Water (Special Measures) Bill [Lords]

Public Bill Committee, 14 January 2025.

Rupa Huq (Labour, Ealing Central and Acton)

I remind Members that they should send their speaking notes by email to hansardnotes @parliament.uk. Electronic devices should be switched to silent. Tea and coffee are not allowed during sittings but there is water—blue is still, silver is fizzy.

Clause 7 - Automatic penalties for certain offences

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

It is lovely to see everybody again and it is a pleasure to serve under your chairwomanship, Dr Huq.

Clause 7 will give the environmental regulators new powers to impose automatic penalties for specified offences. The current process for imposing fixed monetary penalties for minor to moderate offending can be time and cost-intensive. To impose a penalty, the regulators must evidence beyond reasonable doubt—the criminal standard of proof—that an offence has been committed. In addition, the fixed monetary penalty amount that regulators can currently impose for certain water industry offences to that standard of proof is set at just £300. That means it is generally not cost-effective for the regulators to impose financial penalties for frequent minor to moderate offending. Clause 7 introduces automatic penalties for specified offences, which will enable the regulators to impose penalties more quickly without having to direct significant resources to lengthy investigations.

I reassure hon. Members that we will consult on the specific offences that will be in scope for the new automatic penalties and on the value of the penalties. The proposed offences will cover information requests and reporting offences, pollution offences and water resource offences. The House will also have the opportunity to debate and vote on secondary legislation before any changes are made. I hope the Committee agrees that this measure is essential for improving compliance across the water sector.

Neil Hudson (Conservative, Epping Forest)

It is a privilege to serve under your chairship today, Dr Huq. We have no formal objection to clause 7, which imposes a duty on environmental regulators to impose penalties for offences by water company that the clause specifies. Offences have of course increased, and water bosses have been banned from receiving bonuses if a company has committed serious criminal breaches. Regulators have more powers than they used to in being able to impose larger fines for polluters without needing to go to court. The clause focuses on exactly the same principle and we therefore have no formal objections.

I raised in an earlier Bill Committee sitting—this is relevant here—that there has been an increase in the number of inspections that water companies can expect, from 4,000 a year by April this year to 10,000 a year by April of next year. In other words, what has been addressed in the past is not just regulation, but the whole pathway of the enforcement of regulations, so that regulations are not merely blunt instruments but active ones that water companies can expect to have to deal with if they do not act responsibly to their customers, the environment and the wider public.

On that last point, will the Minister clarify and ensure that these offences are and will be enforced and commit to making further amendments to the law, not only regarding the offences themselves, but also on their enforcement, if the Government believe that things need to be tightened up moving forward? Aside from those clarifications, we have no formal objections to the clause.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

It is a great privilege to serve under your guidance this morning, Dr Huq. We also have no objection to the clause and, in fact, we consider automatic penalties to be a positive move.

My concern is that we see water companies not paying the fines that are levied against them. We talk about minor to moderate offences, but water companies wriggle out of paying fines for much larger offences, too. I just want to probe the extent to which the automatic penalties might stretch to what are considered more serious breaches.

I mentioned an example last week in Committee. In November 2021, Ofwat launched an inquiry into sewage discharges and how water companies manage their treatment centres and networks. It found three water companies in particular to be in breach: Thames, Northumbrian and Yorkshire. It imposed fines on those three companies—a £17 million fine against Northumbrian Water, a £47.15 million fine against Yorkshire Water and a £104.5 million fine against Thames Water—but as of autumn last year, not a single penny of that has been collected. It is understood that Ofwat allocated a grand total of eight and a half people to pursuing that particular line of inquiry.

Large fines, which there is no doubt that these companies rightly face, make no difference if they are never collected. That underpins the failure of our regulatory framework—water companies clearly feel they can just run rings around Ofwat and the other regulators. We very much welcome the automatic penalties, but we remain a bit concerned and would like the Minister to clarify whether those automatic penalties would have covered fines of that size as well. Otherwise, we are very supportive of the clause.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

It is good to start the day off with a bit of unity in the Committee Room and everyone agreeing. In terms of which offences the automatic penalties will apply to, we are looking at targeting minor to moderate offending. The purpose behind the clause, and much of the Bill, is to change the culture of the water industry.

As I said in my opening remarks, one of the concerns about how the water industry operates at the moment is that the standard of proof needed to impose fines for minor to moderate offending is often seen as not being worth the cost. Companies are therefore getting away with minor to moderate offences because of the cost of trying to prosecute them. These penalties will apply to those offences. If the offence turns out to be more significant—not minor to moderate, but more of a major pollution incident—obviously, penalties will apply in the usual way.

For an offence to be suitable for an automatic penalty, we consider that the Environment Agency must be able to quickly identify and impose the penalty and the offence must cause no or limited environmental harm. I describe it to colleagues as similar to speeding ticket offences. Everybody knows that if they go over 30 mph in a 30 mph zone where there is a camera, they will get caught and fined. That is the idea behind the fixed penalty notice. If someone commits an offence that they are not meant to do, they are automatically fined.

The proposed offences will cover information requests. The details will be dealt with in secondary legislation, on which colleagues across the House will vote. My thinking on information requests is that a situation where someone has to comply with a request for information and is given a timeframe, but does not deal with it in the timeframe, is the kind of thing we are looking at for automatic fines. As for reporting offences, pollution offences and water resource offences, we will consult on where the penalties can be used, and Parliament will debate and vote on them before any changes are made.

