Water (Special Measures) Bill [ Lords ] (Third sitting)

Charlie Maynard Excerpts

Committee stage
Tuesday 14th January 2025 Public Bill Committees

[Emma Hardy]

I am pleased that hon. Members have echoed my support for the DWI. This clause is specifically about how it can recover some of its costs. It is estimated that the increased cost to householders will be only 2p a year, so it is very good value for money.

The wider issue of regulation and regulators will be covered by the water commission, which is looking at the entirety of regulation. That is out of the scope of this Bill, although the hon. Member for Westmorland and Lonsdale has made those points a number of times, and I have heard them each time.

This measure will cost customers about 2p a year. This is a much-needed clause. The Government maintain that it is important that the Drinking Water Inspectorate is remunerated for its security and emergencies work and is able to design a more equitable fee structure. I therefore commend the clause to the Committee.

Question put and agreed to.

Clause 11 accordingly ordered to stand part of the Bill.

Clause 12

Modification by Secretary of State of water company’s appointment conditions etc to recover losses

[Charlie Maynard (Witney) (LD)]

I beg to move amendment 11, in clause 12, page 16, line 11, leave out from “to” to “such” in line 13 and insert “recover from its creditors”.

[The Chair]

With this it will be convenient to discuss the following:

Clause stand part.

Amendment 12, in clause 13, page 18, line 31, leave out from “to” to “such” in line 33 and insert “recover from its creditors”.

Clause 13 stand part.

[Charlie Maynard]

I will speak about clauses 12 and 13 together, with clause 12 covering England and clause 13 covering Wales. Clause 12 relates to the Secretary of State’s ability to recover losses incurred by the state in a special administration regime—many Members might know that as bankruptcy. What is being proposed by the Government is set out in the Department for Environment, Food and Rural Affairs’ explanatory note 69:

“The modifications can require a water company to raise amounts of money determined by the Secretary of State from its consumers”—

I repeat “the consumers”—

“and to pay those amounts to the Secretary of State to make good any shortfall and may include a requirement that amounts be held on trust pending payment to the Secretary of State.”

What we are talking about here are costs associated with a bankruptcy and the Government want to make good those costs. There is no issue with any of that. What I find completely extraordinary is that a Labour Government are proposing that the consumers pay for that rather than the creditors who put us there in the first place. The management and the creditors are the people who are responsible for the mess that we find ourselves in in the water sector.

[Jerome Mayhew (Broadland and Fakenham) (Con)]

The hon. Gentleman says it is the creditors who put the undertakers in the position that they are in, but surely that cannot be right. Creditors are the people who provide services for a fee to the undertaker—they will not be the organisations that put the undertaker into that position. Surely the hon. Gentleman agrees that if he were to replace the consumer or any other body with recovery from creditors, that would be meaningless unless Government debt was placed above those of other creditors. How would that be fair to the providers of services to water undertakers?

[Charlie Maynard]

I thank the hon. Gentleman—I think he jumped in before I had finished the sentence, which was on the creditors and the management. Who is responsible for this? Yes it is the management, yes it is the regulators and prior Governments, and yes it is the creditors who have provided the debt—they have gone into that with eyes and ears open and they have made that decision to provide that debt willingly. Therefore, they have put that money at risk and they have to take responsibility for that. That is what debt is.

I am not talking about Government debt, but about a loss and who is making good that loss. The Government are proposing that all the consumers pay for that—in other words, the bill payers. That is wrong. The bill payers should not be paying for this; the creditors should be, because they have put in, in Thames Water’s case, £17 billion—soon to be £20 billion very likely—which has saddled those companies with vast amounts of debt. More than a third of the bills of the bill payers of Thames Water is just being spent on paying interest on that debt.

[Jerome Mayhew]

The hon. Gentleman is conflating the term creditor with debt provision, but actually there is a plethora of suppliers to any large organisation such as a water undertaker. They are creditors—that is just how they are defined. His clause would cover small and medium enterprises that are providers of services, and in fact any provider of a service who would be a creditor of such an organisation. How does he propose that his clause only affects debt provision, which I understand is the direction he is trying to focus the clause on, and does not cover all creditors as it is currently drafted?

[Charlie Maynard]

The change in wording would mean that the clause states:

“The Secretary of State may make modifications of the conditions of the company’s appointment so that they include conditions requiring or enabling the company…to recover from its creditors such amounts as may be determined by or under the conditions”.

