Water (Special Measures) Bill [HL]

Lord Roborough Excerpts

Report stage
Wednesday 20th November 2024 Lords Chamber

[Baroness Jones of Moulsecoomb (GP)]

My Lords, I thank the Minister for having listened not just to Members of your Lordships’ House but to the thousands of campaigners, because the amendments tabled in her name are actually of great value. However, I feel they do not go far enough, and a lot of people—though probably not those here—might agree with me.

I have co-signed two amendments in the name of the noble Lord, Lord Cromwell, and one in the name of the noble Lord, Lord Sikka. I will vote for them if any of them are put to the vote. There are lots of other helpful amendments, but those three are the most useful.

I cannot help but feel that, if we were talking about benefit claimants who had behaved in the way that water companies have, we would not just slap them on the wrist in the way that we have the water companies; we would crack down on them, claw back the money and take them to court. The water companies have got off so lightly in this whole process. That really does not seem fair to bill payers or to taxpayers.

Amendment 2 goes to the heart of the issue. Water companies have been ripping us off with financial engineering, and I do not think that the Government’s action plan will resolve this. The water companies have been saying that they invest all the bill payers’ money in infrastructure, but they then take out loans and pay themselves dividends. With this legislation—even with the amendments—the Government are missing the opportunity to crack down on predatory capitalism.

[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.

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[Baroness Altmann (Non-Afl)]

I apologise to the House for not having been able to participate in previous stages. I will briefly support the noble Baroness, Lady McIntosh, and these amendments. How come the Government, when in opposition, supported introducing mandatory sustainable drains in major new developments but now seem not to wish to do so? If no drains, soakaways or culverts are constructed to take the excess, flood-water will go into combined sewers, potentially then bubbling up and leaving sewage in housing developments. This causes a health hazard by flooding homes with sewage.

The amendment asks simply for a report on how developers have implemented Schedule 3 to the Flood and Water Management Act 2010. There was cross-party support for that in this House, and I hope the Minister can reassure us or find a way to meet the concern of the noble Baroness, Lady McIntosh.

[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.

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Moved by

[Lord Roborough]

11: Clause 1, page 4, line 25, at end insert—
“(5) The first rules issued under section 35B of the Water Industry Act 1991 (as inserted by subsection (3)) must be published by the Authority within six months of this Act coming into force and provided to the Secretary of State and do not take effect until the Secretary of State has made regulations made by statutory instrument to bring them into effect.(6) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”

[Lord Roborough (Con)]

My Lords, as I said previously in Committee, consultation with the Secretary of State, as described in the Bill and again by the Minister today, is simply not enough to ensure accountability of this rule-making power, so I would like to test the opinion of the House on my amendment.

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[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.

[Lord Roborough (Con)]

My Lords, I fully echo the noble Baroness, Lady Parminter, in thanking the Minister both for her engagement during the Bill’s progress and also, specifically, for listening to the House on the implementation of the pollution incident reduction plans. We also welcome these government amendments.

I tabled Amendment 15A simply as a reminder of how understanding and accommodating the Government have been. This was originally tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, in Committee. As I said then, we would have tabled it ourselves had she not been so swift with her pen. It is crucial that pollution incident reduction plans are more than a wish list, and actually have real obligations for implementation.

We are most grateful to the Minister for listening to this House and creating a structure for making water companies responsible for implementing these plans and reporting on that implementation. The Minister explained clearly the issues around that responsibility, relating to interference with the other statutory obligations of those companies, and we are very pleased that she and her officials were able to design a methodology that would work.

We agree that making the CEO of the relevant undertaker responsible for signing off the plan and liable for its implementation creates significant incentives to ensure that these pollution incident reduction plans will be implemented. I thank the Minister, yet again, for her further explanation of why annual reporting is appropriate in this instance, and I accept that. We on these Benches are supportive of these government amendments and I will not press my amendment.

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[Baroness Parminter (LD)]

My Lords, as the noble Baroness, Lady McIntosh of Pickering said, this is an interesting group of amendments and we on these Benches welcome them. I do not wish to replicate what has been said but I have a few reflections.

Government Amendment 48, so ably spoken to by the noble Baroness, Lady Willis of Summertown, is extremely welcome. It could go further, but we on these Benches welcome it. We accept that the Bill is an interim measure and that the independent water commission is just that: independent. Nevertheless, it is important that the Government at this point in time are making a marker in the sand that the regulator should have greater regard for climate and environmental targets. That is extremely important and is the additional reason why on these Benches we welcome it.

Amendment 44 was introduced by the noble Baroness, Lady Willis of Summertown, on behalf of the noble Baroness, Lady Boycott. You would expect that we on these Benches, as Liberal Democrats and liberals, would welcome anything that enables local people to have more say on decisions that affect their lives, particularly the environment and climate decisions, because we know that, if they get involved and are caring about their environment, they will help protect it better. So we think that this is an extremely welcome amendment and we look forward to hearing what the Minister has to say in her response.

