Water (Special Measures) Bill [HL]

Lord Remnant Excerpts

Consideration of Commons amendments
Wednesday 5th February 2025 Lords Chamber

[Lord Blencathra (Con)]

My Lords, I will speak to Motion 1A by the noble Lord, Lord Cromwell, to amend Commons Amendment 1, and my own Motion to disagree with Commons Amendment 2. Before I begin, my noble friend Lord Roborough and I remain very grateful to the Minister for her excellent engagement and spirit of openness throughout the discussions on this Bill. We are also grateful to her excellent team of officials, who have been very helpful throughout. Where we have agreed, there has been fruitful progress and where we have disagreed, I hope that we have done so constructively.

I speak first in support of the amendment from the noble Lord, Lord Cromwell, who has argued convincingly for improved financial reporting and transparency by water companies. We support his amendment. On Report, the noble Lord explained:

“This amendment is not complex or onerous, but it is vital. It requires simply that water companies report annually on their financial structuring, debt levels and any associated risks”.—[Official Report, 20/11/24; col. 236.]


He emphasised the need for this to be set out in plain language and prominently displayed.

We all know that debt levels in the water industry are simply too high. Last year, the BBC reported that water companies have a combined debt level of £60 billion; the cost of servicing that debt has grown significantly in recent years. Most notably, Thames Water faces serious financial difficulties. Although the Government have previously argued that the noble Lord’s amendment is duplicative, his Motion today makes his objective even clearer. Yes, existing reporting requirements are already in place for water companies but we know that they are not working. Stronger reporting and transparency requirements are a step in the right direction.

The Minister has accepted that debt levels are being monitored by Ofwat already. On Report, she conceded that

“more can be done to ensure that debt levels are more closely monitored in future”.—[Official Report, 20/11/24; col. 249.]

We agree with her; more can be done, and the noble Lord, Lord Cromwell, has given us that opportunity today. The official Opposition will support him in his Motion, if he chooses to test the opinion of the House.

Turning to the Motion in my name, I am seeking to restore the wording of my noble friend Lord Roborough’s amendment to the Bill following the decision in the other place to remove it. The Bill as drafted allows Ofwat to set rules on water company governance and remuneration for executives without appropriate oversight. Our Motion would ensure that the first rules are provided to the Secretary of State by Ofwat and put before Parliament through the affirmative procedure for statutory instruments.

I am grateful to the Minister for sharing the Ofwat letter with us but, if I may say so, it is a wee bit feeble. A drop-in session for Members of Parliament is not enough. Parliament, without being arrogant about it, deserves the right to greater scrutiny than that.

My noble friend Lord Roborough’s Motion strikes at the heart of what is wrong with our water industry today: the failure of our regulator to tackle problems in the sector and the inability of Ministers to intervene on the independent regulator.

In opposing our Motion, the Government have effectively argued that Ministers and Parliament do not need additional powers to hold the regulator to account. At the same time, Ministers have told us that whole regulatory framework of our water industry needs to be reviewed, and have already started work on that review. So, which is it? Either the water industry is not properly regulated, and therefore Ministers and Parliament need appropriate powers and processes to challenge and scrutinise the regulator, or the sector is regulated well, and these powers are not necessary.

The Minister said that the Government say that they do not want to interfere with the independence of Ofwat, but I was under the impression given by the long-term review that the Government intend to interfere in a mega way and possibly scrap Ofwat. The Government have recognised that the sector is not regulated as well as it needs to be, so it follows that we should put additional oversight in place.

I do not think we can wait for the Government’s review to conclude. Ofwat is not performing as it should, and this House should have a role in scrutinising its plans under this Bill. I believe our Motion delivers that much-needed scrutiny, and I intend to test the opinion of the House when my Motion is called.

[Lord Remnant (Con)]

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

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

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

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

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

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

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

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

[Baroness McIntosh of Pickering (Con)]

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

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

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