Let us talk through the special administration regime and what happens. I would like this to already have happened but it has not When a company is put into special administration—I would like this to already have happened, but it has not—a court appoints a special administrator. A special administrator looks at the creditors. It looks at the debt and the other creditors involved, and it will prioritise, according to the seniority of that debt and those creditors, who is senior to the other. Suppliers will be a lot more senior.

[Jerome Mayhew]

They will be right at the bottom.

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[Charlie Maynard]

Well, compared with the creditors, but I am advocating that the debt providers take the hit.

[Jerome Mayhew]

The hon. Gentleman will perhaps know that under current insolvency law, there are secured creditors. There is a hierarchy of debt, and the least protected—not the most protected—are suppliers. Does he envisage changing the rules to give additional protection in this process to unsecured creditors and essentially reverse the security of credit? That would be an odd thing to do, but I understand why he might need to do it to make this process effective.

[Charlie Maynard]

We are seeking for the debt providers to take the hit. They have gone into this process and been part of the problem that has led to the state of our rivers today. They should be taking the hit ahead of the customers. That is our direction of travel, and I think that is fair and reasonable. What the clause does is the opposite, and that is what we are going after.

We fully support the losses being recovered by the administration process—we have no issue with that—but if we support the clause as drafted, we will find a very large bill on the customer’s account. That is something we want to avoid. I am keen to hear the Minister’s view as to why it is reasonable for the customer to be paying rather than the lenders.

[Dr Hudson]

On clauses 12 and 13, the Opposition tabled amendments 7 and 8 to remove them. They provide the Government with the power to issue special administration orders to water companies that face financial difficulties.

I put on record my thanks to my Conservative colleagues in the other place for sounding the alarm on this issue when the Bill came forward. They made the case that the measures in clauses 12 and 13 could put the very people we want to protect in such legislation, namely the consumers, at risk. The moral hazard has been explicitly set out by my colleagues in the other place, but I will attempt to summarise it so that we are clear what the problem is. As it stands, the clauses will give the Government the power to recover any losses they make through placing a company in special administration by raising consumer bills.

The problem seems self-evident. If water companies, through their own failure, require the Government to place them under special administration, why should consumers be expected to foot the bill for those failures when they had no particular responsibility for them? It runs contrary to the nature of all the action that has been taken in recent years to try to improve our water quality, and companies that have failed to get their affairs in order must take responsibility.

I was on the Environment, Food and Rural Affairs Committee in the last Parliament, and we spent a lot of time looking at the financial resilience and behaviour of the water sector in close detail. I know that the current iteration is continuing that work. It was concerning to hear about the financial resilience of the sector at first hand in our hearings and meetings. As I said in a sitting of this Committee last week, the financial resilience of the water industry is not a hypothetical issue, but one of paramount concern right now.

We are all starkly aware of concerns surrounding the financial resilience of companies such as Thames Water. We heard about that in detail on the Environment, Food and Rural Affairs Committee in the last Parliament. In November, Ofwat’s “Monitoring Financial Resilience” report identified 10 companies that needed an increased level of monitoring and/or engagement concerning financial resilience. Three were placed in the highest category of “action required”, which means that action must be taken or is being taken to strengthen a company’s financial resilience challenges and that there is a requirement to publish additional information and reporting on improvements at a more senior level with Ofwat.

As well as sending out the opposite message to the companies that Ofwat is working so hard to scrutinise and regulate to protect consumers, clauses 12 and 13 send out the wrong message to consumers themselves. Consumers were recently told that they can expect their average bills to rise by a minimum of about £86, at a time when no doubt some of them have concerns about how to afford their existing bills, along with wider cost concerns. I say gently to the Government that the recent Budget did not help the situation for people’s household budgets. How can it be fair that as a result of these clauses the Government may lead consumers to pay more at a time when many are finding it difficult to pay their bills and do not feel that they are getting the clean water that they deserve? It will potentially add insult to injury when many people are all too aware that they could face higher prices on their water bills because of the Government’s moves.

Shareholders and water company bosses used to be able to receive dividends and bonuses despite polluting our rivers and seas and failing to do the right thing to tackle it. Although reforms have been made to ensure that water company bosses who are not doing their duty with regard to our waterways are forbidden from claiming excessive bonuses, the sting will remain for many people when they keep in mind the prospect of paying higher bills to bail out companies for their poor financial performance.

To water companies, these clauses will send out a signal that they do not have to worry about incurring the consequences of financial irresponsibility, as the Government will have a mechanism to bail them out and consumers may indirectly have to fork out the costs. Nobody is being required to take accountability or face the consequences of the decisions that have caused the failure, but those who have no responsibility or influence are being forced to pay an unfair price increase.

