in line with eight objectives, such as ensuring that

“the water industry has clear objectives for future outcomes and a long-term vision to support best value delivery of environmental, public health, customer and economic outcomes”.

The commission will bring in expertise from a wide range of areas, including the environment, public health, investors, consumers, engineering and economics. I hope the Committee will be pleased that its scope explicitly covers the regulators’ purpose, structure, powers and responsibilities. As the noble Earl, Lord Russell, said, it is really important that the review is able to consider a wide range of suggestions on the future of regulation, so it is right that the commission, rather than this Bill, is the vehicle for considering the water regulators’ roles and responsibilities. We absolutely need to ensure that regulators are fit for purpose to clean up the mess we found ourselves in, with our water systems and lack of investment, if we are to end the appalling pollution that we have witnessed over recent years. I hope this reassures the Committee that, while the Government are not accepting these amendments, we are absolutely committed to strengthening the water industry’s regulatory system through the review.

I move on to Amendment 56 in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, which relates to the review of environmental permits. The water industry regulators take a risk-based approach to managing permits. This is because there are over 21,000 of them. This risk-based approach ensures that regulator resource is managed effectively and allows regulators to focus their efforts on reviewing permits that pose the highest risk of environmental harm.

If we create a duty on regulators to review all water company permits every five years, it could have the adverse effect of preventing them reviewing the higher-risk permits in a timely manner. It would also create significant resource pressure and detract from work to provide wider oversight of water companies. That could result in the conditions of high-risk permits not being updated quickly when issues are identified, potentially increasing the risk of environmental harm. I hope that I have explained clearly why, although the amendment has good intentions, in practical or pragmatic use it would not be effective.

I turn to Amendment 78 in the name of the noble Baroness, Lady Parminter, and Amendment 85 in the name of the noble Baroness, Lady Jones of Moulsecoomb. These amendments both speak to the environmental duties of Ofwat and, as the noble Baroness, Lady Parminter, said, we discussed this a bit on Monday on the amendments of the noble Baroness, Lady Willis.

Ofwat has a range of primary duties. These include duties to protect the interests of consumers, to secure that companies properly carry out their functions, to ensure that companies are adequately financed, and to ensure that companies deliver their statutory obligations, including environmental obligations.

On Amendment 78, tabled by the noble Baroness, Lady Parminter, as part of its draft determinations, Ofwat proposed the largest environmental investment programmes in the sector’s history and will hold companies to account against a wide range of environmental performance commitments. In all, the sector should invest £20 billion to reduce pollution, reduce harm from storm overflows, improve river water quality and increase biodiversity. This includes an expansion in nature-based solutions.

In addition, Ofwat is undertaking its most significant sector-wide enforcement action to date. It has issued draft penalties totalling £168 million and enforcement orders against three companies for failing to manage their wastewater treatment works and networks. I would also like to stress that the duties outlined in paragraph 21 relating to customers and the environment are set out in Sections 2 and 3 of the Water Industry Act 1991. We also know that there is still enforcement action going on for other wastewater companies.

I absolutely agree with the noble Baroness and others that we need to move rapidly on our environmental improvement targets. These are challenging targets, as the noble Baroness knows. Meeting environmental targets and turning around the issues we have with biodiversity in this country is not just about what is in the review or in this Bill; it is also about why we have not been delivering on these targets. This is why the Government have decided to do a rapid review of the environmental improvement performance requirements. It is one way we can start to work much more quickly on how we improve our environment. That is really important. If we constantly wait for the next piece of legislation when we already have things in place, we are not doing justice to what we have already said we will do.

I am sure the noble Baroness, Lady Parminter, knows that I am really committed to improving the environment; it is very close to my heart. She made some very good points, and I suggest it might be useful for us to meet and discuss this between Committee and Report to see how we can bottom out improving our environment, not just through this Bill but in other ways.

We are clear that companies need to deliver on obligations to customers and the environment, but we also need to make sure that Ofwat is properly financed to do this. Again, this is where the review comes in; we need to make sure we can achieve what we want to achieve. There are existing duties which can deliver better, and we need to look at how we push this forward.

We have worked to secure agreements with companies to update their articles of association to ensure that customers and the environment are placed at the heart of business decisions. That is an important move forward.

Under Amendment 84, tabled by the noble Baroness, Lady Jones of Moulsecoomb, the EA and Ofwat would not be subject to the regulators code or the growth duty. The economy relies on a secure supply of water, and water is a key factor in ensuring sustainable growth in the UK. It is therefore important that Ofwat and the Environment Agency consider the implications of their actions on growth, and that they create a stable regulatory environment.

It is, however, also the responsibility of the regulators to appropriately balance their growth duty alongside all other duties. In line with this, the independent commission will consider both the roles and responsibilities of the water industry regulators and how to ensure that the water industry regulatory framework maintains resilient finances and contributes to economic growth. I am sure that the noble Baroness, Lady Jones, will understand that, now we have the commission and the review, we do not want to pre-empt the outcomes. We therefore cannot accept the amendment, but this is the kind of thing to feed into the review, so that we can look at how to take these concerns forward.

Amendment 29, in the name of my noble friend Lord Sikka, speaks to possible conflicts of interest. We believe it would be disproportionate to prevent all Defra and Ofwat employees from being able to accept employment in a water company. However, both Defra and Ofwat take the handling of actual or potential conflicts of interest very seriously, including when either staff or board members leave the organisation. Staff in both organisations are bound by the Civil Service business appointment rules, and any requirements with respect to future employment or business relationships are managed appropriately and proportionately in accordance with these rules.

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We share the ambition of the noble Baroness, Lady Parminter, for water sector reform and we hope the Government will listen to the concerns of noble Lords across the Committee who are calling for more accountability on water companies’ actions. The intention of the pollution incident reduction plans is laudable, but we do not believe that the Bill in its current form actually asks enough of the industry, beyond publishing the plan. We need accountability to the regulator and to the public on performance against that plan. I look forward to the Minister’s comments on this group of amendments and I am most grateful for her helpful answer on the previous group.

[Baroness Hayman of Ullock (Lab)]

My Lords, once again I thank noble Lords for their amendments and for taking part in this debate. I start by emphasising that we expect all water companies to reduce all pollution incidents, in line with their legal duties.

I turn first to Amendment 30, tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, which seeks to apply the duty to produce pollution incident reduction plans to water-only companies. Initially, it might be useful to explain why our focus has been on water and sewerage companies only. This is because most pollution incidents arise from sewage incidents, not water supply incidents. We were concerned that, by widening the scope, we could end up diluting the focus of the plans, so that actions were not tailored to the most serious pollution incidents. That is the thinking: the Government want to keep the focus of these plans on sewage incidents, which is why we are not accepting the amendment. Having said that, there have been some very interesting comments around this and I would be very interested to hear some wider thoughts on Amendment 30. Clearly, the noble Baroness is unwell at the moment and is not in her place, but I hope that other noble Lords will go back to her and see whether she would be happy to meet to discuss this further: I think it is something we could pick up, following Committee.

I move now to Amendments 31 and 36, also tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, and Amendments 32, 39 and 40, tabled by the noble Baroness, Lady Parminter, which speak to the implementation of measures identified in pollution incident reduction plans. I thank the noble Baroness for her clear introduction and the noble Duke, the Duke of Wellington, and my noble friend Lady Young of Old Scone for their comments on this amendment.

Clearly, it is really important that we ensure water companies are taking decisive action to reduce pollution incidents. I want to highlight that the provision already requires water companies to report each year on progress made in implementing pollution incident reduction measures. This will create an unparalleled level of transparency that will further enable both regulators and the general public to hold water companies to account. Where pollution incident reduction plans do not meet the statutory criteria set out by legislation, the Environment Agency will be able to take enforcement action. This will include ensuring compliance with the duty for the plan to provide an assessment of progress in implementing the measures.

The noble Baroness, Lady Parminter, was trying to understand why this was not something that we accepted. I can reassure her that it has nothing to do with it being used as a bargaining chip—absolutely not. The big concern is that, if we introduce a duty to implement the measures in the pollution incident reduction plans, this could imply an unusual sub-delegation of powers to the water companies, whereby they would effectively be able to create enforceable duties on themselves. We are concerned that this would then have the perverse outcome of incentivising companies to produce less ambitious plans to mitigate the risk of enforcement action. That is one of the fundamental concerns in a nutshell, and it is why we are not going to accept these amendments. If the noble Baroness has any suggestions, I would be very happy to hear them.

I turn now to Amendment 34A, tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, which speaks to the important matter of waterways in national parks. The Government agree that national parks form a vital part of our environmental heritage. In line with this, the Government will seek to use the powers in the Levelling-Up and Regeneration Act 2023 —I still have the scars on my back—to ensure that relevant authorities, including water companies, deliver better outcomes in protected landscapes. We are in the preliminary stages of developing those regulations, to ensure that authorities deliver the better outcomes that we need. The idea is that they will provide a more holistic approach, conserving and enhancing the purposes and special qualities of our protected landscapes.

We have also set an expectation that Ofwat should challenge water companies to prioritise improvements in national parks. We are expecting considerable investment over the next price review period, to improve water and sewerage assets discharging into national parks. This, of course, will include the iconic Lake Windermere, which we have heard much about. United Utilities was mentioned in relation to this. Noble Lords might be interested to know that I met with a representative of UU last week and discussed issues around the environment and improving nature—so there is work going on with the water companies behind the scenes in this specific area.

However, the Government consider it important that pollution incident reduction plans should identify actions to address pollution incidents right across England and Wales; the noble Lord, Lord Roborough, made exactly this point. A statutory hierarchy of priority areas risks deprioritising pollution incident reduction plans in other areas, so we have to be very careful that we do not do that, because that bathing waters, for example, in other areas could be impacted. For this reason, the Government will not be accepting this amendment, but clearly I want to stress we do take our protected landscapes very seriously.

I turn now to Amendment 35 tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville. I fully recognise her desire to ensure that we see a reduction in the environmental risk posed by pollution incidents. This is why Clause 2 already requires water companies to address environmental risks in their pollution incident reduction plans. The clause requires water companies to set out the measures they will take to reduce the frequency and seriousness of pollution incidents.

Risk to the environment is already used, among other important factors, to determine the seriousness of a pollution incident in the Environment Agency’s incident categorisation process. This is the framework that water companies are required to refer to when they develop their plans. Therefore, by requiring water companies to report on plans to reduce the seriousness of pollution incidents, we are already requiring them to report on and develop measures to reduce the risk to the environment. While we understand the noble Baroness’s intention, the Government believe that because of the reasons I have just set out the amendment is not necessary.

Finally, I turn to Amendments 41 and 42 tabled by the noble Lord, Lord Roborough, which seek to impose requirements around reporting against pollution incident reduction plans. I reassure him that Clause 2 already requires water companies to publish an assessment of their progress in implementing previous plans. Requiring more frequent reporting would be unlikely to allow water companies sufficient time to implement the lessons learned from previous pollution incidents.

I also reiterate that we expect water companies to be fully accountable when developing their plans and implementing the proposals in them. If a plan does not adequately address the statutory provisions required by the Bill or by broader legal requirements, the Environment Agency will take appropriate enforcement action. The Government therefore do not propose to accept these amendments, but I thank the noble Lord for his suggestion.

I will clarify the strategic policy statement. The key point is that it is directed to Ofwat, not to the water companies. The Government’s strategic priorities for Ofwat include the need for companies to prioritise actions to reduce pollution and considerably improve their environmental performance. The SPS sets general strategic requirements for Ofwat and does not create specific measures, as we expect, under the pollution incident reduction plans.

I thank noble Lords for their input into this discussion and for their suggested amendments.

[The Duke of Wellington (CB)]

As the noble Baroness sits down, I must say that I did not find her arguments for not accepting a duty to implement to be very convincing. I therefore wonder if she would at least be prepared to meet the noble Baroness, Lady Parminter, and me between now and Report to see if, between us, we can put together some amendment that might be acceptable to the Government.

[Baroness Hayman of Ullock (Lab)]

I completely understand. This is not a straightforward area, and I would be absolutely delighted to meet the noble Lords to see if we can find a way forward.

[Baroness Parminter (LD)]

I thank the Minister for her responses to the numerous amendments in this group on pollution incident reduction plans, which I think everyone in this Committee believes is one of the really valuable steps in the Bill. I will pass on her comments about a meeting to the noble Baroness, Lady Bakewell of Hardington Mandeville. Water-only companies are responsible for a number of pollution incidents, particularly around drinking water treatment, but I will leave that for that later discussion.

Like the noble Duke, the Duke of Wellington, I just did not find the Minister’s comments very convincing, but it was not just that. I am not a lawyer, so I did not really understand what a sub-delegation of powers was; I am humble theologian, so I will have to go away and think about that and take some advice from people who know about it. However, the offer made to talk about this further is an important step forward. She will have noticed that everyone across the Committee believes that these are important steps we need to take to ensure that the ambitions that the Government rightly have in this regard are carried out as fully as they need to be.

In making that point, I particularly thank the noble Lord, Lord Roborough, for his comments. His phrase—that the Bill in this area does not ask enough of water companies to deliver on the ambition of pollution incident reduction plans—was absolutely spot on, so I thank him for that.

I hope that my noble friend Lady Bakewell of Hardington Mandeville will be reassured by the Minister’s comments about the Government taking pollution seriously in national parks. I am sure that if she has any further matters to discuss with the Minister when she is well—next week, I hope—she will be in a position to come to the Minister’s door, which we all know is an open door, and we thank her for that. I beg leave to withdraw the amendment.