The Regulatory Enforcement and Sanctions Act 2008 provides for the enforcement of penalties if a company refuses to pay a penalty. That includes allowing regulators to use the same enforcement mechanisms available to a court. The Act also allows for interest charges in the event of late payment. Parliament will debate and vote on the details in secondary legislation.

I thank all hon. Members for their invaluable contributions to the debate on clause 7. The clause will fundamentally drive improved compliance across the water sector through introducing automatic penalties for specific offences, allowing the regulators to impose penalties more quickly.

Clause 8 - Abstraction and impounding: power to impose general conditions

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

Clause 8 grants the Secretary of State and Welsh Ministers the power to introduce conditions or general rules subject to which water industry abstraction and impounding licences will have effect. This provision is needed to ensure that automatic penalties under clause 7 can be applied to abstraction and impounding offences under the Water Resources Act 1991. Existing licences have been issued since the 1960s and have inconsistent conditions, making the use of automatic penalties nearly impossible.

More broadly, clause 8 allows for the harmonisation of requirements in relation to abstraction and impounding activities so that the sector operates under consistent and modern standards. A delegated power to introduce conditions or general rules through regulations is crucial in this context, because water resource management is dynamic and must be responsive to emerging challenges. I hope that hon. Members will agree that this power is needed to improve the water industry’s regulatory framework.

Neil Hudson (Conservative, Epping Forest)

Clause 8 seeks to grant the Secretary of State and Welsh Ministers additional powers to impose conditions or general rules on water industry licences relating to abstraction and impoundment activity. His Majesty’s loyal Opposition do not have any formal objections to the clause, but I would suggest that it reinforces some of my comments on clause 6 about the need to make the Government have the powers they need to regulate as necessary a more consistent principle across the Bill.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Gentleman for his comments. Modifying the licences individually is both expensive and time consuming, which is why we are hoping to modernise and harmonise the process under this clause. It is crucial that automatic penalties under clause 7 can be applied to abstraction and impounding offences, so this power is needed to improve the water industry’s regulatory framework. For that reason, I commend the clause to the Committee.

Clause 9 - Requirement for Ofwat to have regard to climate change etc

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move amendment 27, in clause 9, page 14, line 11, leave out from duties to end of line 13.

Rupa Huq (Labour, Ealing Central and Acton)

With this it will be convenient to discuss clause stand part.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

Let me clarify what we mean with this amendment. Among the myriad problems in the water industry, perhaps the greatest is the failure of the regulatory systems. We are concerned, particularly in relation to the Climate Change Act 2008, that the obligations placed on water companies via the regulator are not sufficiently clear. Let us look at the wording of clause 9:

“In exercising or performing any such power or duty in accordance with those provisions, the Authority must also have regard to the need to contribute towards achieving compliance by the Secretary of State with the relevant environmental target duties”,

and we are happy with that, but then it states

“where the Authority considers that exercise or performance to be relevant to the making of such a contribution.”

Basically, we are giving Ofwat wriggle room to do nowt if it wants to. As we saw earlier on clause 7, Ofwat has a track record of not even imposing the colossal fines due from water companies, and I am not filled with confidence that if we give it wriggle room, it will not use it.

My concern is that the clause is building in a qualification, an opportunity for the regulator to step back and the possibility—dare I say, the probability—that measures against water companies will not be enforced. If we care about tackling climate change and about a stronger and robust regulatory framework—and we surely do—we should remove these words to remove the wriggle room and to make sure that regulation is fit for purpose.

Neil Hudson (Conservative, Epping Forest)

Clause 9 would introduce a new requirement for Ofwat to consider, as part of its regulatory decision making and the exercise of its powers and duties as given by the Water Industry Act 1991, the section 1 duty confirmed the Climate Change Act and section 5 of the Environment Act 2021. We have no formal objections to raise to that basic principle and no amendments that we wish to make to clause 9.

Can the Minister provide some clarity on the line that amendment 27 from the Liberal Democrats seeks to remove from the Bill? It states that Ofwat’s duty to have regard to the Secretary of State’s duty to meet environmental targets applies

“where the Authority considers that exercise or performance to be relevant to the making of such a contribution.”

Will the Minister assure the Committee that she and the Government will work with Ofwat so that it has clear guidance on when these environmental targets would be relevant, so that there are no grey areas in Ofwat’s work as it looks to enforce those targets? Can she assure the Committee that the Government will also work with Ofwat to ensure that with regard to its powers and duties in the spirit of clause 9, consumers are protected should there be any subsequent financial costs to water companies, so that we get both environmental protection and the value for money that the tax-paying consumer deserves?

I would be grateful if the Minister provided clarification on some of those questions. However, his Majesty’s loyal Opposition have no formal objections to clause 9.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

As I am sure the hon. Member for Westmorland and Lonsdale will agree, the Government heard the strong support in the other place for adding a further environmental duty to Ofwat’s core duties to support the Government in making progress against our environmental targets. I pay tribute to Baroness Hayman for her work on this.

We understand that there are concerns around the current core environmental performance of the water industry and around the role and responsibilities of the water industry regulators. It is for this reason that the Government tabled an amendment in the other place that will require Ofwat to have regard to the need to contribute to achieving targets set under the Environment Act 2021 and Climate Change Act 2008 when carrying out its functions.