Worse still, the clauses fail completely to specify how much they can require companies to raise from consumers or how much consumers could have to pay in increased costs as a result of the Government’s imposition of these conditions on water companies. That means that any announcements of price changes to water bills, such as those announced by Ofwat, could give no indication at all of how much consumers could end up paying on their water bills. To compound the higher prices even further, consumers may end up facing higher bills to solve special administration financial issues for companies by which they are not even served.

Under clause 12, proposed new section 12J(4) of the Water Industry Act states that “relevant financial assistance” in subsection (3) can include

“any other company which holds or held an appointment under this Chapter and whose area is or was wholly or mainly in England.”

Companies that do the right thing could be forced to pay up, or make their consumers pay up, for the mistakes of those who have failed to do the right thing. As my noble Friend Lord Remnant put it:

“It is the debt and equity investors”

in a company that has failed to do the right thing

“who should pay for these losses in the form of lower proceeds from any eventual sale. Why should a retired police officer in Yorkshire or a hard-working nurse in Cornwall lose out to a hedge fund owner in New York trying to make a quick return?”—[Official Report, House of Lords, 20 November 2024; Vol. 841, c. 293.]

Although in the other place the Government attempted to explain away concerns by suggesting that they do not think that they will have to use the power except as a last resort, and that the bar for special administration would be extremely high, the fact that on more than one occasion the Government could have accepted amendments to remove proposed new subsection (4) must mean that they expect that on at least some occasions they will require its use. The time taken to defend the measure and oppose reforms suggests that this is no mere formality in the wording of the Bill, but something that the Government may put in place.

The Minister in the other place said that the Government would seek to exercise the power in proposed new subsection (4) only if Government bail-outs to water companies could not be financed for the duration for which a company is in special administration—that is, during the shortfall. If that is the condition the Government are setting for the measure—if we have to have the measure at all—could they not have set it out explicitly within the Bill? At the very least, that would have provided clarity about how far the power should be permitted to go.

Clause 13 will provide the Welsh Government with the same powers as those in clause 12. Although the powers in clause 13 are independent of who occupies the offices of the Welsh Government, it should be noted that the Welsh Government who would currently be expected to exercise the powers do not have the most brilliant track record on the water industry, to say the least. Under the Welsh Labour Administration, the average number of spills from storm overflows in 2022 was two thirds higher than in England. That record suggests that the Government in Wales leave much to be desired when it comes to the competence of the water industry, and there is evidence for concern when it comes to exercising the clause’s powers.

Regardless of the specifics of the subsections and of who holds the powers contained in clauses 12 and 13, they are, as they stand, completely against the principles of improving the water industry. I urge the Minister to consider those points and to remove the clauses. Accordingly, we will seek a vote to remove clauses 12 and 13 from the Bill.

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I hope that the Committee agrees that these legislative updates will help to ensure an effective, modernised and efficient water industry SAR, which is in line with the SAR in other essential service sectors such as energy. I hope that, on this basis of fact, the hon. Member for Witney will feel able to withdraw his amendment.

[Charlie Maynard]

Will the Minister give way?

[Emma Hardy]

If the hon. Member does not mind, I would like to finish my remarks, and then I am sure we will hear from him again.

Although I have outlined some of the merits of clauses 12 and 13, I would like to stress again the importance of including them in the Bill. A SAR will ensure the continued provision of essential public services and is the ultimate tool in Ofwat’s regulatory toolkit. There is therefore a high bar for the use of a SAR. A water company can be placed into special administration either on insolvency grounds, where it is unable to pay its debts, or on performance grounds, where it is in such serious breach of its principal statutory duties on enforcement order that it is inappropriate for the company to retain its licence. That includes consideration of a company’s environmental and financial performance. Although the Government have had the powers to place water companies into special administration for more than three decades, it is important that we regularly update legislation to reflect the modernisation of law and experience in other sectors.

Clauses 12 and 13 are essential because if a SAR occurs, Government funding could be provided to cover the cost of special administration. In the unlikely event that the proceeds of a sale or a repayment agreed as part of the rescue at the end of a SAR are insufficient to cover repaying Government funding, there is risk of a funding shortfall. I really am at a loss to understand how this has suddenly become about the Government using customer money to bail out creditors. I am confused about how that started.

The money will be used to cover the cost of repaying Government funding in the risk of a funding shortfall. The DEFRA Secretary of State and the Welsh Ministers do not currently have the power to require this shortfall to be repaid. The shortfall, of course, is the money that the Government may have to provide in the event of a SAR. This is unlike other sectors such as energy, in which the relevant Secretary of State has flexible powers to recover a shortfall in funding. Without this power, there is a risk that taxpayers will foot the bill for costs usually contained within the water sector. Again, that has nothing to do with creditors; it has to do with the costs that the Government could have to pay for the SAR.