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We are grateful to all noble Lords who have spoken on this group and hope that the Minister will look closely at these amendments before Report. In particular, we feel that more can be done in the Bill on flood management and its impact on pollution in our rivers.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank all those who have taken part for their interest in the important topic of sustainable water usage and sewerage infrastructure. I shall start by speaking to Amendments 34 and 38, proposed by the noble Baroness, Lady McIntosh of Pickering, and spoken to by other noble Lords. The noble Baroness, Lady Pinnock, gave some examples around this. The Government agree that nature-based solutions, including natural flood prevention solutions, are a useful tool for tackling the root causes of sewage pollution while delivering wide ecological benefits.

Noble Lords who took part in the progress of the levelling-up Act will remember that this was debated in Committee on that Bill and that I spoke against the proposals that preferred the cheapest option because we were concerned about the amount of concrete that this could lead to rather than the best solutions for the environment.

The Government’s strategic policy statement includes Ofwat’s proposal to allow more than £2 billion of investment in nature-based solutions at its draft determinations for price review 24. This includes £1.6 billion to reduce storm overflow spills through catchments and nature-based solutions, and further funding is proposed for nature-based solutions such as reedbeds and wetlands for nutrient removal. The Government have supported water companies trialling nature-based solutions for groundwater-induced storm overflows. This is, of course, subject to the final determinations to be made in December but, if approved, will allow for greater understanding around effectiveness and suitability and enable greater uptake at future price reviews.

Nature-based solutions may feature in pollution incident reduction plans, but we believe it would be inappropriate to mandate their inclusion because they may not necessarily be effective in every circumstance. These plans are intended to ensure that water companies implement mitigations to reduce pollution incidents. Each year, the single biggest source of pollution incidents is issues such as blockages or mechanical failures within the foul sewer water system. These issues are best addressed via monitoring and maintenance measures, such as the detection of bursts, checking pumps and relining sewers. This is important work that needs to take place alongside. It is for these reasons that the Government are not supporting these amendments. However, I reassure the noble Baroness and other noble Lords that the Government remain extremely supportive of using nature-based solutions to tackle the underlying causes of pollution incidents, and I look forward to discussing this topic with her further alongside colleagues from MHCLG in the coming weeks.

I turn to Amendment 51, tabled by the noble Duke, the Duke of Wellington, about the use of back-up generators at emergency overflows. The Government agree that measures should be put in place to reduce discharges from emergency overflows caused by electrical power failures. However, water companies are already required to implement measures to reduce the likelihood of a discharge occurring due to an electrical power failure through conditions in their environmental permits. In particular, water companies must demonstrate that they have back-up systems in place, such as generators or alternative power supplies, to secure the emergency overflow permit. Ultimately, emergency overflows may still be required to operate as a last resort to protect the sewerage infrastructure and prevent upstream properties flooding.

The near real-time reporting of information required by Clause 3 will enable increased transparency around the use of emergency overflows and will better enable resource to be quickly directed to investigate and address any cause of such a discharge. I thank the noble Duke for meeting me previously to discuss his concerns and his amendment. I am not sure that he will be reassured, but those are the reasons we do not believe an amendment in this space is necessary.

Amendment 53 from the noble Baroness, Lady McIntosh of Pickering, is on the important issue of SUDS, which we also discussed on Monday, and to which my noble friend Lady Young of Old Scone and the noble Baroness, Lady Pinnock, also spoke. As I have noted and discussed with the noble Baroness, this Government are strongly committed to requiring standardised sustainable drainage systems in new developments. We are actively considering whether improvements in the delivery of SUDS, which we all wish to see—14 years is far too long to wait for the implementation of legislation—may be better achieved through mechanisms other than Schedule 3 to the Flood and Water Management Act 2010.

I say to the noble Baroness that I have never had a catchphrase before. I was rather hoping for something a little more exciting—suggestions on a postcard. I am sorry to disappoint, but I am not going to use that catchphrase now. I look forward to meeting the noble Baroness alongside my colleagues in MHCLG. There are certain things that we need to discuss to see how we can move things on in this area.

On Amendment 54, I agree with the noble Baroness, Lady Browning, about the importance of having a drainage and sewerage system that can meet current and future demand. I always appreciate her enthusiasm on these matters.

As part of the Environment Act 2021, a duty has been created for water and sewerage companies in England to produce drainage and wastewater management plans. These plans set out how a company intends to improve their drainage and wastewater systems over the next 25 years, accounting for factors including a growing population and changing environmental circumstances. Taking a strategic approach to drainage and wastewater management will help to identify and mitigate issues related to insufficient network capacity.

The Environment Agency has a role as a statutory consultee for local planning authority decisions for certain types of developments that are made under Part III of the Town and Country Planning Act 1990 to help ensure that matters of wastewater and treatment, work capacity and water resource matters are considered as part of key planning decisions.

The Government appreciate the intent behind the amendment but have concerns about how it could operate in practice. That is because it could potentially give sewerage undertakers the right to refuse connections based on their own predictions of capacity without reference to agreed standards. Furthermore, legislation already permits undertakers to refuse connections where they would be prejudicial to their sewerage systems. Where disputes arise, the matter can and should be referred to the independent regulator, which in this case is Ofwat. However, I am happy to look more closely at capacity issues, as the noble Baroness suggests.

On Amendment 88, also from the noble Baroness, Lady Browning, the Government recognise the importance of ensuring the availability of sustainable water supplies to help meet our target of delivering 1 million new homes in this Parliament while protecting the environment. Under existing powers, water companies should ensure that they have sufficient water resources available to supply new homes, in line with the water resources planning guidance. In addition, Natural England and the Environment Agency are required to assess the impact of water company plans on protected sites.

Amendment 93, in the name of the noble Baroness, Lady McIntosh of Pickering, follows on from those amendments. I agree with the noble Baroness and understand the need for increased water efficiency and water reuse. Looking at all these amendments as a whole, I have to say it is completely bonkers that in this country we use drinking water to flush our toilets. That does not happen elsewhere. For that reason, we are already reviewing the relevant regulations. We intend to publish in the new year a consultation on how we could revise those regulations, with the aim of increasing water reuse.

The reuse of water through rainwater harvesting and grey water reuse may have important benefits for the environment because it is part of reducing our reliance on water abstraction. Water reuse systems have a wide range of benefits, such as reduced demand on water infrastructure, reduced carbon emissions and flood protection.

On the noble Baroness’s particular question about the mandatory water efficiency labels that we are introducing, we are completely committed to that but we have not yet made a decision on the minimum standards.

I hope this reassures the noble Baroness that the proposed new clause will not be needed as we are already taking significant steps in this space. I once again thank noble Lords for their important contributions and suggested amendments around sustainable water usage and sewerage infrastructure.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am grateful to the Minister and others who have spoken in this debate. I am a little concerned, because I understood the Minister to say that they may seek to achieve sustainable drains through other means than Schedule 3.

[Baroness Hayman of Ullock (Lab)]

To clarify, we are not suggesting that we do not do that, but we want to look at all the different options so that we can look at how we can practically move forward.

[Baroness McIntosh of Pickering (Con)]

I just say that I am extremely disappointed. I know this is not necessarily within the gift of the Minister but, as we heard from the noble Baroness, Lady Pinnock, this was meant to be the year that we implemented Schedule 3, and there are only two months left. While I welcome the fact that we are going to meet before Report, I will look to bring something like that back.

I am grateful to my noble friend Lady Browning, who, in mentioning capacity, has underlined the need to end the automatic right to connect and to establish water companies as statutory consultees in all future planning applications. If there is no capacity, I do not see how we can expect water companies to make false connections that will lead to further sewage spills in future.

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I hope we might receive an encouraging response from the Minister, who earlier reaffirmed her commitment to nature restoration. We believe that there is a strong feeling about this amendment, and I welcome discussions with other noble Lords on how it could be improved.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank noble Lords for their amendments and for a very interesting discussion. Clearly, it is very passionately felt as well. I thank the noble Baroness, Lady Jones, for introducing her Amendment 37. I would also like to discuss Amendment 104 tabled by the noble Lord Gascoigne, because they are both about nature-based solutions.

As I mentioned on the previous group, the Government agree that nature-based solutions are an important tool for tackling the root causes of sewage pollution and addressing flood risk, while delivering wide ecological benefits. In line with this, I am pleased that Ofwat has proposed an allowance of over £2 billion for investments in nature-based solutions in PR24. I was pleased that the amendment from the noble Lord, Lord Gascoigne, refers to catchments, because catchment and nature-based solutions are part of that £2 billion investment, and £1.6 billion is looking to reduce storm overflow spills through those solutions.

Ofwat has made it clear in its guidance for PR24 that it expects water companies to adopt more nature-based solutions. The noble Baroness, Lady Jones, mentioned reed beds, and it is important to say that the further funding includes money for reed beds and wetlands for nutrient removal. The Government are also supporting water companies with trialling different nature-based solutions. As I mentioned, this is obviously subject to the final determinations in December, but we hope to move forward in these areas.

At the same time, we need to recognise that nature-based solutions may not always be the most appropriate or effective means of improving water quality or flood risk. We need to ensure that water companies and Ofwat have sufficient flexibility to develop the right solution to deliver the best outcomes for customers and the environment. In a similar vein, although nature-based solutions may feature in pollution incident reduction plans, it is important to recognise that these may not be the most effective or available response to pollution incidents in every circumstance.

Having said that, we will not support the amendments, but I reassure the noble Baroness and the noble Lord that we take this seriously. I am happy to have further discussions on this particular amendment, if that is helpful.

I turn to Amendment 55, tabled by the noble Baroness, Lady Bakewell of Hardington-Mandeville. It is important to draw our attention to the impact of sewage pollution in our national parks. The Government agree that our national parks—Lake Windermere in the Lake District and the Broads have had particular attention regarding this matter—are a vital part of our environmental heritage, and everyone agrees that they must be protected better. For this reason, the Government will seek to use the powers in the Levelling-up and Regeneration Act to ensure that relevant authorities, including water companies, deliver better outcomes in protected landscapes.

I reassure noble Lords that existing plans are in place to protect high-priority sites from sewage pollution, including the Storm Overflows Discharge Reduction Plan. As part of that reduction plan, we expect water companies to tackle overflows discharging to high-priority sites by 2035. These sites include designated bathing waters, SSSIs, special areas of conservation and chalk streams. However, completely eradicating sewage discharges is not possible without a costly redesign of the whole sewerage system.

Similar issues may arise in relation to the proposed requirement for all water bodies in national parks to achieve “high” ecological status. Under the Water Environment (Water Framework Directive) (England and Wales) Regulations, most surface water bodies have an objective to reach “good” ecological status, except where it is technically infeasible or disproportionately costly. I stress that “good” ecological status is a very high standard to achieve, and represents a thriving aquatic environment with only minor disturbance from natural conditions. In this way, it supports a diverse group of aquatic invertebrates, fish, mammals and birds.

“High” ecological status equates to water almost entirely undisturbed from its natural conditions, with almost no impact from human activity. Requiring this very high status would have wide-ranging impacts on any future planning developments and human interaction with national parks—that would include farming and fishing. The requirement would place achieving this demanding objective on only water companies, regardless of the pressures and sectors that are actually impacting on water bodies within the protected landscapes. It would also not allow for the consideration of costs, which would ultimately be borne by water bill payers, and any technical feasibility around this.

It is clearly important to reduce phosphorus levels— I have seen the damage that phosphorus can cause in the lakes near where I live. A reduction of phosphorus levels by 90% by 2028 goes significantly beyond the Environment Act target to reduce phosphorus loading by 80% by 2038—that is assuming that the baseline is at 2020 levels. This would require an extremely expensive and immediate increase to the number of phosphorus improvement schemes planned in the price review of 2024. We are concerned that that is a big jump, with a big extra investment that would immediately be passed on to bill payers. We do not want to risk the delivery of any wider environmental improvements through the price review of 2024.

Amendment 74 was tabled by the noble Earl, Lord Russell. I confirm that the Government are absolutely committed to the protection and restoration of our cherished chalk streams. We recognise that these unique water bodies are not just vital ecosystems but a symbol of our national heritage: we in this country have by far the majority of chalk streams. This requirement would have significant implications for existing legal frameworks’ operational delivery, and would not necessarily result in environmental improvement for chalk streams. As discussed in relation to Amendment 55, requiring “high” ecological status would have the wide-ranging impacts that I mentioned.

The levelling-up Act brought in some protections for chalk streams. The independent water commission on the water sector regulatory system, already announced by the Secretary of State, is the appropriate vehicle for considering broader reforms, including to the current water system and overarching targets for the water sector. In the previous group we talked about better use of water and grey water. If we move forward with that through our review, that will reduce abstraction, which will help to support chalk streams better.

I hope the noble Earl therefore understands why the Government will not accept his amendment. However, he requested a meeting to discuss Blue Flag status as a possible way forward, and I am more than happy to offer him one.

Amendment 90 was tabled by the noble Baroness, Lady Browning. I am grateful to her for this amendment. We are clear that water companies must improve on their delivery of water resources management plans. The independent commission will help to transform how our water system works and will inform further legislation. It would be more appropriate at the moment to consider how we make improvements to the water resources management planning process as part of the independent commission. I note that there are already requirements for the review process in Section 37A of the Water Industry Act 1991. Water companies must also report to the Secretary of State on their reviews annually. Defra works closely with the EA and Ofwat to review water companies’ delivery of their plans, and the EA recently published a summary of assessments of water company delivery and the actions that they must take to deliver their plans.

We are concerned that, in practice, a duty on water companies to deliver all measures simply would not work. Many measures, such as new reservoirs, need further permissions, for example, before they can proceed, and a water company cannot guarantee that it will get those permissions. That is why we will not support that particular amendment. I thank noble Lords again for this interesting and helpful debate.

[Baroness Jones of Moulsecoomb (GP)]

I thank the Minister for her reply. I do not think anyone in the Committee doubts her sincerity or her concern for nature—that is a given. I am afraid it is the Government I do not trust. I did not trust the last Government and I do not trust this one either—it must be something in my nature.