This amendment will further ensure that Ofwat’s work to contribute to the achievement of environmental targets complements the work of Government, who are ultimately responsible for the 2021 Act and the 2008 Act targets. It is important to note that the independent commission announced by the Government will take a full view of the roles and responsibilities of the water industry regulators. Any changes made now to Ofwat’s duties may therefore be superseded by the outcomes of the commission. I hope the Committee agrees that this power is needed to ensure that the environment is considered in regulatory decision making.

Amendment 27 seeks to remove Ofwat’s discretion to exercise its duty to have regard to environmental targets where it feels this as relevant. It will be for Ofwat as the independent regulator to determine how it applies the Government’s new obligation to its regulatory decision making, and how this new duty will not take precedence over other duties. It is for this reason that flexibility has been built into the drafting of this duty, ensuring that Ofwat has discretion to exercise the duty where it feels it is relevant.

Mechanically applying a duty in circumstances where it is not relevant to a particular matter would be a waste of resource. That discretion is in line with similar duties for other regulators. For example, the Financial Services and Markets Act 2000 was recently amended to provide an environmental duty for the financial regulators. It is right that as the independent regulator, Ofwat has the discretion to balance its duties and determine when it is appropriate that they are applied. The new duty introduced by the Government can be only a stopgap before more fundamental reforms are brought forward. For those reasons, we will not accept the amendment from the hon. Member for Westmorland and Lonsdale, and I hope he feels able to withdraw it.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I am not reassured that removing this discretion means that a mechanical duty is placed upon Ofwat. I think that removing discretion is actually very important. It will only be applied where it is relevant by definition. I feel that by building in wriggle room, we are creating vagueness in the process. Nevertheless, we will not seek to push this amendment to a vote today. I beg to ask leave to withdraw the amendment.

Clause 10 - Charges in respect of Environment Agency and NRBW functions

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

Thank you, Dr Huq, for giving me the opportunity to speak on clause 10, which is one of my favourites. The costs for Environment Agency and Natural Resources Wales enforcement activities are paid by the taxpayer via grant in aid. The clause broadens existing charge-making powers, allowing the Environment Agency and Natural Resources Wales to recover costs for enforcement from water companies instead of taxpayers. Failure to introduce the clause would result in the burden of funding water industry enforcement continuing to fall on the taxpayer. It could also result in the regulators being unable to scale up their water industry enforcement activities due to wider budgetary pressures.

The Secretary of State, or the Welsh Minister in Wales, and HM Treasury are required to approve charging schemes in consultation with affected parties. Those safeguards ensure that environmental regulatory powers are proportionate and support sustained improvements in environmental performance in the water industry. I hope the Committee agrees that this power is essential for environmental regulators to become more self-sufficient and less reliant on the taxpayer. I commend the clause to the Committee.

Neil Hudson (Conservative, Epping Forest)

Clause 10 amends the Environment Act 1995 to allow the Environment Agency and Natural Resources Wales the power to make charging schemes to recover costs from water companies. While the Opposition wish to raise no formal objections to the clause, we would be grateful for clarification on a couple of points from the Minister.

First, can the Minister explain whether the changes in this clause to the Environment Act 1995 that allow costs to be recovered from water companies could impact consumers in any way? Although it is already possible, we must be mindful that consumers may face extra costs, which I will discuss later regarding issues with the special administration orders that the Government have laid out in clauses 12 and 13, to be debated shortly. Consumers have already been informed by Ofwat that they should expect to see bills rise—the complete opposite of what the Government had said they intended to deliver. Therefore, do the Government feel confident that they can avoid contributing to the problem of a rising trajectory of bills, at a time when trust in the industry, as we have been debating in Committee, remains low due to financial mismanagement from some water companies and, too often, consumers receive poor quality from these services?

A further question, which I would be grateful if the Minister could clarify, is what modelling have the Government done to ensure that all the costs recovered will always be to the benefit of the taxpayer and the consumer? While we all share the desire that water companies that do the wrong thing must pay to put it right, we must ensure that, when we punish those water companies, we do not hurt the end consumer, who very much deserves to be protected. I would be grateful for the Minister’s thoughts on this, but again, we have no formal, explicit objections to the clause.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

Clause 10 requires payment by water companies. It is fair and reasonable that the regulator should recover costs associated with its regulatory functions. Ofwat will consider the regulator’s proposals to determine which costs are appropriate to be passed on. The impact assessment, which I have mentioned in previous debates, details exactly how much all of the Bill will cost the customer. All the details are in there, and I refer the hon. Member for Epping Forest to look at that if he wants the specifics on the exact numbers that each measure will take.

I thank all hon. Members who have contributed their views on clause 10. I remain of the view that clause 10 will empower environmental regulators to become self-sufficient, reducing the burden on the taxpayer to fund water industry enforcement activities. Therefore, I commend the clause to the Committee.

Clause 11 - Drinking Water Inspectorate: functions and fees

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

We are making excellent progress on the Bill this morning. I am grateful for the opportunity to speak on the importance of clause 11. I would like to mention the unsung hero of water regulation: the Drinking Water Inspectorate.

The clause enables the Drinking Water Inspectorate to fully recover the costs for the security and emergency regulatory work that it provides to companies. I think one of the reasons that it is an unsung hero is because it does its job so well; that is why not many people have heard of it. The responsibility for security and emergencies was delegated to the Drinking Water Inspectorate in 2022, but since then it has been unable to fully recharge for that work. This clause, subject to amendments to the Water Quality and Supply (Fees) Order 2016, will ensure that the inspectorate can fully recover all costs related to security and emergencies, enabling it to scale up its enforcement activities and enhance its capacity to conduct security and emergencies checks with water suppliers.

