Draft Water Industry (Special Administration) Regulations 2024 Draft Water Industry Act 1991 (Amendment) Order 2024

Robbie Moore Excerpts

Tuesday 6th February 2024 General Committees

[The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Robbie Moore)]

I beg to move,

That the Committee has considered the draft Water Industry (Special Administration) Regulations 2024.

[The Chair]

With this it will be convenient to consider the draft Water Industry Act 1991 (Amendment) Order 2024.

[Robbie Moore]

It is a pleasure to serve under your chairmanship, Mr Vickers. The two statutory instruments are part of a package that updates the water industry special administration regime legislation. The package is made up of two commencement orders and three statutory instruments. The first commencement order was made on 11 January, and the two affirmative statutory instruments that we are debating today were laid in draft on 15 January. The second commencement order and the negative resolution statutory instrument will follow shortly after the affirmatives are debated.

The purpose of the statutory instruments is to enable the Government to facilitate a more effective water industry special administration regime. They apply both to England and to Wales, and Welsh ministerial consent has been secured where necessary. The Government already have powers in the Water Industry Act 1991 to apply to the High Court for a special administration order. However, updates are required as the current legislative regime is outdated and largely modelled on the Insolvency Act 1986, which has since been modernised. The most notable legislative updates were the Enterprise Act 2002, the Small Business, Enterprise and Employment Act 2015 and the Insolvency (England and Wales) Rules 2016.

Updates to insolvency legislation are not automatically applied to the water industry special administration regime legislative framework. Instead, the Government must assess how to adapt the insolvency law changes to each industry-specific special administration regime, and legislation relating to those regimes is laid periodically. Recent examples are the Payment and Electronic Money Institution Insolvency (England and Wales) Rules 2021 and the Energy Act 2023. It is vital that the Government are prepared for a range of scenarios, particularly regarding the continued provision of public services, which is why an updated the water industry special administration regime is so important.

The two main grounds on which a water company can enter special administration are unchanged by this legislation. Those grounds are: first, insolvency, when the company may be unable to pay its debts or its liabilities are greater than its assets; and secondly, performance, when the company has failed to carry out its statutory functions or licensed activities to such an extent that it is inappropriate for it to continue holding its appointment or licence. Under a special administration regime, customers’ water and waste water services will continue to be provided.

The draft Water Industry Act 1991 (Amendment) Order 2024 implements hive-down provisions by amending schedule 2 to the 1991 Act. Schedule 2 makes provision about transfer schemes upon the termination of an appointment or the transfer of a licence for a water industry company, and is amended by the order to include provisions about transfer schemes in cases where there is a transfer by hive-down. The amendment is necessary to ensure that the hive-down provisions commenced last month by the Flood and Water Management Act 2010 (Commencement No. 10) Order 2024 are fully operable. Hive-down is a common commercial restructuring practice to ringfence value and attract potential buyers. The amendment allows the administrator to hive down the regulated business to a subsidiary in order to protect its business and facilitate a sale process that may be more attractive to a potential buyer.

The draft Water Industry (Special Administration) Regulations 2024 will disapply and modify general insolvency provisions as they apply in relation to water companies, including licensed infrastructure providers and special administration orders made in respect of water companies under the 1991 Act. The regulations make general modifications to the 1986 Act and other enactments about insolvency provisions, alongside specific modifications to schedule B1 to the 1986 Act. The amendments adapt parts 26 and 26A of the Companies Act 2006 via specific modifications for the purpose of the water industry special administration regime, and amend section 26 of the 1991 Act and schedule 1 to the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013.

In addition, the regulations will give the Government the power to lay a negative statutory instrument in the coming weeks that will revoke the Water Industry (Special Administration) Rules 2009, replacing them with updated special administration rules for water companies based on the Insolvency (England and Wales) Rules 2016. Thus, the statutory instruments will upgrade the water industry special administration regime legislation to ensure that if a water company is ever required to go into special administration, a modern, efficient water industry special administration can be implemented.