Clauses 12 and 13 will therefore introduce a new power for the Secretary of State and the Welsh Ministers to modify water company licence conditions to allocate costs appropriately should there be a shortfall in financial assistance provided in a water industry SAR. The power is designed to be flexible, allowing the Secretary of State or the Welsh Ministers to recover any shortfall in funding in a manner appropriate to the circumstances. The use of the power is also subject to public consultation.

The Secretary of State will be able to decide whether or not to use the power, and to decide the rates at which the shortfall should be recovered from customers. The shortfall that we are talking about is any cost that the Government could have during the time the company is in a SAR; it has nothing to do with shareholders and creditors. The decision will include the group of customers from which it should be recovered. For example, it could be recovered from all water companies’ customers—that is, those in England—or a subset of the sector, or only customers whose water company went into a SAR.

It is possible that a decision could be taken to spread the cost of a SAR across multiple companies, such as where spending benefits are coupled in another region due to shared infrastructure. There is a well-established practice of socialising costs in the energy sector. If a SAR occurs and this power is ever required, it will allow a decision to be made and consulted on as to what the fairest cost recovery option is, based on the evidence and the circumstances at the time.

[Charlie Maynard]

I think the Minister is confirming that consumers will pay for that shortfall. We are advocating that the creditors should pay. We are not looking to rewrite the Insolvency Act. Whatever the special administrator decides in terms of the hierarchy, fine—that is up to the special administrator. I think the Minister has just confirmed what paragraph 69 in DEFRA’s explanatory notes says, which is that a company is required to

“raise amounts of money determined by the Secretary of State from its consumers”

—that is, the bill payers—for that shortfall, rather than the creditors. That is the bit that we are getting at. We think that the special administrator should take into account that hit that the Government have taken and take it out of the creditor’s pocket rather than the customer’s.

[Emma Hardy]

The hon. Gentleman has failed to acknowledge that, as I have just remarked, there is a hierarchy under the Insolvency Act when it comes to debt being repaid. The people he suggests that we take the money from might be people who, in fact, do not receive any money back. As I have already mentioned, the exact quantity of debt recouped by creditors or equity recouped by shareholders is a matter for the SAR. It is unlikely that all debt will be repaid at the end of special administration, and Government funding provided during a SAR takes priority over most creditors. In the event that there was a cost unable to be recovered from the sale of the company or from reprioritising its debt, the Government would receive their money back first and, therefore, this cost recovery mechanism for customers might not be provided before we reach some of the other creditors, and of course that is determined under the Insolvency Act. I am therefore at a loss to understand the hon. Member’s point. It would make sense if there were people who received their debt repayment before the Government, but that is not the case. There seems to be a lot of confusion about what is happening.

All that the Government are doing are providing that, in the unlikely event of the Government’s being unable to recoup costs that they could have paid during the time that a company is under a SAR, there are various mechanisms to have that repaid, all of which would be consulted upon. At the moment, as we know, that would come from the taxpayer. We are instead providing that, yes, we could still use the taxpayer to recoup that debt, or we could use the customers of that particular water company, of neighbouring water companies, or of all of England—and that would be consulted upon.

I think that the hon. Member’s confusion emanates from his being under the impression that, at the exiting of the SAR, creditors would skip off into the sunset with all the money and the Government would take money from customers. That is not the point I am making because, as I have already said, it is unlikely that all debt will be repaid at the end of a SAR and there is a specific order of priority for repayment. I will make the offer—as I did last time and made good on—to provide a fact sheet on exactly how a SAR would work so that there is no further confusion as we progress through the Bill.

I hope that the Committee agrees that the power is essential to protect taxpayers’ money in the event of a SAR.

[Charlie Maynard]

We are going backwards and forwards. I have made my point. The note here is clear—the Secretary of State is looking for moneys from the customers. I think the special administrator should follow the insolvency rules, but that the hit should come from the creditors, not the customers. I will park it there. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn. 

Question put, That the clause stand part of the Bill.

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“primary and fundamental objective.”—[Official Report, House of Lords, 20 November 2024; Vol. 841, c. 244.]

[Charlie Maynard]

New clause 31 would make the process of putting a company into special administration much easier and clearer. There are two steps in the provision: making it easier to apply for special administration and giving more guidance to judges on whether to grant special administration.