The clause will give the DWI greater flexibility in how it structures the fees it charges water companies. It will allow the DWI to introduce new charging models that more equitably share the financial burden of regulation in the water sector. I hope the Committee agrees that the clause rightly remunerates the DWI for its security and emergencies work and allows it to design a more equitable fee structure.

Neil Hudson (Conservative, Epping Forest)

Clause 11 extends the purposes for which water quality inspectors may be appointed to include functions relating to national security directions under section 208 of the Water Industry Act 1991, and it provides flexibility for the charging of fees for regulatory work. This is a straightforward clause to which we raise no formal objection, but once again we would be grateful for a couple of clarification points from the Minister. How will the Government increase the Drinking Water Inspectorate’s ability to monitor and audit water supplies? Does the Minister feel that the clause will improve the inspectorate’s functions? Will the Minister please explain how the Government intend to support the powers of the Drinking Water Inspectorate, beyond this clause? She praised the inspectorate, and I echo that praise, but how do the Government intend to support its capabilities?

Once again, we wish to raise no formal objections to the clause. I would be grateful for clarity on the points I have highlighted.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

We also have no objections to the clause, but I want to probe it a bit. The Minister rightly praised the Drinking Water Inspectorate. I think most of us would say that its performance as a regulator is significantly better than Ofwat’s, but one of the biggest problems that we face within regulation is the fragmented regulatory framework. We have the DWI, Ofwat, the Environment Agency and others too. What consideration has the Minister given to the efficacy of continuing that fragmentation?

The Minister may argue, in relation to the DWI, that if it ain’t broke, don’t fix it. I take that point, but regulation of the water industry is absolutely broke. It is very clear, particularly when it comes to the Environment Agency and Ofwat, that large water companies run rings around the regulators because of their heft, their weight, their capability and the volume of their staffing, which is larger than that of the regulators. The culture of the regulators is sometimes not aimed at pursuing those they are meant to regulate.

Although the DWI is broadly a successful regulator, do we not face the ongoing problem that having so many regulators gives water companies the ability to avoid their responsibilities? Will the Minister give that some further consideration?

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I am pleased that hon. Members have echoed my support for the DWI. This clause is specifically about how it can recover some of its costs. It is estimated that the increased cost to householders will be only 2p a year, so it is very good value for money.

The wider issue of regulation and regulators will be covered by the water commission, which is looking at the entirety of regulation. That is out of the scope of this Bill, although the hon. Member for Westmorland and Lonsdale has made those points a number of times, and I have heard them each time.

This measure will cost customers about 2p a year. This is a much-needed clause. The Government maintain that it is important that the Drinking Water Inspectorate is remunerated for its security and emergencies work and is able to design a more equitable fee structure. I therefore commend the clause to the Committee.

Clause 12 - Modification by Secretary of State of water company’s appointment conditions etc to recover losses

Charlie Maynard (Liberal Democrat, Witney)

I beg to move amendment 11, in clause 12, page 16, line 11, leave out from “to” to “such” in line 13 and insert “recover from its creditors”.

Rupa Huq (Labour, Ealing Central and Acton)

With this it will be convenient to discuss the following:

Clause stand part.

Amendment 12, in clause 13, page 18, line 31, leave out from “to” to “such” in line 33 and insert “recover from its creditors”.

Clause 13 stand part.

Charlie Maynard (Liberal Democrat, Witney)

I will speak about clauses 12 and 13 together, with clause 12 covering England and clause 13 covering Wales. Clause 12 relates to the Secretary of State’s ability to recover losses incurred by the state in a special administration regime—many Members might know that as bankruptcy. What is being proposed by the Government is set out in the Department for Environment, Food and Rural Affairs’ explanatory note 69:

“The modifications can require a water company to raise amounts of money determined by the Secretary of State from its consumers”—

I repeat “the consumers”—

“and to pay those amounts to the Secretary of State to make good any shortfall and may include a requirement that amounts be held on trust pending payment to the Secretary of State.”

What we are talking about here are costs associated with a bankruptcy and the Government want to make good those costs. There is no issue with any of that. What I find completely extraordinary is that a Labour Government are proposing that the consumers pay for that rather than the creditors who put us there in the first place. The management and the creditors are the people who are responsible for the mess that we find ourselves in in the water sector.

Jerome Mayhew (Conservative, Broadland and Fakenham)

The hon. Gentleman says it is the creditors who put the undertakers in the position that they are in, but surely that cannot be right. Creditors are the people who provide services for a fee to the undertaker—they will not be the organisations that put the undertaker into that position. Surely the hon. Gentleman agrees that if he were to replace the consumer or any other body with recovery from creditors, that would be meaningless unless Government debt was placed above those of other creditors. How would that be fair to the providers of services to water undertakers?

Charlie Maynard (Liberal Democrat, Witney)

I thank the hon. Gentleman—I think he jumped in before I had finished the sentence, which was on the creditors and the management. Who is responsible for this? Yes it is the management, yes it is the regulators and prior Governments, and yes it is the creditors who have provided the debt—they have gone into that with eyes and ears open and they have made that decision to provide that debt willingly. Therefore, they have put that money at risk and they have to take responsibility for that. That is what debt is.

I am not talking about Government debt, but about a loss and who is making good that loss. The Government are proposing that all the consumers pay for that—in other words, the bill payers. That is wrong. The bill payers should not be paying for this; the creditors should be, because they have put in, in Thames Water’s case, £17 billion—soon to be £20 billion very likely—which has saddled those companies with vast amounts of debt. More than a third of the bills of the bill payers of Thames Water is just being spent on paying interest on that debt.