--- Later in debate ---

[Robbie Moore]

I am grateful to the hon. Members for Kingston upon Hull West and Hessle and for Bath for their important contributions, although I must say it was good that they eventually came back on to the script, so to speak. The statutory instruments will enable the Government to facilitate a more effective and efficient water industry special administration regime, ensuring that they are prepared in all eventualities to ensure uninterrupted provision for vital public services.

Let me briefly address some of the questions and points raised by the hon. Member for Kingston upon Hull West and Hessle. Before I get into the detail, I should say that I was pleased to hear her reference self-monitoring, because that was brought in by the Labour party when it was in power, in a water industry Act. We have increased the amount of monitoring that we are doing from 7% in 2010 to the 100% that we saw rolled out in 2023.

I will get back to the point. We are taking clear and decisive action to improve water quality. Our plan for water is delivering more investment, stronger regulation and tougher enforcement for our water system, and we are clear that water companies must not profit from environmental damage. Through that plan, we will transform our management of water systems, deliver cleaner water for nature and people, and secure a plentiful water supply.

The hon. Member for Kingston upon Hull West and Hessle made reference to storm overflows, so let me clarify the amount of investment going into them. Our plan for water sets stringent targets on companies to improve storm overflows, which will drive the largest infrastructure programme in water company history, with £60 billion of capital investment over 25 years. We are clear that the volume of sewage being discharged into our waters is utterly unacceptable. However, storm overflows cannot just be switched off, as some have suggested; they are an automatic feature designed to stop sewage backing up into our properties.

We introduced the statutory instruments to update the existing regulations set in place under the 1991 Act so that, should we get to a scenario in which we need to utilise the special administration regime, we are in a position to do so. I will clarify that since privatisation the private water sector model has unlocked about £215 billion of investment; I raise that point because the hon. Member for Kingston upon Hull West and Hessle referenced nationalisation. Since privatisation that has been equivalent to about £6 billion being invested annually, which is almost double the pre-privatisation level.

[Emma Hardy]

Will the Minister give way?

[Robbie Moore]

I will carry on for now.

The hon. Lady quite rightly asked how customers may be impacted should a special administration regime be put in place. We will always act to protect customers as a priority, and any intervention that would put pressure on the public purse would be considered seriously and as a last resort. Dividends are an important part of the investor return and should provide an adequate return that reflects company performance. If a company did not pay its dividends, it would struggle to access the finances to fund investment, impacting on the service for future customers.

In each year since privatisation in 1989, investment has been greater than the dividends paid, but a sustained level of investment in the water industry will continue only if the shareholders of companies can expect a fair return. Companies must pay for new investment up front, so need to secure a large amount of funding to pay for that. To avoid customer bills increasing drastically to pay for that, companies may secure money by raising debt or equity, or through shares in the company or investors.

The hon. Lady also asked whether a company in special administration will have to adhere to the same standards as the rest of the sector. The answer simply is yes. The special administrator will manage the affairs, business and property of the company according to the same statutory obligations as any other water company.

To build on that, the hon. Lady also asked for clarity on whether a water company could be placed in special administration. In general, special administration can be applied for on insolvency grounds, when the company might be unable to pay its debts or when liabilities are greater than its assets—as I said in my opening remarks—or in instances where water companies are in serious breach of their principal statutory duties or an enforcement order.

[Emma Hardy]

The Minister mentioned the failure to fulfil statutory duties, but will he confirm whether a violation of environmental law constitutes a failure to fulfil statutory duties?

[Robbie Moore]

Every water company is specifically regulated by the Environment Agency, as well as Ofwat. The Environment Agency will have powers if water companies are owned and operating under the regime they operate under now, or should they enter special administration.

On the hon. Lady’s point about Ofwat, it is clear from Ofwat’s performance report that there has been marked decline in performance over the past year. That has been driven by company-specific factors, but also by the effects of extreme weather, including the unusually hot and dry summer we had. The Environment Agency and Ofwat have powers of enforcement, and those powers will not change under a special administration regime.

I have addressed the points that were made, so I commend the draft statutory instruments to the Committee.

Question put and agreed to.

Draft Water industry Act 1991 (Amendment) Order 2024

Resolved,

That the Committee has considered the draft Water Industry Act 1991 (Amendment) Order 2024.—(Robbie Moore.)