Water (Special Measures) Bill [HL]

Lord Remnant Excerpts

Report stage
Wednesday 20th November 2024 Lords Chamber

That is basically my proposition in this group. I have other amendments in other groups, to which I will return later. I thank the House for hearing my arguments, which I hope will gather support from all sides.

[Lord Remnant (Con)]

My Lords, I declare an interest as having been a non-executive director of Severn Trent, the largest of the listed water companies, for eight years between 2014 and 2022. I chaired the board’s remuneration committee for that time.

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

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

My Amendment 4 would remove this extended application to individuals below board level. This extension will be difficult to implement in practice, as different water companies will have individuals described differently by title and role. Nor would such an extension be consistent with general remuneration under the corporate governance rules for listed companies, which do not extend to individuals below board level. If we wish to attract and support the next generation of leaders in this vital industry from middle management, this will not be achieved by extending these restrictive remuneration practices to them.

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

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

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

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

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

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

“ensure consumer representation on water company boards”.

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

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

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

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

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

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

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

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

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

[Lord Cromwell (CB)]

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

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

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[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.

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Moved by

[Lord Remnant]

10: Clause 1, page 4, line 25, leave out “2024” and insert “2025”
Member’s explanatory statement
This amendment ensures that the provisions about performance-related pay do not have retroactive effect.

[Lord Remnant (Con)]

My Lords, I heard what the Minister had to say, but I have to say that I believe that the retrospective effect of this legislation is not appropriate —all the more so if it is going to impact on remuneration arrangements that were put in place as long ago as 2022-23. I would like to test the House’s opinion.

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Moved by

[Lord Remnant]

50: Clause 10, page 14, leave out lines 7 to 9
Member's explanatory statement
This amendment ensures that compliant companies in the sector are not required to render financial assistance to recover SAO losses caused by another company under special administration.

[Lord Remnant (Con)]

My Lords, under the special administration orders part of the Bill, relating to the insolvency of water companies, Clause 10 gives the Secretary of State the power to modify the licence of a water company in administration or solvency to recover from its customers any shortfall in costs incurred by the Government in such a situation.

My amendment addresses subsection (4) of the new section to be inserted by this clause, which allows the Government also to recover those costs not just from the company in administration but from any other compliant company, and its consumers, in the sector. My amendment would simply remove this extended unjustifiable right of recourse.

This subsection surely cannot be fair. It would force good companies and their blameless customers to bail out failed companies. Would anybody seriously suggest that, if Sainsbury’s got into financial difficulties, it should be bailed out by Tesco’s customers and shareholders? I think not.

To take a potential live example, were Thames Water to find itself in special administration, if you require customers of Northumbrian Water, at the other end of the country, and other companies to fund SAR losses, the Government are protecting hedge funds and other speculators who are now buying Thames debt at big discounts. It is the debt and equity investors in Thames 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?

I tabled the same amendment in Committee and felt it necessary to bring it forward again because the Minister did not address my concerns at that stage. She covered the circumstances surrounding the introduction of the special administration regime itself rather than justifying the extended right of recourse to other compliant companies in the sector. She said there was a high bar for the introduction of such a regime, that the Government do not expect to have to use this power and that any intervention would be considered very seriously and as a last resort.

As we speak, there are two companies in the sector renegotiating their debts: Thames Water and Southern Water. In theory, either could result in administration or insolvency, which may or may not involve the provision of financial assistance by the Secretary of State and the recovery of any shortfall under Clause 10. The Minister will be much better appraised of these situations than I am, so I derive some comfort from her assurance, armed with that knowledge, that the Government do not expect to have to use this power to recover losses from companies affected. Can she not, however, be more categorical than that, by saying that, even if the powers afforded to the Secretary of State under Clause 10 were to be invoked, they would not be used to recover cost shortfalls from other, blameless companies in the sector, and their customers?

Far more straightforward, however, would be for the Government to accept that any suggestion of collective punishment for the financial ways of others should be rejected, and for the Government to accept my amendment and remove this wide and, I argue, unjustified recourse across the sector. I look forward to listening to my noble friend Lord Roborough on his Amendment 51, which immediately follows. Clearly, if Clause 10 is removed in its entirety, that would satisfy my concerns. I beg to move.

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[Lord Remnant (Con)]

My Lords, the hour is late, so I will be brief. I thank everybody who has participated in our discussion of this group of amendments, and in particular my noble friend Lord Roborough for his support. There is clearly a lot of interest in the special administration regime and the costs arising from it, particularly in the allocation of those costs, and I compliment the noble Baroness, Lady Jones of Moulsecoomb, and the noble Lord, Lord Sikka, who have spoken with their normal passion and dogged determination on these issues.

I thank the Minister for her patience and considered response on all these issues. I do not necessarily agree with all the points she has made, particularly on the cost of capital. I am not sure that it would be raised more in instances that she is referring to, rather than the industry having this spectre of having costs allocated to the compliant companies in respect of losses incurred elsewhere. But I thank her anyhow. I am sorry that she has not been able to accept my amendment, but I beg leave to withdraw it.

Amendment 50 withdrawn.