I supported two other amendments: Amendment 74 in the names of the noble Earl, Lord Russell, and the noble Baroness, Lady Browning, and Amendment 104 in the names of the noble Lords, Lord Gascoigne and Lord Roborough. Chalk streams, for example, are incredibly important; they are so rare. We have the most in the world and we trash them. The amendment of the noble Lord, Lord Gascoigne, goes much further than my modest amendment. The noble Lord, Lord Cromwell, has never called anything I have ever done modest, so I look forward to his signing this same amendment on Report to show that he is sincere.

The noble Baroness, Lady Boycott, talked about local engagement. Just this week, I hosted a group of 30 or 40 people from the Bengali community who are working on recovering mangrove forests in Sundarbans. They do it because they care about the local; they are losing culture, opportunities and so on. I really see that local activity is incredibly important, but the Government have to make that easy. This is the thing about the nature recovery schemes. They are obviously not the only way; they can be extremely effective, and sometimes quite cheap as well. It definitely engages the local community. I was up at Lake Windermere recently, and the local support there for cleaning up the lake was quite astonishingly broad.

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[Lord Blencathra (Con)]

My Lords, I first declare my interest as on the register. Since it seems to be de rigueur in the Committee tonight, I declare my wholehearted support for the controlled reintroduction of beavers into appropriate locations.

I thank the noble Earl, Lord Russell, for leading this group of amendments on improved monitoring and publication of data and I rise to speak to Amendment 48 in my name. First, I was rather impressed by the points on telemetry made by the noble Lord, Lord Cameron of Dillington. We find in Natural England that the use of modern technology can replace hundreds of people on the ground trying to carry out inspections, and this sort of technology has to be the way to proceed.

It is important that the nature of emergency discharges is collected by water companies and is made available to the public and Parliament in an easily accessible format and location, as has been said by every noble Lord tonight. The damage of pollution caused by emergency overflows has become an issue of increasing concern to the public in recent years, and they deserve more information on how water companies are performing. It is sensible to require water companies to publish the extent of emergency discharges, as this data is indicative of the strain on our water sector and will provide valuable information as to what kind of infrastructure development is necessary to prevent overflows in the future.

We support the Government’s intention in this part of the Bill, but we feel the Government can go slightly further to ensure that the monitoring data is available to the public on the water company’s website. My Amendment 48 is a modest little amendment that would deliver that change. We on these Benches feel that this relatively small amendment would do a great deal of good in ensuring that consumers can access this information easily on the website of their own provider.

A number of noble Lords have moved amendments on monitoring and reporting. We are broadly satisfied with the Government’s measures to improve monitoring and reporting in the Bill, but we are also keen to see some movement from the Government in the direction of making this information more readily accessible to the public and have taken on board many of the points raised by other noble Lords tonight.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank all noble Lords for the interest they have taken in this debate. I turn first to Amendment 43, tabled by the noble Earl, Lord Russell, Amendments 44 and 46, tabled by the noble Lord, Lord Cromwell, and Amendment 59, tabled by the noble Lord, Lord Cameron of Dillington. The Government agree that it is vital to understand the causes and impact of sewage discharges, and agree with the noble Lord, Lord Cromwell, that this needs to be timely and accessible.

Clause 3 requires water companies to provide information on the frequency and duration of discharges from emergency overflows. This information will enable regulators and the public to see, in near real time, when a discharge from an emergency overflow has occurred, and how long it lasted for. This will enable resource to be directed to investigate the cause as well as the impact of a discharge, with a view to resolving any issues.

While the Government agree with the intention behind the amendments seeking to require companies to specify the volume of discharges in their publications, we do not see the value in doing so, as this would not provide the meaningful insights that we need about the actual impact a discharge has had. Monitors required to measure volume as well as concentration are also very costly to install and could delay the rollout of other monitors.

The volume from sewage discharges is measured through flow monitoring, and the installation of flow monitors would likely require construction projects to install them at the majority of emergency overflows, hence the large cost. This is because the pipework in emergency overflows would require modification for flow monitors to be able to record accurate measures of volume. Therefore, the Government do not believe the expected high costs are proportionate to the information we would get. With respect to the cause of discharges, it is not possible for companies to provide this information in near real time. This is because an investigation and site visit are often required to validate the cause.

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[Lord Cromwell (CB)]

I would like clarification on a point. The Minister mentioned that there will be a map of overflows across the country. How near to real time will it be? She said that it will be accessible to the regulator. Will it be accessible to the public?

[Baroness Hayman of Ullock (Lab)]

I do not have that detailed information. I will write to the noble Lord and place a copy of the letter in the Library so it is available to everybody ahead of Report.

Amendment 50 was tabled by my noble friend Lady Young of Old Scone. The Government fully agree that emergency overflows should be monitored. However, we do not support the removal of the delegated power for Ministers to make exceptions to the Clause 3 duty. We believe that this power is necessary to allow for scenarios where it is not feasible to monitor emergency overflows, such as where an overflow is due to be decommissioned. Removing this power may inadvertently lead to delays in commencing this duty, if issues arose that we could not resolve without this power. Any exception to the monitoring duty would need to be agreed by Parliament using the affirmative statutory instrument procedure.

On Amendment 58, tabled by my noble friend Lady Young of Old Scone, water companies should bear the cost of understanding the impact of their discharges on water quality. Installing and maintaining continuous water quality monitors requires regular access to water company sites. Water companies can do this much more easily than can the Environment Agency. Defra has issued guidance on the expected standards of these monitors, and in future all monitors will be expected to become independently certified under the Environment Agency’s certification scheme. Water quality data that will be made available will then be scrutinised by the independent regulator. Regulators will continue to work with water companies to ensure that the data is of high quality. I hope that this reassures my noble friend and that she feels able not to press her amendments.

Amendment 75 was tabled by the noble Baroness, Lady McIntosh of Pickering, and I thank her for raising this issue. Misusing sewers to dispose of materials such as wet wipes and cooking oils contributes to major issues, such as blockages in the sewerage system. The noble Lord, Lord Deben, asked whether I have gone down a sewer. I have, and it is just disgusting; it is quite extraordinary what can happen there. Sewer blockages cost the water industry £200 million a year to fix and are responsible for 40% of pollution incidents.

Many people are not aware that the actions they take in their own homes can have such damaging impacts. Small but significant steps, such as not pouring fats and oils down the plug hole, can prevent blockages. The Government work to encourage all householders and businesses to play their part, and fully support water industry campaigns to address this issue, including Water UK’s “Bin the Wipe” campaign. I completely understand where the noble Baroness, Lady McIntosh of Pickering, is coming from. I will take this away and look at whether there is any more we can do to draw attention to this fact.

Having said that, we do not believe that water companies should be exempt from sanctions when using emergency overflows following blockages caused by sewer misuse. Water companies should take every reasonable measure to prevent the use of emergency overflows, including measures to prevent blockages. Some blockages caused by sewer misuse can often be mitigated by good maintenance; for example, by detecting blockages before they become significant issues and with preventive cleaning. The intent of this Bill is to strengthen water companies’ accountability for pollution incidents and not to diminish it. That is why Clause 2 will require water companies to publish the pollution incident reduction plans that we debated earlier.

I was interested in the suggestion from the noble Lord, Lord Deben, to look at how Canda deals with this issue. My brother-in-law lives in Canada, so my family and I go there. It is a really interesting suggestion.

I turn to Amendment 87, tabled by the noble Baroness, Lady Boycott. Proactive data publication is vital for transparency and to enable the public to scrutinise water companies. While we support the principle of transparency and are taking action to increase transparency through Clauses 2 and 3, we are concerned that the noble Baroness’s specific proposals duplicate pre-existing provisions and would create practical difficulties. Case law and the Information Commissioner’s Office have been clear: water companies are public bodies for the purpose of the Environmental Information Regulations, and water companies already provide information under these regulations.

The Information Commissioner’s Office is clear that water companies must be transparent, and it is taking several actions to enforce that. In May of this year, the ICO released decision notices for six water companies, instructing them to disclose the start and stop times of sewage discharges. In July, it wrote to water companies to encourage them to proactively publish information on sewage monthly. In October, it published a practice recommendation to United Utilities to address the specific issues that it had identified.

I turn to Amendment 89, tabled by the noble Baroness, Lady Browning. The Government acknowledge that it is important that there is more transparency about the abstraction of water by water companies. However, any new requirements must be both practical and proportionate. Clause 7 already provides the necessary flexibility for the Secretary of State and Welsh Ministers to impose conditions or general rules for abstraction licences. We believe that secondary legislation is the more appropriate vehicle to address these technical matters effectively. However, having listened to the noble Baroness carefully, we will consult on the use of Clause 7 powers to ensure that the conditions introduced are appropriate and achievable.

Finally—I am sure we all want our dinner—I turn to Amendment 94, tabled by the noble Earl, Lord Russell. I am supportive of greater involvement of the public in this sector. He made the very important point that bringing in the public is vital, including through citizen science. However, this amendment is not needed, as we believe that the provisions in the Bill will already increase transparency and the provision of data in this sector, which are critical to informing and engaging the public going forward.

I hope that I have set out sufficient detail on Clause 3 to reassure all noble Lords of its intended purpose and effect. I sent out a fact sheet on the definition of emergency overflows and storm overflows to try to make sure that everybody is clear on the difference, but I am sure that we will come back to these issues in future. I hope that noble Lords will not press their amendments and enjoy their dinner break.

[Earl Russell (LD)]

My Lords, I thank the Minister for her detailed response; that was a lot of amendments to respond to in one go.

I take the point about volumetric flow monitoring. I will go away and think about that but I am aware that there might have been costs associated with it. It is welcome that that has been confirmed.

I take the point also about a number of amendments on the website, access to data and one data point. I hear what the Government say—that one does not want to pin that down, limit it and find that what is written in the Bill is yesterday’s technology, or that there are other, better ways of making sure that it is accessible. I welcome the response there as well.

I also welcome the response of the Minister about the plans of the Government to publish live maps in one place. That seems sensible.

In relation to my amendment on citizen science, I welcome what the Minister said. Let us go away, think about it and explore it. I am pleased that the Government acknowledge the importance of that matter, the work that has been done and the work going forward.

This has been an interesting group of amendments. I thank the noble Baroness, Lady Young of Old Scone, for what she said, and the Minister’s response on the emerging threats was important. I am particularly concerned about microplastics because we do not know what those are doing. They are in our brains and various parts of our body where they should not be. I encourage the Government, outside the Bill, to do more research and work on that.

I thank also the noble Lord, Lord Cromwell, for his interesting comments on telemetry monitoring, and the noble Lord, Lord Deben, for his contribution.

This was an interesting debate. I am getting in the way of everyone’s dinner, so I thank noble Lords. I beg leave to withdraw my amendment.

Water (Special Measures) Bill [HL]

Baroness Hayman of Ullock Excerpts

Committee stage
Wednesday 30th October 2024 Lords Chamber

[Lord Blencathra (Con)]

My Lords, on behalf of my noble friend Lord Bethell, I am pleased to move Amendment 52 in his place. This amendment seeks to increase and improve the monitoring undertaken by water companies after an emergency overflow.

The amendment is quite straightforward. It makes the case that, where there is a discharge from an emergency overflow, the undertaker must regularly assess the environmental health of that inland water within 500 metres downstream of the overflow. My noble friend then suggests that the methods used to make assessments under that subsection must include the use of fish counters or other methods of accurately monitoring the fish population. I accept that there may be a weakness here because, unless one knows what the fish count was before the overflow happened, it may be difficult to come to a conclusion as to the number of fish which should be in the river after the overflow has taken place. The undertaker must also prepare a report on the results of these assessments on a quarterly basis and submit it to the authority, and, after having done so, the undertaker must publish the report within 30 days. In addition, in accordance with everything else which has been said in debates tonight, the information must be in a form which helps the public to readily understand it, be published in a way which makes it readily accessible to the public, and be published in the undertaker’s name.

For those reasons, we on these Benches want to protect our rivers and restore the health of those rivers that have been seriously affected by pollution. Thanks to our efforts in government to drive up monitoring, 100% of emergency overflows are now monitored, and as such, we are able to access information about all emergency overflows that occur. This was a seriously transformative step forward compared with the situation we inherited in 2010 but we accept the need to go further, and we support better monitoring of both overflows and of the overall health of rivers themselves.

With the level of monitoring achieved under the Conservatives, it is now possible to learn far more about these incidents and therefore to take action to prevent them happening again. However, this does not mean that water companies are now taking enough responsibility to publish the results of this monitoring and to report their findings so that they can be held to account.

This amendment focuses on an area that the Bill does not address and ensures that the health of our rivers, not just the extent of pollution incidents, is a central component of the Bill. The inclusion of monitoring 500 metres down the river will give a real insight into the impact that an overflow is having on the overall health of a river over time. This monitoring will ensure that water companies cannot downplay the damage and leave the natural area to be ruined; instead, they will have to take a responsibility for a wider area that these emergency overflows can impact.

We on these Benches support this amendment in its intention to ensure that regular reporting is done so that the public are able to access up-to-date information on the overall health of our rivers beyond the immediate aftermath of any emergency overflow.

I know that many amendments in the previous group were related to monitoring of emergency overflows, and, although this amendment specifically relates to river health, I am sure there will be cross-party support for much of the previous group and for this amendment to ensure that water companies can be held publicly accountable for their action after emergency overflows.

I hope the Minister will take the concerns of my noble friend Lord Bethell as expressed in this amendment seriously and will consider it. Once again, we feel this is a timely opportunity to deliver a positive reform in the Bill today rather than waiting for the wider reform which the Government have proposed. I beg to move.