Jerome Mayhew (Conservative, Broadland and Fakenham)

The hon. Gentleman is conflating the term creditor with debt provision, but actually there is a plethora of suppliers to any large organisation such as a water undertaker. They are creditors—that is just how they are defined. His clause would cover small and medium enterprises that are providers of services, and in fact any provider of a service who would be a creditor of such an organisation. How does he propose that his clause only affects debt provision, which I understand is the direction he is trying to focus the clause on, and does not cover all creditors as it is currently drafted?

Charlie Maynard (Liberal Democrat, Witney)

The change in wording would mean that the clause states:

“The Secretary of State may make modifications of the conditions of the company’s appointment so that they include conditions requiring or enabling the company…to recover from its creditors such amounts as may be determined by or under the conditions”.

Let us talk through the special administration regime and what happens. I would like this to already have happened but it has not When a company is put into special administration—I would like this to already have happened, but it has not—a court appoints a special administrator. A special administrator looks at the creditors. It looks at the debt and the other creditors involved, and it will prioritise, according to the seniority of that debt and those creditors, who is senior to the other. Suppliers will be a lot more senior.

Jerome Mayhew (Conservative, Broadland and Fakenham)

They will be right at the bottom.

Charlie Maynard (Liberal Democrat, Witney)

Well, compared with the creditors, but I am advocating that the debt providers take the hit.

Jerome Mayhew (Conservative, Broadland and Fakenham)

The hon. Gentleman will perhaps know that under current insolvency law, there are secured creditors. There is a hierarchy of debt, and the least protected—not the most protected—are suppliers. Does he envisage changing the rules to give additional protection in this process to unsecured creditors and essentially reverse the security of credit? That would be an odd thing to do, but I understand why he might need to do it to make this process effective.

Charlie Maynard (Liberal Democrat, Witney)

We are seeking for the debt providers to take the hit. They have gone into this process and been part of the problem that has led to the state of our rivers today. They should be taking the hit ahead of the customers. That is our direction of travel, and I think that is fair and reasonable. What the clause does is the opposite, and that is what we are going after.

We fully support the losses being recovered by the administration process—we have no issue with that—but if we support the clause as drafted, we will find a very large bill on the customer’s account. That is something we want to avoid. I am keen to hear the Minister’s view as to why it is reasonable for the customer to be paying rather than the lenders.

Neil Hudson (Conservative, Epping Forest)

On clauses 12 and 13, the Opposition tabled amendments 7 and 8 to remove them. They provide the Government with the power to issue special administration orders to water companies that face financial difficulties.

I put on record my thanks to my Conservative colleagues in the other place for sounding the alarm on this issue when the Bill came forward. They made the case that the measures in clauses 12 and 13 could put the very people we want to protect in such legislation, namely the consumers, at risk. The moral hazard has been explicitly set out by my colleagues in the other place, but I will attempt to summarise it so that we are clear what the problem is. As it stands, the clauses will give the Government the power to recover any losses they make through placing a company in special administration by raising consumer bills.

The problem seems self-evident. If water companies, through their own failure, require the Government to place them under special administration, why should consumers be expected to foot the bill for those failures when they had no particular responsibility for them? It runs contrary to the nature of all the action that has been taken in recent years to try to improve our water quality, and companies that have failed to get their affairs in order must take responsibility.

I was on the Environment, Food and Rural Affairs Committee in the last Parliament, and we spent a lot of time looking at the financial resilience and behaviour of the water sector in close detail. I know that the current iteration is continuing that work. It was concerning to hear about the financial resilience of the sector at first hand in our hearings and meetings. As I said in a sitting of this Committee last week, the financial resilience of the water industry is not a hypothetical issue, but one of paramount concern right now.

We are all starkly aware of concerns surrounding the financial resilience of companies such as Thames Water. We heard about that in detail on the Environment, Food and Rural Affairs Committee in the last Parliament. In November, Ofwat’s “Monitoring Financial Resilience” report identified 10 companies that needed an increased level of monitoring and/or engagement concerning financial resilience. Three were placed in the highest category of “action required”, which means that action must be taken or is being taken to strengthen a company’s financial resilience challenges and that there is a requirement to publish additional information and reporting on improvements at a more senior level with Ofwat.

As well as sending out the opposite message to the companies that Ofwat is working so hard to scrutinise and regulate to protect consumers, clauses 12 and 13 send out the wrong message to consumers themselves. Consumers were recently told that they can expect their average bills to rise by a minimum of about £86, at a time when no doubt some of them have concerns about how to afford their existing bills, along with wider cost concerns. I say gently to the Government that the recent Budget did not help the situation for people’s household budgets. How can it be fair that as a result of these clauses the Government may lead consumers to pay more at a time when many are finding it difficult to pay their bills and do not feel that they are getting the clean water that they deserve? It will potentially add insult to injury when many people are all too aware that they could face higher prices on their water bills because of the Government’s moves.

Shareholders and water company bosses used to be able to receive dividends and bonuses despite polluting our rivers and seas and failing to do the right thing to tackle it. Although reforms have been made to ensure that water company bosses who are not doing their duty with regard to our waterways are forbidden from claiming excessive bonuses, the sting will remain for many people when they keep in mind the prospect of paying higher bills to bail out companies for their poor financial performance.