On the final group of amendments, on nature-based solutions, which we participated in in Committee, I think there is broad agreement. Everybody understands that we need water companies to look less at concrete and far more at green solutions. Government Amendment 42 is extremely welcome. The only point that I would make echoes that made by the noble Lord, Lord Gascoigne, when introducing his Amendment 55: there is an area where it could have gone a bit further. The noble Lord’s amendment talks powerfully about water storage and flood prevention; the Government’s amendment is welcome, but it excludes that. We on these Benches would like to hear a little more about how the Government see themselves taking that forward —mindful that it is not in their amendment. Having said that, we welcome these amendments.

[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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[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, Amendments 39 and 40 in the name of the noble Lord, Lord Cromwell, relate to the publication of data on sewage overflows in a form that is readily accessible to the public. The public are concerned about sewage spills, and they want to know when and where they are occurring. They also want to know what is being done about preventing further spills in their area. The amendments help to redress the current balance on availability of information.

Amendment 41 in the name of the noble Duke, the Duke of Wellington, relates to the failure of electricity supply which affects a sewage overflow outlet. I agree completely with the noble Duke. If an overflow outlet is reliant on an inefficient electricity supply, it is up to the undertaker to work with the electricity company to ensure that it is fit for purpose. The electricity supplier, similarly, will know when there is going to be a planned outage and should notify the undertaker in advance so that alternative arrangements can be made. If the electricity supply which serves an overflow outlet is inclined to break down, the undertaker should plan to have a generator on standby, as the noble Duke said, to take over when the electricity supply is down. This is common sense, and I look forward to the Minister’s comments.

[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.

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[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, the noble Duke, the Duke of Wellington, has set out the case for this group of amendments with his usual clarity and passion for sorting out the obligations which Ofwat needs to impose.

The money collected from fines from sewerage and water companies needs more clarity over its destination. At the moment, it would appear that the money from fines imposed by Ofwat does not go back into ensuring that investment occurs to correct the defects which allowed sewage spills in the first place. Much of the money from fines goes into the Treasury coffers and supports other government departments. This is not what the public want. They want the money from fines to go into making good inadequate and out of date sewerage systems and helping to create new reservoirs. A transparent and obvious way to achieve this is to set up a water restoration fund. This group of amendments requires all fines for environmental offences to be ring-fenced for this fund.

I understand that the Treasury is not in favour of this as it is hypothecation. I understand where it is coming from. However, it is necessary, due to the appalling performance of the water industry, for the public to be able to see just where the money from fines is going and how it is being used to improve the service they are paying for in their water and sewerage bills. We are, therefore, very keen to see such a fund set up without delay. There are undoubtedly going to be large fines coming down the line which water companies will have to pay. These fines cannot just evaporate into the ether so that customers cannot see what is being done with the money. Restoring public confidence in the water and sewerage industry is key to moving forward and a water restoration fund is a vital element of achieving this.

[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.

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[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, this is the last group of amendments. The noble Lord, Lord Remnant, has introduced Amendment 50 on recovering costs from water companies. The noble Lord, Lord Roborough, has Amendments 51 and 52 to leave out Clauses 10 and 11. We did not support these amendments in Committee and have not reconsidered our view.

The noble Baroness, Lady Jones of Moulsecoomb, has spoken to Amendments 53, 54 and 59, dealing with water companies that have been taken into special administration. Under Amendment 53, 50% to 100% of the debts of the company would be cancelled. Under Amendment 54, the Secretary of State would place a water company into special measures for breach of environmental conditions. Amendment 59 requires an assessment of costs to bring water companies back into public ownership. Although the noble Baroness, Lady Jones, is very articulate and passionate, I am afraid we are not able to support these amendments.

Amendment 56 in the name of Lord Sikka, to which he has spoken very eloquently, seeks to prevent companies from operating where they have criminal convictions in a five-year period. I have listened to the noble Lord’s arguments on this amendment and will listen carefully to the Minister’s response, but at the moment I am not convinced of the efficacy of Amendment 56.

[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.

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Moved by

[Lord Roborough]

51: Leave out Clause 10
Member’s explanatory statement
This amendment would prevent consumers in England from being charged higher water bills to cover any losses incurred by the Government as a result of the Secretary of State’s decision to make a special administration order.

[Lord Roborough (Con)]

My Lords, the Minister said that His Majesty’s Government do not expect to use these powers in Clause 10. I struggle to believe that any noble Lord listening to the noble Baroness describe socialising these losses across consumers can feel comfortable, however unlikely it is. If the clause is not to be used, I would like to test the opinion of the House on whether it should stand part.