[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 Bethell, for raising this important issue and tabling Amendment 52, and the noble Lord, Lord Blencathra, for moving it in his absence. I start by reassuring him that I always take the concerns expressed in this House very seriously. I think that we agree that understanding the impact of sewage discharges on the environmental health of rivers is vital.

Clause 3 requires water companies to provide information on the frequency and duration of discharges from emergency overflows. These measurements will enable regulators and the public to see, in near real time, when a discharge from an emergency overflow has occurred, and how long it lasted for. This will, in turn, enable resource to be directed to investigate the cause as well as the impact of a discharge, and will enable the regulators to take enforcement action if it is required.

However, this is just one measure that the Government will use to better understand the impact of sewage entering our waterways. New continuous water quality monitors will be installed at storm overflows from 2025 to continuously measure the impact of sewage discharges on the receiving watercourse. The information gathered from these monitors will be key in supporting fish populations. Requiring the installation of additional fish counters downstream of emergency overflows may require additional structures in the watercourse and may impose additional costs on water companies and their customers.

This does not appear to be proportionate, given that emergency overflows should be used on only very limited occasions. The Government will therefore not accept this amendment. However, I hope that I have been able to reassure the noble Lord that the Government are using this Bill to enable quicker action to be taken to investigate discharges from emergency overflows.

[Lord Blencathra (Con)]

I thank the Minister for that response. I regret that she is not accepting the amendment but, if we accept her assurances that the monitoring of overflows will be thorough, that may negate the need for further monitoring downstream. I like to think that we will check the water further downstream than just within a short distance of the storm overflows, because what happens downstream is terribly important. I recall when the creamery at Appleby burst and flooded the River Eden. The damage was considerable for a couple of miles downstream. Checking what happens right beside the factory or the storm overflow is one thing, but it is important that we check downstream when the money allows. I beg leave to withdraw the amendment.

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[Lord Sandhurst (Con)]

My Lords, my Amendments 105 and 106 were commencement blocks when laid that sought to ensure that the Government published an assessment of the justice impact of the Bill before it could come into effect. I thank the Government for publishing their impact assessment, which makes it clear that there will be a small additional burden on our already strained prison estate as a result of the custodial sentences included in the Bill. I am satisfied that the Government’s impact assessment covers the justice impacts of the Bill, so I will not press my amendments.

That said, this is a good opportunity to raise the question of the Government’s priorities. We know the burden on our prisons will be small but is it not the wrong priority to sentence water executives to up to two years’ imprisonment at a time when the Government are releasing violent criminals early? Equally, there is the question of necessity. The Government’s own impact assessment states:

“Defra assumes there could be one case every two years with the maximum sentence of a two-year imprisonment based on the fact there has been four historic cases”.


So is this provision truly necessary? I hope that the Minister will be able to respond to these concerns in her reply.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank the noble Lord, Lord Roborough, for introducing this small group of amendments, and the noble Lord, Lord Sandhurst, for his amendments on the issue of justice. I thank both noble Lords for their interest in ensuring that the Government are fully considering all the impacts of the Bill, on both the environment and the justice system.

Amendment 57, tabled by the noble Lord, Lord Roborough, relates to the reporting of impacts on environmental pollution. This Government share the noble Lord’s concerns that the number of water company pollution incidents has not reduced in the last few years. It remains unacceptably high. That is why the Bill seeks to increase accountability for water companies and their executives where they pollute the environment.

The Bill will enable automatic and severe fines for certain pollution offences, making it possible for the regulators to take swift action where it is clear that an offence has been committed. The Bill will increase transparency around pollution incidents by enabling the public and regulators to see where and how often emergency overflows are discharging and, as discussed in previous groups, by requiring water companies to publish pollution incident reduction plans on an annual basis. As I set out on our first day in Committee, the Bill provides Ofwat with legal powers to ban bonuses where companies fail to meet standards on environmental performance, financial resilience, customer outcomes or criminal liability. Collectively, these measures will strengthen enforcement and disincentivise pollution incidents.

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[Lord Sandhurst (Con)]

My Lords, this is a group of five amendments. Amendment 60 would reduce the maximum custodial sentence to 12 months. Amendment 61 would remove the word “connivance” in respect of a possible offence. Amendment 62 would prevent liability for those purporting to be officers of water companies. Amendment 65 would prevent individuals who impede investigations receiving custodial sentences, and Amendment 66 would reduce the maximum custodial sentence to 12 months.

We on these Benches have been clear that we support tougher measures in order to hold water companies to account. However, to put water executives in prison during a time that the Government have admitted is a time of crisis for prisons because of overcrowding is to us the wrong priority. I am concerned, as I am sure so many are across the Committee, that dangerous individuals are being released from prison having served less than half their sentence. I draw attention to the fact that this Government appear more focused on putting water executives in prison than on keeping violent offenders in, and that seems to be a wrong priority.

In the latest release, 1,100 prisoners were released, and although the scheme claims that none of those offenders are guilty of serious violence, sex crimes or terrorism, this is true only of their primary conviction. An additional 1,800 were released earlier in September. Some mistakes were made, as offenders were released who were not supposed to be. That is the context.

Amendments 60 and 66 in my name seek to reduce the maximum custodial sentence that a water executive can receive from two years down to 12 months. As it stands, prison resources are seriously overstretched, and it seems to be the case that the Government in this Bill are wrongly prioritising those resources. While I do not think that custodial sentences are the right way forward, if the Government insist upon them then can they at least reduce the maximum custodial sentence to 12 months to prevent further overstretching? That would have the added advantage of ensuring that these cases would not need to be heard in the Crown Court under the new provisions, which would prevent further strain on our court backlogs.

The Government’s own impact assessment admits that this measure will put a further burden on our prison services. While it is certainly necessary to hold water executives to account, I believe my other amendments address more appropriate penalties. There is no doubt that the pollution of our rivers is a serious issue. Measures to ensure that those who break the rules are dealt with, and that those who work for water companies do so properly, are necessary. However, these measures appear to be too severe at a time when prisons cannot handle further pressure. Can the Minister set out the Government’s position on releasing domestic abusers, only to put individuals who work on the boards of water companies into the same cells?

In the same vein, Amendment 65 seeks to prevent a custodial sentence from being placed on an individual who has impeded an investigation. While that is indeed a serious issue, our prisons cannot handle further pressure.

Amendment 61 in my name seeks to remove “connivance” as an offence in the Bill. We have tabled the amendment to probe the use of the word “connivance” in this Bill specifically. We understand the use of that word, which exists in other legislation, such as the Theft Act 1968 and, more recently, the Bribery Act 2010. However, we pose the question to the Government as to why they have used it in this scenario. Under what circumstances do they envisage using it? Can they provide the Committee with real-world examples of situations where it will be used?

Amendment 62 seeks to remove the offence in respect of individuals who purport to be executives. This simple amendment would ensure that only those who were actually acting in executive roles could be held responsible for the mistakes of the water company.

[Baroness Hayman of Ullock (Lab)]

I thank the noble Lord, Lord Sandhurst, for his interest in sentencing powers for obstruction investigations and for all the suggested amendments covered in this group.

Amendments 60 and 66, tabled by the noble Lord, both look to reduce the maximum custodial sentence available for those convicted. The obstruction of investigations by the regulators is already an offence, but that has not stopped companies from blocking the regulators’ investigations. For example, in 2019 the Environment Agency prosecuted a number of individuals at Southern Water for removing evidence from the possession of officers. I am sure the noble Lord will agree that such behaviour is unacceptable.

The aim of the two-year maximum custodial sentence is to deter future obstruction. That should support more effective investigations, which should ultimately enable stronger enforcement action against both companies and individuals. I am pleased to confirm for the noble Lord that this sentence is consistent with other provisions in the Environment Act 1995 and the Environmental Permitting (England and Wales) Regulations 2016.

I highlight to the noble Lord that the two-year sentence is the maximum limit. Sentencing will ultimately be decided by the courts, factoring in the specifics of each case and the relevant sentencing guidelines. While I cannot comment on Home Office procedure on prisoner release, I would be interested if the noble Lord could provide some information as to why our prisons became so overcrowded in the first place.

Amendments 61 and 62, also in the name of the noble Lord, Lord Sandhurst, speak to senior leader liability. I hope the noble Lord will agree it is unacceptable under current law that, if water company senior leaders encourage or allow obstruction of Environment Agency or Natural Resources Wales investigations, they cannot be held liable for this wrongdoing. In contrast, senior leaders can be held liable for other environmental offences, as well as obstruction offences in other sectors: for example, the Building Safety Act 2022.

This clause will remedy this gap by bringing the offence of obstructing the Environment Agency and Natural Resources Wales in line with other environmental offences, as well as offences in other sectors. I hope the noble Lord will agree that, in doing so, it should mirror the conventions and language of existing “consent, connivance and neglect” clauses. These make connivance by senior leaders a potential ground for liability and ensure that, where a person “purports to be” a relevant officer, they should also be held liable for wrongdoing. I hope the noble Lord is therefore content that these amendments are unnecessary.

Finally, I turn to Amendment 65, also in the name of the noble Lord, Lord Sandhurst, which proposes to remove increasing the sentence for offences of impeding Drinking Water Inspectorate investigations from the scope of the Bill. As I mentioned earlier, the Yale Environmental Performance Index ranks the drinking water in England and Wales as the best in the world, alongside just 10 other countries. This is in part thanks to the effectiveness of the Drinking Water Inspectorate. To accept this amendment would be to imply that the regulations enforced by the Drinking Water Inspectorate are not as serious as those enforced by the Environment Agency and Natural Resources Wales.

This cannot be right. There are grave public health risks if the DWI does not have the power or the authority to ensure that water supplies in England and Wales are safe and of the right quality. While I accept that this may not be the intention behind the noble Lord’s amendment, it would certainly be its effect. The quality of our drinking water is one of the enduring strengths of the current model and one that the Government want to protect. I once again thank the noble Lord for his contributions and hope my response has reassured him.

[Lord Sandhurst (Con)]

I thank the Minister for her response and for the care with which she delivered it. My amendments were there to ensure that the already overburdened prison sector is not put under further pressure. I hope the Government will bear them in mind and take them on board before Report. We will seek to work with the Government to ensure that the Bill ensures appropriate punishment for water executives. I beg leave to withdraw the amendment.

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[Baroness Hayman of Ullock (Lab)]

My Lords, I thank the noble Lord, Lord Roborough, for speaking to the amendments proposed by the noble Lord, Lord Bethell, in his absence. Amendments 63 and 64 relate to guidance and mandatory training for water company employees on obstruction offences.

One thing that it is important to emphasise on this matter is that Clause 4 amends only existing offences. It does not create any new obligations on companies, so employees should already have some understanding of that in the first place. To be clear, the existing offences are obstruction of investigations of the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate. Prosecutions have already been brought against companies and individuals under Section 110 of the Environment Act 1995. On that basis, we believe that companies should already be very well aware of their obligations under that section of the 1995 Act, and of the obligations to their staff to ensure that they are properly trained to engage in this area.

I reassure the noble Lord that the obligations of companies are set out as well in the Environment Agency’s enforcement and sanctions policy, so it should be very clear. I hope he understands why we do not think it proportionate to put this into legislation.

[Lord Roborough (Con)]

My Lords, I am most grateful for the reply from the Minister. I am not sure that I am necessarily entirely satisfied with it, but—as I have not yet had a chance to say it today—I am most grateful to the Minister for the constructive engagement that she has had with us, as well as all parties in this House. That will continue and perhaps we can discuss it then. I beg leave to withdraw the amendment.

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[Baroness Hayman of Ullock (Lab)]

I thank noble Lords for their contributions on this aspect of the Bill on fines and penalties. Amendment 67 was tabled by the noble Lord, Lord Sandhurst, whom I thank for his points on variable monetary penalties. Currently, there is no limit on the maximum variable penalty for water industry offences, whether the case is tried summarily in the magistrates’ courts or in the Crown Court. This amendment would not provide additional protection or assurance. However, we recognise that there are concerns about ensuring that there are robust protections for civil sanctions. So the Government will consult on the offences for which the civil standard of proof may be used and on the cap for new civil standard variable monetary penalties. This cap will not be limited to offences triable only in a particular court—we believe this is a proportionate safeguard. The House will also have the opportunity to debate and vote on secondary legislation containing the cap before any changes are finally made.

I reiterate that unlimited penalties issued to the criminal standard will still be available to the Environment Agency, along with all its other existing enforcement tools. Existing legal protections, including the right to appeal, will also be maintained. There are proportionate safeguards and legal protections for the use of those penalties, which will strengthen the enforcement of minor to moderate offences. Therefore, we do not believe this amendment to be necessary, and I hope that the noble Lord agrees.

--- Later in debate ---

Moved by

[Baroness Hayman of Ullock]

68: Clause 5, page 10, line 4, at end insert—
“(6) But an offence is to be regarded for the purposes of this section as committed by a water supply licensee or sewerage licensee only if it is committed by such a licensee in the course of the activities to which its licence relates.”Member’s explanatory statement
This amendment provides that Clause 5 applies to water supply and sewerage licensees only in relation to their licensed activities.

[Baroness Hayman of Ullock (Lab)]

My Lords, I turn now to the amendments that we are making to Clauses 5 to 8. Government Amendments 68, 71, 76, 77 and 83 are minor and technical amendments to clarify who is within scope of the measures in Clauses 5 to 8. The inclusion of water and sewerage undertakers remains unchanged by these amendments.

Ofwat issues water supply and sewerage licences, which give the holder rights to provide water or sewerage retail services—for example, billing—or certain services using the public water and wastewater networks. In this remit, businesses are operating as water companies. The amendments make it clear that the measures relating to penalties and the recovery of enforcement costs apply to licensees only in relation to their water supply and sewerage licensed activities. This clarification means that companies can be subject to these measures where this is relevant to their licensed activity.