To water companies, these clauses will send out a signal that they do not have to worry about incurring the consequences of financial irresponsibility, as the Government will have a mechanism to bail them out and consumers may indirectly have to fork out the costs. Nobody is being required to take accountability or face the consequences of the decisions that have caused the failure, but those who have no responsibility or influence are being forced to pay an unfair price increase.

Worse still, the clauses fail completely to specify how much they can require companies to raise from consumers or how much consumers could have to pay in increased costs as a result of the Government’s imposition of these conditions on water companies. That means that any announcements of price changes to water bills, such as those announced by Ofwat, could give no indication at all of how much consumers could end up paying on their water bills. To compound the higher prices even further, consumers may end up facing higher bills to solve special administration financial issues for companies by which they are not even served.

Under clause 12, proposed new section 12J(4) of the Water Industry Act states that “relevant financial assistance” in subsection (3) can include

“any other company which holds or held an appointment under this Chapter and whose area is or was wholly or mainly in England.”

Companies that do the right thing could be forced to pay up, or make their consumers pay up, for the mistakes of those who have failed to do the right thing. As my noble Friend Lord Remnant put it:

“It is the debt and equity investors”

in a company that has failed to do the right thing

“who should pay for these losses in the form of lower proceeds from any eventual sale. Why should a retired police officer in Yorkshire or a hard-working nurse in Cornwall lose out to a hedge fund owner in New York trying to make a quick return?”—[Official Report, House of Lords, 20 November 2024; Vol. 841, c. 293.]

Although in the other place the Government attempted to explain away concerns by suggesting that they do not think that they will have to use the power except as a last resort, and that the bar for special administration would be extremely high, the fact that on more than one occasion the Government could have accepted amendments to remove proposed new subsection (4) must mean that they expect that on at least some occasions they will require its use. The time taken to defend the measure and oppose reforms suggests that this is no mere formality in the wording of the Bill, but something that the Government may put in place.

The Minister in the other place said that the Government would seek to exercise the power in proposed new subsection (4) only if Government bail-outs to water companies could not be financed for the duration for which a company is in special administration—that is, during the shortfall. If that is the condition the Government are setting for the measure—if we have to have the measure at all—could they not have set it out explicitly within the Bill? At the very least, that would have provided clarity about how far the power should be permitted to go.

Clause 13 will provide the Welsh Government with the same powers as those in clause 12. Although the powers in clause 13 are independent of who occupies the offices of the Welsh Government, it should be noted that the Welsh Government who would currently be expected to exercise the powers do not have the most brilliant track record on the water industry, to say the least. Under the Welsh Labour Administration, the average number of spills from storm overflows in 2022 was two thirds higher than in England. That record suggests that the Government in Wales leave much to be desired when it comes to the competence of the water industry, and there is evidence for concern when it comes to exercising the clause’s powers.

Regardless of the specifics of the subsections and of who holds the powers contained in clauses 12 and 13, they are, as they stand, completely against the principles of improving the water industry. I urge the Minister to consider those points and to remove the clauses. Accordingly, we will seek a vote to remove clauses 12 and 13 from the Bill.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I back my hon. Friend the Member for Witney, who has made an excellent case for our amendment to clauses 12 and 13. We are deeply concerned about the issue. There are two aspects to the public’s reaction to the scandal in our water industry. First, there is revulsion about sewage being dumped in our lakes, rivers, streams and coastal areas, which is obviously appalling. Secondly, there is a deep sense of injustice that people are making vast amounts of money while not providing basic services.

For a day or two last week, the coldest place in the country was Shap, in my constituency. I had the pleasure of being there over the weekend. All water was frozen. However, that is not always the case. Last year alone, at Shap pumping station, 1,000 hours’ worth of sewage was pumped into Docker beck. Just along the way at Askham waste water treatment works, 414 hours’ worth of sewage were dumped into the beautiful River Lowther just last year. I make that point because the water bill payers who have to deal with that know that of every £9 they spend on their water bills, £1 is going to serve United Utilities’ debt. That is at the low end of the scale: until the change announced just before Christmas, 46% from Thames Water’s bills was used to service debt.

Over the lifetime of our privatised system in this country, the water companies have collectively racked up £70 billion of debt. That means that all bill payers are paying between 11% and 46% of their bills simply to service those companies’ debt. Our amendment would simply tackle the fact that if investors choose to take risks, hoping to make gains, but fail, they should accept the consequences of those risks, which they chose to take, rather than passing on the cost to my constituents and everybody else’s. It is not for the public to carry the can for corporate failure.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I will speak to amendments 11 and 12, both of which were tabled by the hon. Member for Westmorland and Lonsdale. I welcome the opportunity to bust some myths and add some facts to the debate. Speaking of facts, following the debate that we had at our last sitting, we have produced a fact sheet relating to storm and other overflows, which has been circulated to all members of the Committee. I recognise that we are not discussing that now, but I thought I might mention that my promise to provide the evidence has been fulfilled. For this debate, perhaps it would be helpful to produce a fact sheet that explains exactly what this is and what it is not, because there has been an awful lot of confusion already.

On the subject of facts, I am not quite sure where the shadow Minister’s number on average bill increases of over £80 a year comes from. The fact is that the average bill increase is £31 a year.

A special administration regime is a well-established mechanism. Without one, it is likely that public service provision, in this case for water or waste water services, would cease. A SAR is not a form of renationalisation; it is a tool to ensure that vital public services continue to be provided after a company fails. The Government would take no ownership or management of the company; an independent special administrator would oversee the running of the company until it could either be rescued or be transferred to new owners.

