Lord Cromwell:

Moved by Lord Cromwell

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.

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.

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

“more can be done to ensure that debt levels are more closely monitored in future

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.

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

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

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

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

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

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

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

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

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.

My Lords, I am grateful for this opportunity to speak at this stage of the Bill, which is ping-pong, not Report. I was satisfied with the progress we made on the Bill while it was completing its passage in this Chamber before going off to the other place. I am naturally disappointed that the amendments we voted on were removed. However, I understand the rationale for this. I am grateful to the Minister for her time, and that of her officials, in providing a briefing ahead of ping-pong. This helped to set the scene for moving forward.

From the outset, the Government made it clear that the Water (Special Measures) Bill was the first step in a series of changes that the Government were considering to improve the water industry generally. Yesterday morning, I attended a briefing with Sir Jon Cunliffe, who is chairing the water commission, which is looking into a wide range of aspects of the water industry on behalf of the Government. The water commission will call for evidence towards the end of this month, and a period when submissions will be made and received will follow. At the right time, Sir Jon will publish his report. At that stage, there will no doubt be a series of debates and discussions around the recommendations contained in that report.

Given that the Government’s stated aim is to look at the water industry in its entirety, I believe that there is wisdom in waiting for the water commission to report, so that we can see where the Water (Special Measures) Bill fits into that scenario. We could then understand how the pieces of the jigsaw fit together and have a more complete picture of how the water industry is to be taken forward for the benefit of both the consumer and the water companies as a whole.

Turning to Motions 1A and Amendment 1B, in lieu of government Amendment 1, I understand the desire of the noble Lord, Lord Cromwell, to have transparency and clarity over the issue of water company debt. He is looking for this to be in the Bill. It is not acceptable for water companies to hide their level of debt in the depths of their financial reports, where it is unlikely that many water bill payers will be able to find it. Transparency is essential for consumers to grasp the level of debt that water companies are carrying. If the noble Lord, Lord Cromwell, is not satisfied with the Minister’s response this evening and decides to test the opinion of the House, these Benches will support him.

Motion 2A, from the noble Lord, Lord Blencathra, which seeks to amend the government Motion on Amendment 2, would require the Secretary of State to bring in regulations relating to Ofwat via statutory instrument. The use of statutory instruments to bring in legislation is a slow, cumbersome and not very transparent way of moving forward; perhaps that is the intention of the noble Lord, Lord Blencathra. These Benches did not support the noble Lord, Lord Roborough, when he moved his original amendment on Report. We welcome the Minister’s commitment that Ofwat will hold drop-in sessions, and we will not support the noble Lord, Lord Blencathra, today.

My Lords, I thank all noble Lords for their further contributions to this debate. I am grateful to the noble Lords, Lord Cromwell and Lord Blencathra, for providing further detail around their concerns. I would like to make it clear that the Government have carefully considered all non-government amendments tabled throughout the passage of the Bill, and that, where we agree with the intent behind a given amendment, we have worked hard to find an appropriate way forward.

It is in that spirit that I reviewed Motion 1A and Amendment 1B, tabled by the noble Lord, Lord Cromwell. As previously explained, the Government agree that it is of utmost importance to ensure that members of the public can easily access and understand information on water company finances. However, I do not agree that the approach proposed by Motion 1 A and Amendment 1B is the most effective way of achieving this outcome. I am disappointed that, after considerable engagement on the Government’s alternative approach, the noble Lord, Lord Cromwell, is still dissatisfied with the suggested way forward.

The noble Lord has previously spoken to me about the need to specify how data is presented. I want to be clear that the specific metrics that he wants to see in reports are already required to be included through licence conditions. Indeed, he has pointed that out himself; the information appears in the annual Water Company Performance Report. What is missing, and what we agree with him on, is better formatting and clearer presentation with this information readily available right at the front of these reports, which is exactly what we propose can be achieved through regulatory accounting guidelines.

The noble Lord’s amendments require only that the data is presented in a format that can be “readily accessed and understood”, which is arguably open to interpretation by water companies. Having listened closely to him, we agree that data should be presented in this way, but the approach proposed by government would be more specific and could include, as I mentioned before, a summary table of financial information right at the front of the annual Water Company Performance Report. As such, while I am grateful to the noble Lord for bringing this important matter to the attention of the House, I maintain the view that primary legislation is not the most effective means by which to achieve the intended outcome. I therefore urge Members of the House to support Commons Amendment 1 and the non-legislative proposal put forward by government and Ofwat.

I am also grateful to the noble Lords, Lord Roborough and Lord Blencathra, for continuing to raise the need for sufficient parliamentary oversight of Ofwat’s rules. These rules will be central in driving improvements in the culture of water companies, which of course we all want to see. As such, it is right that we, as parliamentarians, do what we can to ensure the rules are robust, without compromising the regulatory independence of Ofwat. That is why I was pleased to receive Ofwat’s offer of a drop-in session, which would give noble Lords and MPs an opportunity to further understand and raise concerns on the rules before they are finalised. I therefore urge all members of the House to support Commons Amendment 2 and enable Ofwat to move forward with arrangements for that session.

To finish, I reiterate that the Government strongly agree with the need to ensure increased transparency and accessibility of water company data and ensure sufficient scrutiny of Ofwat’s rules on remuneration and governance. I believe that the approaches that I have outlined today demonstrate the commitment of government and Ofwat to effectively and comprehensively address the concerns raised by noble Lords on these topics. I therefore ask that all noble Lords support Commons Amendments 1 and 2 and, in conjunction, the non-legislative proposals put forward by the Government.

My Lords, the hour is late. I thank the Minister for her kind, helpful and almost persuasive words. I do not think that anything that she has proposed is precluded by my amendment—in fact, it could be a way of implementing it. Had I put it down in such detail, I would have been told that it was too prescriptive. However, for the reasons I set out earlier, I am afraid that my amendment needs to be in the Bill, and I wish to test the opinion of the House.

Ayes 168, Noes 112.

Motion 1A (Amendment to the Motion on Amendment 1) agreed.