As businesses with these licences often operate in other sectors alongside the water industry, wider business activities unrelated to the licensing regime should not be brought within scope of Clauses 5 to 8. These amendments ensure that this is the case. For example, a food manufacturer may hold a water supply licence that is issued by Ofwat and permits them to provide billing and metering water services only. Unrelated permitted or licensed activity, regulated by the Environment Agency and undertaken by this business, such as abstraction of water for food manufacturing, would not be in scope of the Bill measures. This is because these activities, which are already regulated and enforced, are not relevant to the company’s operations as a water company.

These amendments minimise impacts on wider businesses and their regulation and ensure that enforcement regimes are consistent within sectors, while still ensuring that water companies are better held to account where they have failed to deliver for the environment. I commend these amendments to the House.

[Lord Roborough (Con)]

My Lords, I thank the Minister for introducing this group. It is essential that the way that this Bill applies to the activities of licensees is clearly laid out, and we are satisfied that the amendments brought by the Minister are necessary to achieve this.

[Baroness Hayman of Ullock (Lab)]

I thank the noble Lord for his support.

Amendment 68 agreed.

Water (Special Measures) Bill [HL]

Baroness Hayman of Ullock Excerpts

Committee stage
Monday 4th November 2024 Lords Chamber

On these Benches, we believe that setting up a water restoration fund is a much more effective and transparent way of moving forward. It is also more likely to see the necessary investment in infrastructure carried out in a timely fashion. I will listen to the Minister’s response. However, I do not feel certain that she will give this amendment a positive welcome.

[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.

--- Later in debate ---

Moved by

[Baroness Hayman of Ullock]

71: Clause 6, page 11, line 9, at end insert—
“(11) Section 5(6) also applies for the purposes of this section.”Member’s explanatory statement
This amendment provides that Clause 6 applies to water supply and sewerage licensees only in relation to their licensed activities.

--- Later in debate ---

[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.

--- Later in debate ---

[Baroness Jones of Moulsecoomb (GP)]

Before the Minister sits down, I had better clarify: I want another Labour Government only if I cannot have a Green Government. On the issue about having monopolies where market forces do not operate, can she see that there are inherent problems in having monopolies on something such as water—or any public service that we all need?

[Baroness Hayman of Ullock (Lab)]

I completely get the noble Baroness’s point. I would hope that, when we do the review, we look completely across all the issues to do with a water company, including the way it behaves because of the way it is set up, and that that should be part of any consideration. By the time we have reported, I am sure the noble Baroness will be very happy to have another Labour Government.

[Earl Russell (LD)]

I thank the Minister for her responses on this group. Mine was a probing amendment and I appreciate her response. I fully recognise that there would be issues with six months as a period, but I think it is important that we have a discussion about the power of revoking licences. I appreciate that the Government are keeping that under review. On Amendment 97, I appreciate what she says about the courts and their powers in all this: that was a welcome response. On Amendment 98 on the public ownership of water companies, I think her response to the noble Lord, Lord Sikka, giving those figures and calculations, was useful in moving that debate forward. Obviously, there are costs involved in that and in the Government supporting failing water companies as well. I know that these are difficult matters. Of course, on our Benches we want to have public ownership of water companies, and we will continue to support that, but I thank the Minister for her inclusive responses and I beg leave to withdraw the amendment.

--- Later in debate ---

Moved by

[Baroness Hayman of Ullock]

76: Clause 7, page 11, line 25, leave out from “if” to end of line 28 and insert “—
(a) it is held by a water undertaker or sewerage undertaker, or(b) it is held by a water supply licensee or sewerage licensee, within the meaning of the Water Industry Act 1991, for the purposes of the activities to which its water supply licence or sewerage licence relates;”Member's explanatory statement
This amendment provides that Clause 7 applies to water supply and sewerage licensees only in relation to their licensed activities.

--- Later in debate ---

Moved by

[Baroness Hayman of Ullock]

83: Clause 8, page 12, line 32, at end insert—
“but, in relation to water supply licensees and sewerage licensees, includes those functions only so far as performed in respect of the activities to which their licences relate.””Member’s explanatory statement
This amendment provides that Clause 8 applies to water supply and sewerage licensees only in relation to their licensed activities.

--- Later in debate ---

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, it is a while since I have taken part in proceedings where a stand part debate has been used to try to remove clauses of a Bill. On our Benches, our departed colleague Lord Greaves was very fond of this measure to enable him to make detailed speeches railing against the Government of the day’s proposed legislation.

The noble Lord, Lord Roborough, has set out his case eloquently for why he believes that Clauses 10 and 11 should be removed from the Bill. Clause 10 refers to England, and Clause 11 offers the same powers to Welsh Ministers. Both clauses are complex and deal with the recovery of losses. I respect the motives of the noble Lord, who appears to be on the side of the water industry and the bill payers at the same time. However, when 15,000 people from around the country are prepared to give up their Sunday to come to London to join a protest against the action of the water companies, I fear that he may have misjudged the mood of the water company bill payers. The public are rightly furious that, while their water and sewage bills have increased, the infrastructure has not been improved, but directors’ bonuses and shareholders’ dividends have not reflected the poor service that some water companies have given. I say “some” water companies, because some are performing well and do meet their targets; unfortunately, it is the ones that do not do so that we hear about on a continual basis.

Removing from the Bill the two clauses, which would have seen some balance being provided to enable costs to be recovered from those water companies that have failed to deliver on their Ofwat targets, is to give a signal to bill payers that the poor service that they have received is acceptable. If Clauses 10 and 11 are removed from the Bill, there would be no clarity on what is happening or how recompense would be achieved. I am therefore afraid that, on the Lib Dem Benches, we are unable to oppose these clauses standing part of the Bill.

[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.

Water (Special Measures) Bill [HL]

Baroness Hayman of Ullock Excerpts

Report stage
Wednesday 20th November 2024 Lords Chamber

[Lord Roborough (Con)]

My Lords, I thank the Minister yet again for her engagement at every stage of the Bill’s progress and for the significant improvements that have been made to it as a result. I will speak to my Amendments 11 and 58, to Amendments 4, 7 and 10 in the name of my noble friend Lord Remnant, and to Amendment 2 in the name of the noble Lord, Lord Cromwell.

Amendment 11 is a simple amendment that would give the Secretary of State greater influence over the drafting of the rules on remuneration and governance. We all know that it is the Government who will be held to account in this House and across the country for their record on water quality and pollution reduction. It seems only right that Ministers should have the ability to shape these rules. Indeed, given the importance of getting them right, Amendment 11 would make the regulations subject to the affirmative procedure for statutory instruments, giving Parliament its own role in approving these rules. I intend to test the opinion of the House on this, depending on the Minister’s answer.

Amendment 58 relates to limits on water company borrowing. I will not reiterate the arguments I made in Committee and, having listened to the Government’s concerns about the possible impact of a hard statutory limit on current negotiations between the sector and prospective investors, I have tabled an altered amendment here on Report.

It is clear to His Majesty’s Opposition that water companies have failed to take a sustainable approach to borrowing, and the current safeguards are insufficient. The amendment simply gives the Secretary of State the power to make regulations under the affirmative procedure for secondary legislation, limiting water company flexibility and returns to shareholders when leverage becomes excessive. I am most grateful to the noble Lord, Lord Sikka, for stating the current leverage ratios of the industry, and I agree with many of his comments, if not his amendment.

Nothing in the amendment forces the Government to do anything; we are merely seeking to give them the tools they need to deliver an effective limit on water company borrowing, given the inability of the regulator to do so historically. The Minister will no doubt tell us that borrowing will be considered in the wider review of the water sector, and we welcome this. However, in the meantime, Ministers need tools to take appropriate action now. If the Government do not feel that a borrowing limit is necessary, nothing in the clause requires them to act, but we on these Benches feel that it would be a missed opportunity to let the Bill pass without giving Ministers powers that they may need to ensure that water company borrowing is at sustainable levels while we await the conclusion of the Government’s review. Subject to the response of the Minister, I am also minded to test the opinion of the House on Amendment 58.

The amendments in the name of my noble friend Lord Remnant, which we spoke positively of in Committee, have a great deal of merit. They would ensure that board members are the individuals subject to the rules on remuneration and governance, as well as preventing consumers being inadvertently subject to these rules and other penalties as members of a water company’s board. This can be left to the company to decide.

Amendment 2 in the name of the noble Lord, Lord Cromwell, to which I am also a signatory, complements my Amendment 58 on water company borrowing. Greater clarity on water companies’ financial engineering is important. Should he seek to test the opinion of the House, we would support his amendment.

Finally, following the Minister’s constructive response, I did not bring back an amendment on the requirement to provide training to employees on their specific legal obligations within the water industry both before and after the implementation of the Bill. I would be most grateful if she could confirm that the Environment Agency will give guidance to the industry on how employees will be informed of these legal obligations.

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

My Lords, I am very pleased to be back in the Chamber, continuing to debate a very important piece of legislation. I once again thank all noble Lords for their interest in the Bill and their constructive engagement. We may not always agree— I may not always be able to accept amendments—but it has been very useful to have good, constructive discussions, which have helped to inform the amendments. Before I start my response, and before I forget, I confirm what the noble Lord, Lord Roborough, asked in his last question.

Amendments 1 and 5 in the name of the noble Duke, the Duke of Wellington, consider the views of environmental groups. I fully support his intention to increase the voice of environmental experts and company decision-making processes. However, we do not feel that these are necessary amendments to the Bill, and I shall explain why.

Environmental issues are already a key consideration in company decision-making. Water companies have a range of environmental obligations that they are required to meet, from ammonia limits to phosphorus reductions, and actions related to those obligations. If they break the law, regulators must enforce against them. Ensuring that these obligations are properly met is why we are giving the commission the opportunity to do a full review of regulation.

I agree that we need a step change from water companies. I remind noble Lords that, after only seven days in office, the Government called in all water companies to negotiate and require them to update their articles of association—the fundamental rules that govern each company—in order to make the interests of customers and the environment a primary and fundamental objective. These updates will place customers and the environment at the heart of business decisions, and we expect the majority of companies to have updated their articles of association by the end of the year.

--- Later in debate ---

[Lord Remnant (Con)]

I apologise for interrupting the Minister; I do not mean any discourtesy. I thank her for clarifying that the provisions relate to the time from 1 April 2024. Despite what she has said, I am still concerned about the retrospective element. My understanding is that that would affect the bonus arrangements for the year from 1 April 2024 to 1 April 2025 and would also impact the three-year LTIP arrangements entered into on 1 April 2024 for the following three years. But it will not impact LTIP arrangements entered into as long ago as 2022 or 2023 but which still have the financial year beginning in 2024 as part of those three years. From what the Minister has said, my understanding is that the retrospective element will not go so far back as to apply to LTIP arrangements entered into in 2022 and 2023. If she could confirm that, I would be much happier.

[Baroness Hayman of Ullock (Lab)]

Just to reiterate, Ofwat will look closely at the impact this will have on long-term incentive plans. I cannot give the noble Lord any firm detail on the specific question he asks, because Ofwat is currently looking at this. Perhaps this is something we could pick up so that I can understand his specific concerns in more detail, and we can feed those into Ofwat’s current discussions. At the moment I cannot give him any more firm information than I have already given. If the noble Lord wants to continue this discussion so that I can feed it back to Ofwat, I shall be happy to do so. I do not know what else I can offer at the moment, because I cannot give the noble Lord a firm answer.

I am going over time, but I shall look quickly at what else I need to say. Amendment 11, in the name of the noble Lord, Lord Roborough, would ensure that Ofwat’s rules on remuneration and governance came into force within six months of Royal Assent. Ofwat will be responsible for developing and implementing those rules but, as the Secretary of State will already be consulted through the process, we do not believe there is a need for a statutory instrument to be laid to bring the rules into effect.

We think that allowing Ofwat to set rules in this way, rather than through legislation, will enable those standards to be more easily amended where it is appropriate to do so in the future. I hope that that reassures the noble Lord. Ofwat does intend to implement the first set of rules following its statutory consultation, so this is not something that is going to drag on. We are keen for the rules to be in place as soon as possible after Royal Assent.

Amendment 57, in the name of my noble friend Lord Sikka, is about involvement in Ofwat’s board. We believe that it is the responsibility of Ofwat to determine who is on its board and who has voting rights for board meetings. There are already a number of ways in which consumers can feed into Ofwat’s regulatory work.

Finally, Amendment 58, in the name of the noble Lord, Lord Roborough, is about water company borrowing. At sensible levels, debt can be an appropriate way to fund investment for essential infrastructure in the longer term. Ofwat is already taking steps to monitor debt levels as part of its report on financial resilience. Companies will need to access additional debt and equity to support the price review 2024 investment programme. I do, however, agree with the noble Lord that more can be done to ensure that debt levels are more closely monitored in future, and I would like to reassure him that, as he expected, that the independent commission will look at this.

Following our meeting, I also know that the noble Lord understands that this is a critical point in time for the water industry and its investors, and we have previously discussed the importance of ensuring that we do not jeopardise water companies’ ability to secure investment before Ofwat’s final determinations are made at the end of this year. Today, Barclays reported in the Times on the deterioration in investor sentiment following the publication of the draft determinations.

I therefore trust that the noble Lord, Lord Roborough, is reassured that the Government take this issue very seriously, and that he and other noble Lords understand that introducing further rules on borrowing through this Bill is not appropriate for the water industry at this time. That is what I want to stress—“at this time”.

I have run out of time, but I thank noble Lords. This has been a long group and a lot has been discussed. I hope that they will feel able not to press their amendments.

