My Lords, I will also speak to the other amendments in this group and to the Motions tabled by the noble Lords, Lord Cromwell and Lord Blencathra.
I am delighted to be back in the Chamber debating this important legislation. I thank all noble Lords for their continued interest in this Bill. In recent weeks I have met noble Lords from across the House to discuss changes made to the Bill during its passage through the other place, and I am grateful for the insightful questions and views shared with me and my officials in advance of our debate today. I am also grateful to the noble Duke, the Duke of Wellington, for accompanying me on an interesting day we spent at two emergency overflows operated by Anglian Water. Although Clause 2 is no longer in scope of our discussions on the Bill, I hope the noble Duke found his visit helpful in bringing to life some of the issues we considered during previous debates.
I turn to today’s debate and to the first group of amendments that the House must consider. I thank the noble Lords, Lord Cromwell, Lord Roborough and Lord Blencathra, for the very constructive way in which they have worked with me and my officials to strengthen the Bill during its passage through this House. Although I am sure the noble Lords were somewhat disappointed to see the Commons overturn their amendments, which were voted into the Bill at Lords Report stage, I am grateful to them for meeting me over the past weeks and months to discuss the reasons why and to try to find alternative means of realising the intent behind their amendments.
I will now take some time to share the key points from these discussions with other noble Lords here today. Commons Amendment 1 removes from Clause 1 the requirement for Ofwat to set rules on the reporting of water company finances. This requirement was removed because it would duplicate existing processes and requirements set out within water company licences, which I will briefly summarise now.
1A: Leave out from “House” to end and insert “do disagree with the Commons in their Amendment 1 and do propose Amendment 1B to the words so restored to the Bill—
1B: Clause 1, page 2, line 8, at end insert “, and to present such information on structuring and debt prominently, including on the website of the undertaker, in a format that can be readily accessed and understood, including by bill payers.””
My Lords, I will speak to Motion 1A and Amendment 1B together and would like to put on record how very grateful I have been for the discussions with the Minister and her team, her recent letter to all Peers about my amendment and the nice things she has said today—although I thought there was a bit of a threat to the noble Lord, Lord Blencathra, at the end there.
Although there is much that we agree on in principle, and what the Minister has outlined today is not obstructed in any way by Motion 1A and Amendment 1B, it is my firm belief that the amendment as presented today in Motion 1A and Amendment 1B, in plain language, needs to be included in the Bill. I suggested that the Government bring forward their own amendment setting out what she has suggested today, but they have chosen not to do so.
The original amendment required water companies to report annually on their financial structuring or restructuring and their debt levels and associated risks. I therefore regret its deletion by the Commons which, as I will address in a moment, perhaps misunderstood the need for and purpose of the amendment. That is why I have added the further wording at Amendment 1B to ensure that the information is sufficiently prominent and accessible.
The background to the amendment remains the same. The water industry and, in particular, several companies within it have both failed to invest sufficiently and got into financial difficulties because of distorted financial engineering, including overloading with debt and what I might politely call accounting sleight of hand. This has come to light not because of the regulator Ofwat, which went along with these corporate behaviours either because it simply did not understand them or, so long as the water kept flowing and the prices were low, chose not to look closely at what was going on. What was going on was an almost complete failure to invest at anything like the rate that was needed to secure a sustainable water and sewerage management system, while at the same time extracting moneys conveniently rebadged so that they were not classed as dividends. It was not Ofwat that blew the whistle on this but rather civil society, individuals and some in the media. The Industry and Regulators Committee of this House, on which I had the honour to serve, also played a part in highlighting the matter in its critical report on the water industry.
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Further, Thames Water has estimated that its legal bill alone is running at £15 million per month and openly stated that restructuring is expected, the advice costs for which will take the bill for that restructuring to above £200 million. Meanwhile, groups of MPs are writing letters urging that the company be taken into special administration. I will leave it there, as the matter is now in the courts. However, I see that the company claims that these costs will not be passed on to customers. I can note only that its experience to date of raising investor money, as we were promised, has not been nearly successful enough. The water companies are now imposing, with Ofwat’s agreement, very substantial increases in water rates for bill payers, who have no choice but to pay up or somehow learn to live without water.
All this was able to take place because information on financial structuring and debt accumulation lurked, if at all, in the back pages of large and complex annual reports. I recently read the most recent annual report of one water company which has financial engineering and debt issues. There was no reference to that in the chairman’s report or in the chief executive’s report—surely, the two people who should take ownership of such matters. Finally, more than 100 pages in, I found a single line in the financial report that stated just one figure as the amount of debt. In subsequent discussions with the Minister’s team, I was presented with what was felt to be a better annual report from another water company. On a page heavy with small print, there was indeed a small diagram of its ownership structure, but where was this? It was on page 108.