Proposed new section 24(1B) of the Water Industry Act 1991 states:

“Where a company which is a qualifying water supply licensee or qualifying sewerage licensee…is required, as a condition of its licence, to maintain two Issuer Credit Ratings which are Investment Grade Ratings from two different Credit Rating Agencies, and…fails to comply with that requirement, the Secretary of State must make an application to the High Court by petition under this section.”

That states that if a company does not have investment grade credit ratings, the Secretary of State will apply for special administration.

Proposed new section 24(2)(ca) of the 1991 Act states that special administration may be granted if a company

“is required, as a condition of its licence, to maintain two Issuer Credit Ratings which are Investment Grade Ratings from two different Credit Rating Agencies, and…has failed to comply with that requirement.”

That gives guidance to the judge. It says, “You’ve got to have those credit ratings. If you don’t, special administration is much more likely to be granted.”

At the moment, we have some bizarre situations. Thames Water, which I will use as my standard example, has £17 billion of debt and cash flows of £1.2 billion; its debt is 14 times higher than the cash flow it generates every year. By financial standards, that is somewhere between ludicrous and ridiculous. In an unregulated sector, the company would have gone bankrupt long ago. I believe—people may contest this—that our Government are keeping it alive because they are worried about being sued by the bondholders if they put it into special administration, because the criteria are not very clear.

If we are serious about fixing our rivers, we have to deal with the debt. We cannot spend the money our rivers require if we do not fix the debt, but we are still digging. Thames Water’s proposed £3 billion of special restructuring is going through the courts right now, so we are adding even more debt—an even bigger millstone around that company’s shoulders. Its debt will go from £17 billion to £20 billion. The Government have the opportunity to say, “That is the last Administration’s trick. We are going to do something different,” but at the moment they are not saying that. I really hope that we will change course. If we do not, all we will do is add more debt on to these companies; that will keep them alive for another 12 or 18 months, but we will be back in the same place again. Customers in Witney and in every constituency are paying through the nose just to cover the interest expenses.

Ofwat has just thrown Thames Water the great big juicy bone of a 35% price increase. That is great news for lenders, but not such great news for customers. It means that instead of 46% of my bill covering the lenders’ interest expenses, it will be only 38%, but I will be paying 35% more. I do not believe that is helping, so the purpose of the new clause is to make it easier to get water companies into special administration.

[Emma Hardy]

I emphasise to Committee members that special administration is the ultimate regulatory enforcement tool; as such, the bar is set high.

To respond to new clause 1, tabled by the hon. Member for Waveney Valley, and new clause 31, tabled by the hon. Members for Witney and for Westmorland and Lonsdale, a water company can already be placed into special administration on performance grounds where it is, or is likely to be, in serious breach of its principal statutory duties or an enforcement order—in other words, where it is inappropriate for the company to retain its licence—as set out in section 24 of the Water Industry Act 1991.

The Secretary of State and Ofwat will consider all aspects of a company’s performance and enforcement record, including environmental and financial performance, when considering whether to pursue an SAR on performance grounds. Licence breaches, such as the loss of an investment-grade credit rating, are considered as part of that holistic review of a company’s performance. Ofwat will consider the circumstances around any loss of an investment-grade credit rating to identify the actions that the company must take to address associated licence breaches.

Regulators have a range of enforcement mechanisms to ensure the delivery of performance, including environmental performance. Water companies can also be required to make clear plans to address failures. I gently point out that this Bill does an awful lot to give more powers to address environmental performance. As we have discussed, our pollution reduction implementation plans address some problems relating to pollution.

Special administration must be a last resort, as it has significant consequences for a company’s investors. If special administration could be triggered without allowing a company to rectify performance issues and licence breaches, investors would have low confidence and would not provide the necessary funding. That could create instability in the market, potentially affecting the entire sector.

Although we recognise the concern behind these new clauses and others tabled by the hon. Gentlemen that highlight concerns that the system is not working, they address the symptoms rather than the underlying causes. In October 2024, the Government announced an independent commission that would be the largest review of the water sector since privatisation. That commission has a broad scope and will consult experts in areas such as the environment, public health, engineering, customers, investors and economics.

The governance of companies and regulatory measures to support financial resilience will be covered, including the operation of existing tools, such as the special administration regime. The review will report by quarter two in 2025. The UK and the Welsh Governments will respond and consult on proposals they intend to take forward. We expect those to form the basis of future legislation to tackle the systematic issues to transform the water sector fundamentally. On that basis, I hope that the hon. Member is content to withdraw the proposed new clause.