[The Duke of Wellington (CB)]

My Lords, I am still certain in my own mind that the environmental voice needs to be louder in decision-making in this industry in future. I was considerably reassured by the Minister explaining how environmental considerations are central to so much of the current structure; however, one has to admit that, in practice, that has not been very evident.

I must admit that I became a bit concerned when the Minister was commenting on Amendments 6 and 7 and board representation. She emphasised more than once the importance of the consumer voice on boards, panels and committees, and she never mentioned the environmental voice. I must say that I then slightly worried about the reassurances I had previously received from her. However, one has to be pragmatic about these things. I think that my amendment is important, and I am grateful to the Liberal Democrats for apparently being prepared to support it. I noticed that the Conservatives, the Official Opposition, did not comment on it and therefore, with great regret, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Roborough (Con)]

My Lords, I thank my noble friend Lady McIntosh of Pickering for moving this amendment. In Committee, we discussed the implementation of the provisions of Schedule 3 to the Flood and Water Management Act 2010. As my noble friend has said previously, the last Government accepted the recommendation of a sustainable drainage systems review to implement Schedule 3. We share my noble friend’s concerns about the impact of additional run-off from developments. If the Government seek to deliver the homes we need for the next generation and to drive the economic growth they promised, we need to get sustainable drainage right.

Although I understand that the Government have concerns about whether these amendments should be in the Bill and which department should be responsible for this policy area, I hope they will listen carefully to my noble friend Lady McIntosh’s concerns and be able to reassure her. However, I am sorry to disappoint my noble friend, but we will not be able to support Amendment 43.

[Baroness Hayman of Ullock (Lab)]

I thank the noble Baroness, Lady McIntosh of Pickering, for continuing to raise this important issue, and for tabling her Amendments 3 and 43, which speak to the implementation of Schedule 3. I thank her for her passion and persistence on this matter—she has never let it drop, which is important because this stalled 14 years ago. I also thank her for taking the time to meet me and my noble friend Lady Taylor of Stevenage, the Minister in MHCLG, to discuss this matter in some detail and to look at how we can improve delivery.

On Amendment 3, the standards introduced under Schedule 3 would be designed specifically for relevant approval bodies to use when determining applications for sustainable drainage. As I am sure the noble Baroness is aware, such applications would be submitted mainly by developers, not water companies—obviously, for SUDS, that is who implements the developments. Because of that, the Government do not consider Schedule 3 standards to be appropriate to use when we are establishing the rules on remuneration of pay prohibitions. That is why we cannot accept the noble Baroness’s amendment.

Amendment 43 is the important, indeed critical amendment in this group. As I have previously said, the Government are strongly committed to requiring standardised SUDS in new developments. We are not looking to renege or backtrack in any way. We are committed to this; it is about the most effective method of delivery.

There are specific outcomes that the Government want to achieve. We want to see an increase in quantity, with more SUDS being built, but we need to see better design qualities that do what we want them to do. We need effective adoption and maintenance, to ensure the new SUDS being built are long-term and keep their quality for the long-term. We need an increase in sustainable drainage in more developments. We need to ensure that, when we are improving the design, they are designed to cope with our changing climate; that is critical, as we are seeing more and more water, often followed by drought, which compounds a lot of the problems. We need to make sure that anything we bring in delivers wider water infrastructure benefits by reducing the levels of rainwater entering sewers, which noble Baronesses have mentioned, and helps improve water quality, while enabling economic growth and delivering the biodiversity and amenity benefits that we need.

Surface water run-off was mentioned by a number of noble Lords. It is important that we look at how we tackle all aspects of drainage and surface water. The noble Baroness, Lady Browning, mentioned her house in Devon. We live in a very old stone-built house in Cumbria. Our house has also flooded in the past. There is much that we need to work on in this area. I am also very aware that there are occasions when new build, if not done properly, can have a knock-on effect on houses that have never flooded before. There is a big picture question in the planning system around how we approach this and tackle it most effectively.

While I am on the subject of surface water, the noble Earl asked about the amendments coming up on nature-based solutions. That is absolutely part of the package of how we tackle this going forward. He asked whether all the areas that we are looking at will continue to be input into the review. Anything we have discussed here that is still outstanding or of concern will absolutely be looked at and will be within the scope of the review going forward.

Having said all of this—the noble Baroness knows this because we discussed it with the noble Baroness, Lady Taylor of Stevenage—we believe that our ambition for SUDS delivery can be achieved in different ways. It can be achieved through improving the current planning-led approach, and using powers through that route, or by commencing Schedule 3 to the Flood and Water Management Act 2010, as the noble Baroness requested. If we are going to get this to work in the most effective way possible, and get the kinds of results that we need, we need to work hand-in-glove with the MHCLG. Ultimately, this is about development and developers, and getting them to make the right kind of connections and drainage decisions in new developments.

As we discussed, we are looking at planning reforms that can deliver improved sustainable drainage. The National Planning Policy Framework is out for consultation at the moment, until the end of the year. We have asked specific questions around SUDS, from Defra, in that consultation. If noble Lords are interested in inputting to that, it is currently open for consultation.

The MHCLG is looking at the best approach to this, through the NPPF consultation, and there is going to be planning and infrastructure legislation coming up. That is why we cannot accept the amendment at the moment. There are a number of delivery paths. We want to deliver this and we want to deliver it well, so we need to get the delivery path correct. That is why we are unable to accept the amendment of the noble Baroness.

[Baroness McIntosh of Pickering (Con)]

Before the Minister sits down, she failed to respond on the case study on capacity and on the cumulative impact. I am afraid that in this Bill the Minister is making water companies liable and responsible for something that the developers are responsible for by not putting SUDS in place. That is just not acceptable.

[Baroness Hayman of Ullock]

I do not quite understand the last point of the noble Baroness. On the basis that it comes through planning, the whole point is that it then becomes the developers’ responsibility and not that of the water companies.

On the case study, I will definitely take that back to the Department. I am very happy to do that—I am sorry that I forgot to answer that question. Obviously it was picked up from the previous debate, but I will raise it and see where we are with that. I am very happy to write to the noble Baroness about what is happening, if that helps.

[Baroness Browning (Con)]

I am very grateful to the Minister, but without labouring the point, the case law showed that there is sufficient legislation now for capacity to be an important key point of planning decisions. It could save an awful lot of work going down the track if that were there, but it is simply unused. If that is the case, it is simply a matter of ensuring that it is enforced or that local authorities and planning departments can use it. That could save an awful lot of time.

[Baroness Hayman of Ullock (Lab)]

The noble Baroness makes an extremely important point. I am more than happy to pick this up, look at it and write to her on how we propose to move forward. I am so sorry: the noble Baroness, Lady McIntosh, asked another question, but I cannot remember what it was.

[Baroness McIntosh of Pickering (Con)]

It was on cumulative impact. I quoted what the noble Baroness had said about the cumulative impact on development, and I am trying to understand why we are delaying implementing Schedule 3. What is the cumulative impact and regulatory burden that the noble Baroness is so concerned about?

[Baroness Hayman of Ullock (Lab)]

The main issue, for me, is to look at how we get developers to implement what we need them to be implementing as far as sustainable drainage is concerned. We know that that is the right way forward and we have said that we want to increase it. When we are working with developers, we need to get them to want to do this, to be part of moving forward in the planning system and to improve drainage systems on the basis that, ultimately, it helps everybody when it comes to flooding and sewage overflows.

Clearly, there is a cumulative impact if you are developing in an area that already has a lot of development. We already know that there are issues around this. We need to get it right, so we need to consider the cumulative impact when SUDS are being designed. I have said that we want to improve design, to make sure that it is effective and works for the long term. As part of that, we also need to look at how it is managed. It is all part of that.

Developments do not just get built and then that is it, they are on their own. As I said, there are areas—certainly near where I live—where development has taken place and the cumulative impact on the other developments nearby has been negative; it has not been good. We need to ensure that we consider that, so we make sure that any systems we bring in will work properly.

[Baroness McIntosh of Pickering (Con)]

From the Minister’s last remarks, we are in fact saying the same thing. All I am asking the noble Baroness to put into this Bill is the requirement to report in six months’ time on where we are on the implementation of SUDS. So, if the Government have decided that they do not want to go down the SUDS path and want to go down the planning path, she will know that within six months. I do not intend to press Amendment 3 to a vote, but I would like to test the opinion of the House on Amendment 43, which will come later.

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Moved by

[Baroness Hayman of Ullock]

12: Clause 2, page 4, line 28, leave out “Before section 95” and insert “After section 205”
Member's explanatory statement
This amendment moves the provisions about pollution incident reduction plans to a different part of the Water Industry Act 1991, in consequence of the Minister’s subsequent amendments extending Clause 2 to the water supply network.

[Baroness Hayman of Ullock (Lab)]

My Lords, in Committee noble Lords across the House made it clear that, although they were supportive of the new requirement for water companies to produce annual pollution incident reduction plans, they wanted further assurances that the measures in the plans would be duly implemented. I have listened carefully to the points raised in Committee and to the views shared on this issue during a number of very constructive meetings with several noble Lords, including the noble Lord, Lord Roborough, the noble Duke, the Duke of Wellington, and the noble Baronesses, Lady Jones of Moulsecoomb and Lady Bakewell, among others, and I thank them for their time and consideration.

The noble Lord, Lord Roborough, asked for further explanation as to why we believe annual reporting is more appropriate than more regular reporting for pollution incident reduction plans. The measures in these plans are typically programmes of ongoing maintenance that will need to continue on an ongoing basis. Examples include regular cleaning of wet wells at sewage pumping stations to remove detritus that could lead to blockages or replacing rising main sewage pipes. We want companies’ focus to be on delivering the measures they have set out in their plans rather than on preparing reports for publication to talk about delivery. More regular reports also may lead to a focus on the wrong metrics to show progress for progress’s sake rather than the work necessary to reduce pollution incidents.

In response to the noble Lord, Lord Roborough, and other noble Lords, I am pleased to propose a group of amendments to enhance and strengthen Clause 2 of the Bill. I turn first to Amendments 12, 13, 14, 16, 17, 18, 22, 25, 27 and 31, all tabled in my name, which will expand the scope of pollution incident reduction plans to encompass water supply system-related incidents. The noble Baroness, Lady Bakewell of Hardington Mandeville, specifically raised this in Committee when she tabled an amendment which would require that water-only companies as well as water and sewerage companies produce pollution incident reduction plans. She made very persuasive points which we listened to carefully and, on reflection, we agree that including water supply incidents in scope would strengthen these plans. While pollution incidents attributable to the water supply system are less frequent than incidents attributable to the sewerage system, they have the potential to be equally serious. I thank the noble Baroness for drawing our attention to this in Committee. Such incidents could include a burst clean-water main leading to erosion and then silt pollution in the watercourse or the addition of chlorinated or fluorinated water into the watercourse.

The amendments tabled in my name will mean that water companies will have a duty to develop and publish measures to reduce pollution incidents attributable to the water supply system as well as the sewerage system. This duty will apply to all relevant companies, including water-only companies as well as water and sewerage undertakers. We believe this will support the overall intent of Clause 2 in further reducing the frequency and impact of pollution incidents from the water sector. I once again thank the noble Baroness, Lady Bakewell of Hardington Mandeville, and all who spoke in support of this topic in Committee for their constructive approach.

I now move to Amendments 29, 34 and 35, also tabled in my name. These amendments create personal liability for chief executives to ensure that pollution incident reduction plans are published and implemented in line with the requirements set out in the Bill. A key aim of this Bill has been to hold water company executives to account for pollution caused by the water industry. As a core part of their role, water company executives should be acting to minimise pollution incidents and ensuring that their infrastructure is fit for purpose and resilient to pressure, including from climate change and population growth.

This is why Clause 1 of the Bill will enable Ofwat to ban bonuses for executives when water companies fail to meet environmental standards. But we want to build on this by making chief executives personally liable for the production of pollution incident reduction plans. This will mirror the personal liability which accompanies the duty for directors of a company to publish accounts and a company report under the Companies Act 2006. This will emphasise that minimising pollution incidents is a central aspect of a water company chief executive’s role. Under this group of amendments, the chief executive must personally ensure that the company produces a plan each year which meets all legal requirements. The chief executive must also personally approve the plan before it is published.

If the company fails to publish a compliant plan by the deadline each year, the chief executive—as well as the company—will have committed an offence. The regulator will be able to prosecute against this offence and, if the courts find the chief executive guilty, they will issue a fine.

To ensure that this measure is proportionate, imprisonment will not be available as a sanction. Furthermore, we have provided a defence to ensure that chief executives are not penalised if non-compliance arises due to circumstances that are—I emphasise—genuinely out of their control.

Through bringing forward these amendments, we will ensure that the production and publication of pollution incident reduction plans is overseen at the highest level, reflecting the importance of water companies bringing forward measures to meaningfully reduce pollution incidents.

I turn now to Amendments 19, 32 and 37, tabled in my name. In Committee, noble Lords made it clear that they wanted to see a clearer mechanism to ensure that water companies implemented their pollution incident reduction plans. We have listened very carefully and now propose a group of amendments to further ensure that companies implement the measures in their plans.

However, before I describe these amendments, I would like to recap why we do not think imposing a direct duty for water companies to implement the plans—as is proposed in Amendment 15A, tabled by the noble Lord, Lord Roborough—is helpful. First, at present, it is rightly the responsibility of companies to produce these plans and to decide the steps they will take to reduce pollution incidents. A direct duty to implement the measures in the plans could therefore result in companies setting enforceable duties for themselves. This would create a confused regulatory system, which could ultimately make it more challenging for the regulators to enforce legal requirements for pollution reduction.

For example, regulators would need to disentangle measures that water companies have put in their plans from pre-existing regulatory duties. This could make investigations and enforcement action more challenging and add complexity and confusion to the regulatory system.