Motion 1A and Amendment 1B are simple. They require that, once a year, the financial structuring and debt of the water company are reported in a prominent and clear way that is understandable by bill payers and civil society, who are not equipped with expensive forensic accountants to dig out and explain what lies beneath. Noble Lords will remember that the original amendment was strongly supported in this House but, although praised in the Commons by several speakers as sensible and valuable, it has been removed. On what grounds was that? The grounds were that the information required is already in the annual reports—albeit buried many fathoms deep, as I highlighted just now—and that its repetition might cause confusion. Those making this argument have maybe never heard of key facts being repeated in an executive summary. I fear they must also be rather easily confused.
I have been told that the information the amendment requires is already in the annual reports but, at the same time, that regulatory guidelines mean we cannot include this information. I am sorry, but it cannot be both already included in the reports, albeit almost impossible to find, and not possible to include. That is a direct contradiction. It is also simply not credible that a company cannot make the information more prominently or intelligibly displayed in its reporting, rather than folded away after 100 or so pages. I know that the Minister agrees with me on this, hence her proposal just now. For clarity, I should finally point out that the amendment proposed requires the company to report annually on its financial engineering and debt; it does not specify that this has to be in the annual report.
I say again that I, like all in this House, have enormous respect for the Minister. I am genuinely very grateful to her for the courteous discussions we have had and again for her suggestions today, but this is not about good will between transitory individuals. It is about ensuring within the Bill public transparency to assist society and regulators in holding more effectively to account the companies entrusted with what is, after all, the most vital resource we all need to survive. They need that simple, publicly accessible check on the factors that have brought them to their current mess—not after a further review or by words from the Dispatch Box, but now. I will listen with care to what the Minister says but I believe that, before the matter passes out of our hands, I may need to ask this House to ask the Commons to think again on this. I beg to move.
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
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.
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.
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Water companies are already required under their licences to publish, by a set date, financial performance metrics within their annual performance reports. These metrics include interest on their borrowings, financial flows and an analysis of their debt. Condition F requires water companies to keep appropriate accounting records, while condition P requires them to report material financial issues to Ofwat and includes restrictions on dividend payments. If water companies do not comply with these licence conditions, Ofwat can take enforcement action, including issuing fines.
I hope that noble Lords can therefore see why additional, detailed financial reporting requirements, such as those that would be introduced as a result of Motion 1A tabled by the noble Lord, Lord Cromwell, would not be a necessary addition to the Bill. However, having further discussed the intention behind the previous amendment with the noble Lord, the Government now understand that he has been seeking more transparent and accessible reporting on the key financial metrics. Indeed, I believe that this is what Amendment 1B, also tabled by the noble Lord, Lord Cromwell, seeks to do.
Ensuring that key financial information is presented in a format that is easy for the public to understand is vital, particularly if we are to rebuild public trust in the sector, and we agree with the noble Lord that there is room for improvement in making financial data more accessible. From studying a range of water company financial reports, it is evident that some water companies provide information much more clearly than others, so to achieve our shared objective to improve accessibility, in recent weeks my officials have worked closely with Ofwat and the noble Lord, Lord Cromwell, to identify the most effective way of ensuring that data on water company finances is presented in a simple format. The Government and Ofwat believe that this outcome can be achieved through the use of water company annual performance reports, which must be produced in line with Ofwat’s regulatory accounting guidelines.
As previously outlined, Ofwat requires companies to keep appropriate accounting records through licence conditions. Crucially, Ofwat can also specify how this information is presented through its regulatory accounting guidelines. Ofwat is due to consult on changes to these guidelines this year, which will provide an opportunity to update how financial information is presented in annual performance reports. These updates could include, for example, a requirement for a summary table of financial information, such as debt levels and financial restructuring, among other things, to be presented at the front of the report, all on one page.
Using Ofwat’s regulatory accounting guidelines ensures flexibility and means that requirements around data presentation can be updated to reflect changes in the public’s priorities and interests. Ofwat can also use its guidelines to help ensure consistent presentation of financial information across all water companies’ reports. Updating these guidelines would quickly and effectively achieve the objective that the noble Lord, Lord Cromwell, seeks to achieve.
I understand that other noble Lords across the House also want to see improved transparency around water company financial reporting, and I encourage noble Lords to think about how we can most effectively achieve this outcome. We believe that a dynamic approach using existing powers, rather than a non-specific legislative requirement, would be more effective because it can respond to the changing needs and expectations of the public.