Let me be clear, because I do not think we can say this enough: the water industry special administration regime does not bail out water company financial creditors and shareholders. Since we seem to be getting in the habit of repeating things from DEFRA, I will repeat that line: the water industry special administration regime does not bail out water company financial creditors and shareholders.

The introduction of a shortfall recovery mechanism gives DEFRA, the Secretary of State and Welsh Ministers the power to recover His Majesty’s Government’s funding, provided during a special administration, in the unlikely event that there are not sufficient funds to repay His Majesty’s Government at the end of a SAR. As set out in legislation, the court-appointed special administration’s statutory objectives are to continue the running of the company to meet its statutory functions until such a time as it is possible to exit from a SAR.

I keep hearing that creditors are going to be bailed out by customers and are going to get lots of money, but the actual facts are that the exact quantity of debt recouped by creditors, or equity recouped by shareholders, is a matter for the court-appointed special administrator. They are appointed by and answerable to the court and must comply with the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016, both as modified for the purpose of special administration by the relevant legislation. It is important to note that it is very unlikely that all debt would be repaid at the end of a special administration. A specific order of priority for repayment would be followed, with any Government funding provided during a SAR taking priority over most other creditors.

I must reject the amendment, as the changes that we are making to the water company special administration regime in the Bill are designed to align it with other essential service regimes. We are not seeking to move the water industry SAR away from existing insolvency principles. The shortfall recovery mechanisms can only—this is important—be used to recover shortfalls in repaying Government funding. They cannot and would never be used to recover financial, creditor or shareholder losses. I am at a loss as to where that idea has come from in this debate.

Let us get in the habit of repeating important things, in the hope that they will be taken up: the shortfall recovery mechanism can only be used to recover shortfalls in repaying Government funding. It is not providing money to creditors. It is not providing money to share-holders. Creditors have rights within special administration and in normal insolvency legislation, which the water special administration regime adapts to fit the water industry model.

Under the current legislative framework, the Government do not directly or indirectly make any decisions relating to the exact quantities of debt recouped by creditors or shareholders. That is a matter for the special administration and the rules of the SAR in the water sector. The special administrator is an officer of the court and must comply with the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016. The levels of reduction that creditors and shareholders may expect will be in accordance with the order of repayment clearly set out in statute. The amendment is therefore not required.

I hope that the Committee agrees that these legislative updates will help to ensure an effective, modernised and efficient water industry SAR, which is in line with the SAR in other essential service sectors such as energy. I hope that, on this basis of fact, the hon. Member for Witney will feel able to withdraw his amendment.

Charlie Maynard (Liberal Democrat, Witney)

Will the Minister give way?

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

If the hon. Member does not mind, I would like to finish my remarks, and then I am sure we will hear from him again.

Although I have outlined some of the merits of clauses 12 and 13, I would like to stress again the importance of including them in the Bill. A SAR will ensure the continued provision of essential public services and is the ultimate tool in Ofwat’s regulatory toolkit. There is therefore a high bar for the use of a SAR. A water company can be placed into special administration either on insolvency grounds, where it is unable to pay its debts, or on performance grounds, where it is in such serious breach of its principal statutory duties on enforcement order that it is inappropriate for the company to retain its licence. That includes consideration of a company’s environmental and financial performance. Although the Government have had the powers to place water companies into special administration for more than three decades, it is important that we regularly update legislation to reflect the modernisation of law and experience in other sectors.

Clauses 12 and 13 are essential because if a SAR occurs, Government funding could be provided to cover the cost of special administration. In the unlikely event that the proceeds of a sale or a repayment agreed as part of the rescue at the end of a SAR are insufficient to cover repaying Government funding, there is risk of a funding shortfall. I really am at a loss to understand how this has suddenly become about the Government using customer money to bail out creditors. I am confused about how that started.

The money will be used to cover the cost of repaying Government funding in the risk of a funding shortfall. The DEFRA Secretary of State and the Welsh Ministers do not currently have the power to require this shortfall to be repaid. The shortfall, of course, is the money that the Government may have to provide in the event of a SAR. This is unlike other sectors such as energy, in which the relevant Secretary of State has flexible powers to recover a shortfall in funding. Without this power, there is a risk that taxpayers will foot the bill for costs usually contained within the water sector. Again, that has nothing to do with creditors; it has to do with the costs that the Government could have to pay for the SAR.

Clauses 12 and 13 will therefore introduce a new power for the Secretary of State and the Welsh Ministers to modify water company licence conditions to allocate costs appropriately should there be a shortfall in financial assistance provided in a water industry SAR. The power is designed to be flexible, allowing the Secretary of State or the Welsh Ministers to recover any shortfall in funding in a manner appropriate to the circumstances. The use of the power is also subject to public consultation.

The Secretary of State will be able to decide whether or not to use the power, and to decide the rates at which the shortfall should be recovered from customers. The shortfall that we are talking about is any cost that the Government could have during the time the company is in a SAR; it has nothing to do with shareholders and creditors. The decision will include the group of customers from which it should be recovered. For example, it could be recovered from all water companies’ customers—that is, those in England—or a subset of the sector, or only customers whose water company went into a SAR.

It is possible that a decision could be taken to spread the cost of a SAR across multiple companies, such as where spending benefits are coupled in another region due to shared infrastructure. There is a well-established practice of socialising costs in the energy sector. If a SAR occurs and this power is ever required, it will allow a decision to be made and consulted on as to what the fairest cost recovery option is, based on the evidence and the circumstances at the time.