Secondly, a direct duty may inadvertently reduce companies’ ambition. To manage the risk of enforcement, companies might be persuaded to make a commitment only when highly confident they could deliver.

Thirdly, this direct duty may force companies to continue implementing measures, even when they have realised it is not the most effective way to reduce pollution incidents. Companies should have the flexibility to learn and iteratively improve their approach. Sometimes, this may mean companies ceasing implementation of a specific measure and taking a different approach. Therefore, we do not think it is appropriate to create a legal duty for water companies to implement the measures they have set out in their plans.

I will now turn to the government amendments themselves and explain how they will ensure that water companies reduce pollution incidents and are held to account for delivery of their plans. First, this group of amendments introduces a duty for companies to produce an implementation report alongside their annual plans. Companies will be required to set out where they have and have not implemented the measures they planned to implement in the preceding year. Companies must then set out the reasons for any failure to implement their plans and the steps they are taking to avoid similar failures in the future.

This will create a high level of transparency, enabling the public and regulators to scrutinise the extent to which companies have implemented their plans. Requiring companies to set out the steps they are taking to avoid similar failures in the future will ensure that companies cannot continue to make the same excuse year after year.

Secondly, we are also amending the Bill to ensure that the environmental regulators take into account companies’ track records in implementing their plans when undertaking regulatory activities. This means that the regulator will consider the extent to which the company has implemented its plan when considering its enforcement response to a pollution incident, or when planning its schedule of investigations. This may well mean that a company will face more severe enforcement action for a pollution incident if it has failed to sufficiently implement those plans.

I hope the House will agree that, collectively, these amendments represent a significant strengthening of the Bill, and will ensure that companies are firmly held to account for implementing the measures outlined in their pollution incident reduction plans.

I will conclude by speaking to Amendments 15, 20, 21, 23, 24, 28, 30, 33, 36, 38, 60 and 63. I am delighted to move this suite of amendments to extend the application of the provisions introduced by Clause 2 of the Bill to Wales. Upon reviewing the requirements imposed by Clause 2 of the Bill, the Welsh Government and Natural Resources Wales have requested that Clause 2 be extended to apply in Wales. This was announced by the Deputy First Minister on 16 October and these amendments seek to deliver on that request.

I look forward to continuing to work collaboratively with our counterparts in Wales, and indeed with all of the devolved Governments, to tackle shared problems relating to the water industry and water quality more broadly.

I once again thank all noble Lords for their thoughtful contributions and input to discussions around the new requirement to produce pollution incident reduction plans, and hope that noble Lords agree that these amendments will significantly improve and strengthen this new requirement. I move that these amendments form part of the Bill.

[Baroness Parminter (LD)]

On behalf of these Benches, I thank the Minister for listening to the cross-House comments made on the pollution incident reduction plans in Committee. The whole House welcomes the fact that the Government are bringing forward these plans. They can be an important contribution to dealing with the sewage crisis which we have seen for too long; water companies have let the public down.

On that point, it was a disgrace in the last week to see that United Utilities—which has been so responsible for all the sewage pollution that has gone into Windermere, as we referred to in Committee—has increased its dividend to shareholders. It is an absolute disgrace, so these measures cannot come soon enough.

We thank the Minister for listening to the very real concerns we had on two fronts: first, that water companies were excluded from the provisions in the way that water and sewerage companies were not. Although they are a smaller number of the 16 and may be proportionally less important, they are still very important. We thank the Minister for that.

On a slightly broader point, we hear what the Government said on not accepting the amendment proposed in Committee, about adding “and implement” into the Bill, which I see that the noble Lord, Lord Roborough, has brought back today. We are satisfied with the numerous amendments the Government have brought forward to address the two main points: first, that the plans will have to be annually and publicly reported, so we can see what the companies are doing. As the Minister made very clear, it is not just what they have done; they have to make absolutely clear what they have not done and what they are going to do about it, so that we the public—and indeed the regulators—can hold them to account.

The second point, which the Government have moved on significantly—which we very much welcome—is that the chief executives have become personally liable for the production of both the plans and the reports and have some legally binding responsibility which can translate into sanctions, which we believe are strong enough. We thank the Government for bringing forward these pollution incident reduction plans and for listening so constructively to the comments which were made. This is a major improvement to the Bill.

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[Baroness Hayman of Ullock (Lab)]

My Lords, I thank all noble Lords who contributed to this group, and in particular I thank the noble Baroness, Lady Parminter, and the noble Lord, Lord Roborough, for their support for the government amendments. Our amendments will ensure that water companies develop robust and comprehensive pollution incident reduction plans and will also guarantee that they are held accountable for delivering the measures outlined in the plans. Once again, I thank noble Lords for helping the Government to improve the Bill in this respect, and I look forward to working with them as the Bill progresses. I beg to move.

Amendment 12 agreed.

Moved by

[Baroness Hayman of Ullock]

13: Clause 2, page 4, leave out line 29 and insert—
““Pollution incident reduction plans
205A Duty to prepare and publish plans”Member's explanatory statement
This amendment is consequential on the Minister’s previous amendment.

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Moved by

[Baroness Hayman of Ullock]

16: Clause 2, page 4, line 35, leave out “sewerage”
Member's explanatory statement
This is one of a group of amendments extending Clause 2 so that it covers the water supply network as well as the sewerage network.

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[Lord Roborough (Con)]

My Lords, I thank my noble friend Lady McIntosh of Pickering for moving the first amendment in this group. I shall speak to my noble friend Lord Gascoigne’s Amendment 55 as well as government Amendments 42 and 48.

Amendment 55 is a powerful, concise amendment, and I congratulate my noble friend Lord Gascoigne on his commitment to, and passion for, making the case for nature-based solutions within the water industry. My noble friend’s amendment has two parts— both are important for the future of nature-based solutions in the water sector. The first would require water companies to give due consideration to nature-based solutions for meeting their statutory obligations. The second would prevent the regulator blocking the use of nature-based solutions.

The Minister has two amendments in this group that make significant additions to the Bill around the use of nature-based solutions. Amendment 42 requires undertakers to explain the contribution from nature-based solutions. Amendment 48 is a broad amendment that could also contribute towards nature-based solutions being used for their wider benefit to nature restoration. I am most grateful to the Minister for her constructive engagement on my noble friend Lord Gascoigne’s amendment, and for these government amendments. It is clear from these discussions that the Minister cares deeply about nature recovery.

However, I ask the Minister to clarify the approach taken by Ofwat to the use of nature-based solutions within the water and sewage industry. I am aware that £2 billion of investment is included within the draft determinations. However, we on these Benches wish to be reassured that, where suitable and at no additional cost to consumers, further nature-based investment is possible within this determination and beyond. To echo my noble friend Lord Gascoigne and the noble Baroness, Lady Parminter, we would also like reassurance that nature-based solutions will be used not just in drainage and sewerage but throughout the water supply and treatment network, including catchment restoration for flood prevention, drought mitigation and water quality.

I am sympathetic to the intentions of Amendment 26 in the name of my noble friend Lady McIntosh of Pickering. This would appear to be captured within our Amendment 55 as a specific case but also potentially within the government amendments. The water companies are perfectly positioned to stimulate nature restoration at scale and without using the public purse. We welcome these government amendments and look forward to the Minister explaining how impactful she believes they will be.

[Baroness Hayman of Ullock (Lab)]

My Lords, I again thank noble Lords for the discussion on this group, for their amendments and for the thoughtful consideration that we have had since Committee on these issues regarding the environmental duties of water companies and the regulators.

Amendment 26 tabled by the noble Baroness, Lady McIntosh of Pickering, and Amendment 55 by the noble Lord, Lord Gascoigne, would require water companies to consider further opportunities to use nature-based solutions. I thank noble Lords for meeting me to discuss these amendments and nature-based solutions more broadly.

One thing the Government are clear about on these amendments is that water companies need to be encouraged to increase their use of nature-based solutions. In line with that, I am very pleased to see that Ofwat has proposed an allowance of over £2 billion for investment in nature-based solutions in the draft determinations at price review 2024. Alongside this, Ofwat has been clear, publicly, that it remains open to companies to identify where additional nature-based solutions can be delivered. We very much support this approach.

The noble Baroness, Lady McIntosh, and the noble Lord, Lord Roborough, mentioned the catchment approach. Again, that is something we are very supportive of. If we are to make a real difference in our water quality, and our approaches to our waterways, we need a whole-catchment approach.

Ofwat’s £200 million innovation fund aims to grow the water sector’s capacity to innovate. Since 2020, the fund has awarded funding to 93 collaborative projects where water companies work with different sectors to solve the water sector’s biggest challenges. The main- streaming nature-based solutions to deliver greater value project is one example that is working to overcome barriers to the adoption of nature-based solutions.

What I am trying to get across is that the nature-based solutions the Government are supporting are not just about what is in the Bill; it goes much broader than that. That is important, because we need to look at this approach right across the board. I hope that helps to reassure noble Lords and answer some of their questions.

The regulators have, for example, recently approved several new and innovative nature-based solutions. One example is the use of sustainable drainage systems in Mansfield to manage flood risk. That is a £76 million scheme and includes over 20,000 sustainable additions to the built environment in the area, including rain gardens, planters and permeable paving, creating the equivalent of 23 Olympic-size swimming pools of storage and protecting 90,000 people from flood risk. Again, this is about much more than just what is in the Bill. There is further funding proposed for nature-based solutions alongside this—for example, reed beds and wetlands—and the Government are also supporting water companies trialling nature-based solutions for groundwater-induced storm overflows. There is a lot of work going on in this area.

Having said that, we recognise the strong support in this House for the Government to do more to ensure greater use of nature-based solutions across drainage and sewerage systems specifically. I am therefore pleased to table Amendments 42, 61 and 64, which require sewerage undertakers in England and Wales to address how nature-based solutions have, or will, contribute to the resilience and development of their network within their drainage and sewerage management plans. I thank noble Lords who have expressed their support for these amendments today.

Drainage and sewerage management plans are the key planning mechanism for the entirety of the sewerage undertakers’ wastewater network. This new requirement will ensure that water companies consider the use of nature-based solutions at the very start of the investment planning process. In this way, they embed solutions into delivery.

We intend to commence this new requirement very quickly—two months after Royal Assent—and it will apply also in respect of the next round of drainage and sewerage management plans, which will be published ahead of the 2029 water price review. Sewerage undertakers will need to demonstrate that they have addressed the use of nature-based solutions in their draft, and final, drainage and sewage management plans and will be held to account if they fail to do so, because there is no point in bringing forward amendments if they are not going to be delivered as swiftly and as effectively as possible.

The noble Baroness, Lady Willis, asked whether the review would look at things such as adaptation and further environmental matters around reservoirs. Absolutely: the review has a very broad scope in these areas. I remind the House that in our manifesto we pledged to build new reservoirs, because we know how critical they are.

I hope that noble Lords agree that these government amendments will support the future exploration, development and delivery of nature-based solutions by adding this requirement into existing planning frameworks.

I turn to Amendment 44, in the name of the noble Baroness, Lady Boycott. I thank the noble Baroness, Lady Willis, for introducing it on her behalf. It looks to improve public access to real time and operational water company data. I will explain why the Government do not support the amendment; I had a discussion with the noble Baroness, Lady Boycott, about this. I know that the noble Baroness has questioned this, but we believe the amendment would duplicate existing requirements for transparency from water companies.

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Moved by

[Baroness Hayman of Ullock]

27: Clause 2, page 5, line 31, leave out “sewerage” and insert “relevant”
Member’s explanatory statement
This is one of a group of amendments extending Clause 2 so that it covers the water supply network as well as the sewerage network.

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[Lord Roborough (Con)]

My Lords, first an apology: in my excitement in the last group on the government amendments, I forgot to refer to my register of interests, including as a landowner across a number of river catchments and an investor in several natural capital-related technology companies.

I thank the noble Lord, Lord Cromwell, for moving his amendment. I recognise how hard he has worked to improve the Bill, in consultation with the Government. We agree with the spirit of his Amendments 39 and 40 in that we also want more transparency from water companies on pollution incidents. This is an important principle that runs through the Bill, and I hope that the Government will listen to the noble Lord’s argument and seek to strengthen transparency in the water sector where this is appropriate.

I also thank the noble Duke, the Duke of Wellington, for his Amendment 41. While we do not agree with it, we do agree that water companies should take some and more responsibility for the resilience of their power supplies. I would be interested to hear what the Minister can offer in reassurance.

[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.

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Moved by

[Baroness Hayman of Ullock]

42: After Clause 3, insert the following new Clause—
“Nature-based solutionsIn section 94A(3) of the Water Industry Act 1991 (matters to be addressed in drainage and sewerage management plans), after paragraph (e) insert—“(ea) the use that is to be made of nature-based solutions, technologies and facilities within the undertaker’s drainage system and sewerage system,”.”Member's explanatory statement
This amendment requires a sewerage undertaker’s drainage and sewerage management plan to explain the intended contribution of nature-based solutions, technologies and facilities.

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[Lord Roborough (Con)]

My Lords, I thank the noble Duke, the Duke of Wellington, for introducing this group. I also take the opportunity to thank him for his tireless commitment to clearing up the water industry. I have no doubt that the fact that we are considering this Bill in this Chamber at this time owes much to his hard work.

In government, we made progress on work to ensure that fines charged to water companies would be reinvested into the infrastructure of the water sector to reduce pollution and tackle flood risks. Given the very clear concern of the public about the health of our rivers, lakes and beaches and the impact of pollution, it seems only right that the proceeds of fines levied on water companies should be invested in tackling pollution, so we support the spirit of Amendments 46 and 47 in principle.