If the House agrees with the Government’s proposed approach, Ofwat stands ready to consult on the necessary changes to its reporting guidelines and the change will be made in time for the 2025-26 annual performance reports to be published. However, I am not able to ask Ofwat to proceed with this approach if water companies are separately required to meet a new legislative obligation. Therefore, I kindly ask all noble Lords to carefully consider the options I have outlined here today.
I now turn to Commons Amendment 2, which removed the requirement for rules made by Ofwat under Clause 1 to be brought into force by statutory instrument and within six months of the Act coming into force. I will take this opportunity to speak to Motion 2A tabled by the noble Lord, Lord Blencathra, which does the reverse. As the noble Lord is aware, the Government understand the need to ensure that Ofwat’s rules are brought forward as soon as possible. Indeed, that is why the Government tabled Commons Amendments 5 to 7, which collectively will ensure that the duty on Ofwat in Clause 1 to make rules commences on Royal Assent.
Motion 2A would require publication of Ofwat’s rules within six months of this Act coming into force. This timing obligation is rendered unnecessary as a result of Commons Amendments 5 to 7, which amend the commencement provisions for Clause 1 so that Ofwat will now have a statutory duty to issue the rules without significant delay following Royal Assent. I hope noble Lords can understand why we believe that this aspect of Motion 2A is no longer appropriate. I am also pleased to report to the House that Ofwat has been making good progress towards developing its rules and had already completed its initial policy consultation at the end of 2024.
The other key element of Motion 2A requires that rules made by Ofwat under Clause 1 be brought into force by statutory instrument. Existing powers in the Water Industry Act 1991 for Ofwat to make rules adopt the same approach to scrutiny as in Clause 1 and do not require confirmation by statutory instrument. Further, I am concerned that the additional scrutiny process in Motion 2A would lead to a delay in bringing the rules into force. I have also previously outlined that this additional legislative process risks compromising the independence of Ofwat, which must be protected. The necessary secondary legislation would also need to be prepared by government, and therefore represents significant government interference in the independent regulatory process. This kind of interference has the potential to have adverse impacts on investor confidence and confidence in the regulatory regime.
I also note that the Delegated Powers and Regulatory Reform Committee has reviewed and reported on the appropriateness of all powers in the Bill, excluding the new clause on support schemes, and did not recommend additional parliamentary scrutiny of Ofwat’s rule-making processes. While the noble Lord, Lord Blencathra, does not necessarily agree with the Government on this point, I know we agree on the intention behind the amendment, which is to ensure that parliamentarians have sufficient oversight of Ofwat’s rules.
On that basis, my officials have worked with the team of the noble Lord, Lord Blencathra, and Ofwat to find an alternative way of providing parliamentarians with the opportunity to scrutinise Ofwat’s rules. I am pleased to say that, as a result of this collaborative approach, Ofwat has offered to hold a drop-in session in Parliament where it will answer questions on its proposed rules on remuneration and governance. This session would provide all interested Peers and MPs with the opportunity to ask Ofwat questions about the rules and raise any concerns before they are finalised.
Ofwat has provided a draft of a letter stating its intention to hold this drop-in session and stands ready to finalise and issue this letter to formalise its commitment to doing so should the House be supportive of this approach. I therefore urge the noble Lord, Lord Blencathra, in light of what I have just laid out, to reconsider whether his Motion is now needed. As I am sure he would understand, Ofwat cannot reasonably be expected to offer its drop-in session if additional, legislative processes are required in this space.
I once again thank the noble Lords, Lord Cromwell, Lord Roborough and Lord Blencathra, for their continued and thoughtful scrutiny of the Bill and for drawing attention to areas where improvements could be made and on which the Government have responded, as I have laid out. I hope the noble Lords, and indeed all noble Lords across this House, will see that the alternative proposals put forward by the Government and Ofwat present a more effective means of achieving the intended outcomes. On that basis, I hope that both noble Lords feel able to not press their Motions. I beg to move.
Motion 1A (Amendment to the Motion on Amendment 1)
Noble Lords will be familiar with the rest: polluted rivers, excessive executive bonuses and some water companies close to bankruptcy. Once the scale of underinvestment came to light, we were told that the water companies would raise money from investors and the City to catch up—albeit over a 25-year period—on the neglect of the water and sewerage infrastructure, but we have seen that protestation fail to reach anything like the scale of money needed. Indeed, in the case of Thames Water, different classes of bondholders have fallen out with each other and the company is in court seeking £3 billion more of expensive debt, in part from hedge funds, to add to its existing £19 billion of debt, to which should be added an estimated bill of £800 million to £900 million in interest by next year.
“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.
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.