While there is clearly disagreement on how best to achieve the goal of reinvesting the funds raised through fines on water companies, we hope the Minister will listen to the concerns of the noble Baroness, Lady Bakewell of Hardington Mandeville, and the noble Duke, the Duke of Wellington, and ensure that proceeds from water company fines are reinvested in the sector.

[Baroness Hayman of Ullock (Lab)]

I thank noble Lords for their suggested amendments and the points raised in relation to penalties and the water restoration fund.

First, I will talk to Amendment 45, tabled by the noble Duke, the Duke of Wellington. While I acknowledge the intention behind this amendment, which seeks to strengthen Ofwat’s enforcement powers, we do not believe that automatic penalties are appropriate for the obligations which Ofwat is responsible for enforcing. Ofwat’s role as the economic regulator is distinct from the role of environmental regulators and from the permitting regime for environmental activities. Offences that may be subject to automatic penalties and outlined on the face of the Bill, such as pollution control, abstraction, impounding and drought, fall within the remit of the Environment Agency and Natural Resources Wales. Extending the enforcement of these areas to Ofwat would therefore duplicate the responsibilities of the regulators and create more complexity in the current system.

Furthermore, Ofwat’s investigation and enforcement activities relate largely to breaches of core licence conditions, which are highly complex matters that are not fixed to singular assets or permits but rather systemic failings right across the company’s operations. Investigations often require significant and detailed evidence to be gathered, potentially from a number of sites, to establish whether a breach has occurred. This can take months to conclude and does not lend itself to an automatic penalty.

Ofwat has existing appropriate powers to impose financial penalties. For example, the Water Industry Act 1991 enables Ofwat to take enforcement action, including imposing financial penalties on companies if they are in breach of their statutory duties or licence conditions.

Finally, I remind the House that the independent commission will consider the roles and responsibilities of the water industry regulators and how we can ensure our regulators operate as effectively as possible. This is something that may be discussed in some depth by the commission. The Government will therefore not accept this amendment, but I hope the noble Duke feels reassured on the points about automatic penalties.

I will take Amendments 46 and 47, tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, and by the noble Duke, the Duke of Wellington, together. I very much appreciate the intention behind the amendments, but we do not believe it is necessary to define a mechanism for spending the money received through fines in law. A water restoration fund was launched in April this year, and this arrangement does not require legislation. As we have heard, the water restoration fund serves as a mechanism to direct water company fines and penalties into water environment improvement projects. We feel that defining a water restoration fund in law would instil inflexibilities regarding the scope of the fines available to include within the fund and how the money gathered from fines could be spent. We believe that retaining flexibility is important to ensure funding programmes deliver value for money.

As for the devolved elements of the noble Duke’s amendment, water is a devolved policy area, so it is for the Welsh Government to determine the extent to which a water restoration fund should apply in Wales.

What has come across in the debate, and what came across strongly in Committee, is the recognition that investment in the water industry will be absolutely critical to improving the existing poor standards. The Government are continuing to work with His Majesty’s Treasury on the continued reinvestment of water company fines and penalties in water environment improvement. We are working with the Treasury on this specific issue because we recognise its importance. As this is ongoing work and discussion, we will not be able to accept the amendments today. I thank noble Lords for the debate, and hope that they have been reassured by my comments.

[The Duke of Wellington (CB)]

My Lords, I thank the Minister for that explanation. The point of Amendment 45 was only that I was advised by the Public Bill Office that I had to table it to make Amendment 47 make sense—parliamentary drafting not being one of my specialities. However, the underlying point, which I share completely with the noble Baroness, Lady Bakewell, is that we want to see all the fines levied on the water industry reinvested in ensuring improvements to the clean water environment. That is what we are all trying to do. I suspect that the Minister would support that, in theory, and I wish her well with her discussions with His Majesty’s Treasury. I therefore beg leave to withdraw the amendment.

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Moved by

[Baroness Hayman of Ullock]

48: Before Clause 8, insert the following new Clause—
“Requirement for Ofwat to have regard to climate change etcIn section 2 of the Water Industry Act 1991—(a) after subsection (4) insert—“(4A) In exercising or performing any such power or duty in accordance with those provisions, the Authority must also have regard to the need to contribute towards achieving compliance by the Secretary of State with the relevant environmental target duties, where the Authority considers that exercise or performance to be relevant to the making of such a contribution.(4B) The “relevant environmental target duties” means—(a) the duty in section 1 of the Climate Change Act 2008 (UK net zero emissions target), and(b) so far as the exercise or performance concerned relates to appointment areas wholly or mainly in England, the duty in section 5 of the Environment Act 2021 (other environmental targets);and for that purpose an “appointment area” is an area for which an appointment is held under Chapter 1 of Part 2.”;(b) in each of subsections (6A), (6B) and (7), for “(4)” substitute “(4A)”.”Member's explanatory statement
This new Clause requires Ofwat to have regard to the need to contribute to the achievement of Secretary of State’s targets on climate change and other environmental matters where relevant to its functions.

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[Lord Roborough (Con)]

My Lords, I shall speak to my Amendments 51 and 52, which seek to leave out Clauses 10 and 11 from this Bill. These would also have the effect of rendering unnecessary Amendment 50 of my noble friend Lord Remnant.

Our concern on these Benches is that the consumers are left as the providers of funding of last resort to the water industry. In the event of a company going into special administration and there being losses incurred by the Government, these clauses allow the Secretary of State to recover those losses by putting consumer bills up above the levels that have been determined by Ofwat—not just customers of that undertaker but also of others.

This does not seem fair or just. Surely the ultimate responsibility resides with the Government who created the system of regulation that must have failed in this scenario. I intend to test the opinion of the House on my amendment; we do not believe that the Government should grant themselves this power.

I would also like to briefly address Amendment 53 in the name of the noble Baroness, Lady Jones of Moulsecoomb. We on these Benches agree with her that a bailout of creditors or shareholders by the Government would be completely wrong. It is not for the Government to make professional or retail investors whole when their investments have gone wrong. However, we are unconvinced that this amendment needs to be in the Bill, given that there does not appear to be any mechanism where the Government could be called on to bail out investors. Perhaps the Minister can reassure the House that this is the case.

[Baroness Hayman of Ullock (Lab)]

I thank all noble Lords for the constructive discussion on the important topic of ownership and management structures of water companies. I turn first to Amendment 50, tabled by the noble Lord, Lord Remnant. I understand his concern about the aspect of the clause that allows for socialisation of shortfall recovery. We had some discussion around that, as he mentioned. However, I reassure him again that this element is necessary for the shortfall recovery power to function effectively and safeguard the interests of taxpayers and water customers.

We do not expect to have to use this power—the noble Lord mentioned that we had talked about this—and I stress that it would be utilised only if it were not possible to recover all the funding provided by Government over the course of a special administration; that is, in the event of a shortfall. It is only at that point that Ministers would decide whether to exercise the shortfall recovery power. Water sector stakeholders, including the Consumer Council for Water, would be consulted about any decision to exercise the power. It is therefore not entered into lightly.

All water customers benefit from the use of a special administration regime, as it ensures that services continue in the event that a water company fails. This power already exists within special administration regime frameworks for other essential service sectors, such as energy, where there is a well-established principle of socialising these costs across the sector.

The noble Lord, Lord Remnant, asked specifically about why we think the powers are needed, so I will provide an example. There may be an occasion where government funding, provided during a special administration regime, contributes towards water sector infrastructure—such as a reservoir—that goes on to benefit several different water companies. In other cases, a particularly small water company, with a limited number of customers, may enter special administration. In this scenario, it is vital that a decision can be made about recovering a shortfall from more than one company, to ensure fair allocation of costs and to prevent customers of a single, small company facing unmanageably huge bill increases.

In all scenarios, a failure to deal with a shortfall fairly, or to prevent impacts unduly falling on a single company, risks increasing the cost of capital for the whole sector. This is because investors will price in the risks of excessive shortfall costs falling on a single company. The ability to recover a shortfall from multiple companies is therefore necessary both to ensure that it is possible to recover government funding in the event of a shortfall and to safeguard the sector from any wider cost impacts. I reiterate that we see it as very unlikely that this will ever happen. For this reason, the Government will not accept the amendment.

I turn next to Amendment 53 tabled by the noble Baroness, Lady Jones of Moulsecoomb. While I thank her for her engagement on this clause, the Government must reject this amendment because it would jeopardise the main purpose of the water special administration regime, which is to ensure the continuation of water and sewerage functions in the event of a water company insolvency or failure.

The role of the special administrator, once appointed, does not include a power to cancel debt, so does not serve to bail out water company creditors or shareholders. When a water company exits from special administration, via either a rescue or a transfer, the special administrator determines the level of repayment to creditors in accordance with the statutory order of priority. The level of repayment that creditors and shareholders may expect will be in accordance with the order of repayment clearly set out in statute. Any power to cancel debts outside of a restructuring plan agreed as part of a special administration, or a scheme where there is built-in court supervision, would be a material departure from long-established insolvency principles of fairness and treating creditors equally according to their rights. I hope that the noble Baroness understands why the Government must therefore reject this amendment.

I will turn next to Amendment 54, also tabled by the noble Baroness, and Amendment 56 tabled by my noble friend Lord Sikka. He mentioned dividends. I assure him that Ofwat is able to stop the payment of dividends if they would risk the company’s financial resilience, and can take enforcement action against water companies that do not link dividend payments to performance. I just wanted to make that point clear.

Amendments 54 and 56 are already covered by the existing legal framework for insolvency and special administration regimes. The noble Baroness, Lady Jones, specifically asked why a SAR can be used in only financial circumstances. However, that is not the case. A water company can already be placed in special administration on performance grounds where it is in such serious breach of its principal statutory duties, or an enforcement order, that it is inappropriate for the company to retain its licence. Both the amendments would limit the powers of the Secretary of State and Ofwat by forcing their hand to take specific action, thereby limiting their ability to respond appropriately to individual situations. As part of an application to the court for a special administration on performance grounds, the Secretary of State and Ofwat must consider all aspects of a company’s performance and enforcement record, including its record of criminal convictions. Under the current framework, a company must take actions to address performance issues, including those involved with poor performance. Any failure to do so would form part of any assessment by the Secretary of State, or Ofwat, of the appropriateness of that special administration in the first place. Special administration must be a last resort, and proportional and appropriate to the circumstances. An automatic threshold for special administration, such as outlined in these amendments, would limit the ability of the Government or regulators to act. It would also likely undermine the confidence of actual and potential investors, and bring instability to the wider sector.

The Government are already taking action to strengthen the regulatory system through the recently launched independent commission into the water sector and its regulation. The regulators’ roles and responsibilities, including on enforcement, will be reviewed as part of this. We expect that recommendations from this review will form the basis of future legislation. The rigid approach in these amendments would prevent the Secretary of State from exercising their powers to respond to the details of individual cases. For this reason, the Government will not accept these amendments. However, I hope that noble Lords are reassured by my explanation.

Regarding Amendment 59 tabled by the noble Lady, Baroness Jones of Moulsecoomb, I have already spoken at length about the costs of nationalising the water sector. It would require a fair price to be paid to shareholders and debt holders. This would come to over £90 billion. I know that noble Lords have disputed this figure, but it is based on Ofwat’s regulatory capital value figures for 2024. I have also spoken about the benefits—or lack thereof—of nationalisation.

Research commissioned by the Consumer Council for Water, an independent organisation that represents customer interests, found that a substantial change to the industry and company ownership would not address the main problems experienced. We also see a variety of ownership models in the UK and internationally, with clear mixed performance. For these reasons, the Government have been clear that nationalisation is not on the table.

[Baroness Jones of Moulsecoomb (GP)]

As the noble Lord, Lord Sikka, said, it is okay for the railways but not for water. If it were within the remit, at least we could get some accurate figures. At the moment we do not have accurate figures. Also, a recent poll said that 82% of the general public would like water out of private hands and in public ownership again. That means that this Government are going against the grain.

[Baroness Hayman of Ullock (Lab)]

I appreciate what the noble Baroness is saying, but the Government are clear: nationalisation is not going to be within the scope and we are not going to change our position on that. I think we are just going to have to agree to disagree on this matter.

Moving on, the noble Lord, Lord Roborough, tabled Amendments 51 and 52. The special administration regime is not new to the water sector and, as I have mentioned, it is normal practice in the provision of public services. SARs exist for a variety of other sectors, including energy, transport and financial services. Although Governments have had the power to place water companies into special administration for over three decades, it is important that we regularly update legislation to reflect the modernisation of law and experiences across other sectors. There is a high bar for the imposition of a special administration regime and we want to make it clear that the Government and Ofwat will always act to protect consumers as a priority.

However, 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, for ensuring that statutory environmental obligations were met as well as paying the cost of the special administrator. I reiterate that we expect most of these costs to be recouped either through the proceeds of a sale or through the repayments agreed as part of a rescue at the end of a SAR. If there are insufficient funds to cover repaying government, there is a risk of a funding shortfall. The Defra Secretary of State does not currently have the power to require this shortfall to be repaid. This is unlike in other sectors, such as energy, where the relevant Secretary of State has flexible powers to recover a shortfall in funding.

The introduction of the mechanism is required to ensure that the costs of any water industry SAR could be recovered appropriately, in line with special administration regimes in other regulated sectors. Without this power there is a risk that, in the event of a shortfall, taxpayers’ money would be lost. The Government are clear that any intervention that would increase customer bills would always be considered very seriously and used only as a last resort. I hope noble Lords agree that this power is therefore essential to protect taxpayers’ money in the event of a SAR and I move that these clauses stand part of the Bill.

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Moved by

[Baroness Hayman of Ullock]

60: Clause 13, page 19, line 18, at end insert “, so far as relating to undertakers whose areas are wholly or mainly in England;”
Member's explanatory statement
This amendment is consequential on the Minister’s amendments extending Clause 2 to Wales.