Charlie Maynard (Liberal Democrat, Witney)

I think the Minister is confirming that consumers will pay for that shortfall. We are advocating that the creditors should pay. We are not looking to rewrite the Insolvency Act. Whatever the special administrator decides in terms of the hierarchy, fine—that is up to the special administrator. I think the Minister has just confirmed what paragraph 69 in DEFRA’s explanatory notes says, which is that a company is required to

“raise amounts of money determined by the Secretary of State from its consumers”

—that is, the bill payers—for that shortfall, rather than the creditors. That is the bit that we are getting at. We think that the special administrator should take into account that hit that the Government have taken and take it out of the creditor’s pocket rather than the customer’s.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

The hon. Gentleman has failed to acknowledge that, as I have just remarked, there is a hierarchy under the Insolvency Act when it comes to debt being repaid. The people he suggests that we take the money from might be people who, in fact, do not receive any money back. As I have already mentioned, the exact quantity of debt recouped by creditors or equity recouped by shareholders is a matter for the SAR. It is unlikely that all debt will be repaid at the end of special administration, and Government funding provided during a SAR takes priority over most creditors. In the event that there was a cost unable to be recovered from the sale of the company or from reprioritising its debt, the Government would receive their money back first and, therefore, this cost recovery mechanism for customers might not be provided before we reach some of the other creditors, and of course that is determined under the Insolvency Act. I am therefore at a loss to understand the hon. Member’s point. It would make sense if there were people who received their debt repayment before the Government, but that is not the case. There seems to be a lot of confusion about what is happening.

All that the Government are doing are providing that, in the unlikely event of the Government’s being unable to recoup costs that they could have paid during the time that a company is under a SAR, there are various mechanisms to have that repaid, all of which would be consulted upon. At the moment, as we know, that would come from the taxpayer. We are instead providing that, yes, we could still use the taxpayer to recoup that debt, or we could use the customers of that particular water company, of neighbouring water companies, or of all of England—and that would be consulted upon.

I think that the hon. Member’s confusion emanates from his being under the impression that, at the exiting of the SAR, creditors would skip off into the sunset with all the money and the Government would take money from customers. That is not the point I am making because, as I have already said, it is unlikely that all debt will be repaid at the end of a SAR and there is a specific order of priority for repayment. I will make the offer—as I did last time and made good on—to provide a fact sheet on exactly how a SAR would work so that there is no further confusion as we progress through the Bill.

I hope that the Committee agrees that the power is essential to protect taxpayers’ money in the event of a SAR.

Charlie Maynard (Liberal Democrat, Witney)

We are going backwards and forwards. I have made my point. The note here is clear—the Secretary of State is looking for moneys from the customers. I think the special administrator should follow the insolvency rules, but that the hit should come from the creditors, not the customers. I will park it there. I beg to ask leave to withdraw the amendment.

Clause 13 - Modification by Welsh Ministers of water company’s appointment conditions etc to recover losses

Clause 14 - Winding-up petitionsClause 14

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I hope this clause will be a little less fractious than the last one—it is pretty straightforward. If a water or waste water company is about to go insolvent, it can make a winding-up petition to court, as may its creditors. If the court is satisfied that the company is insolvent, it must make a special administration order, triggering a water industry special administration regime, or SAR.

Unlike in normal administration, in a SAR the administrator must prioritise the public interest ahead of creditors. In this case, that means ensuring that water and waste water services continue. However, there is no statutory requirement for creditors or the court to notify the Government or Ofwat that a winding-up petition has been made. In addition, neither the Government nor Ofwat have guaranteed rights to be heard at the subsequent court hearings. This creates the risk that a SAR could be triggered without Government involvement. Given the essential nature of water and waste water services, a SAR presents significant risk to public safety if it is not conducted appropriately. It would be vital, in the event of an imminent SAR, for the Government to be quickly made aware of important developments and to be involved in the arrangements for how the SAR is run. Creditors are unlikely to protect the public interest as comprehensively as a Government and may exercise undue influence over a SAR if a Government are unable to make their views heard.

This clause prohibits a court from making an SAO without the Government and Ofwat being notified, and it gives both parties guaranteed rights to be heard at the subsequent court hearings. That provides a vital safeguard against the risks of a SAR being triggered without Government involvement and the potential dilution of the public interests that that could entail. This also updates the water industry’s SAR to bring it into line with more recently introduced regimes, such as energy, where these rights are standard practice. I hope the Committee agrees that these rights are essential to safeguard the public interest and modernise the water industry’s special administration regime. I commend the clause to the Committee.

Neil Hudson (Conservative, Epping Forest)

The Opposition note that clause 14 attempts to make amendments to previous legislation so that a court may not exercise powers that it currently has with regard to an application for winding up an undertaker without providing advance notice of the petition to the Secretary of State, Welsh Ministers—as appropriate—and Ofwat, and without a period of 14 days having elapsed, as outlined in subsection (2). We also note that the clause likewise grants a further power for the Secretary of State, Welsh Ministers and Ofwat to be entitled to be heard at a winding-up petition’s hearing and any other hearing that relates to part 4 of the Insolvency Act 1986.

Again, we do not wish to raise any formal objections to this particular clause, but we ask for a couple of clarifications from the Minister, if she will indulge us. First, we would like to hear the Minister articulate what benefits this particular clause brings to the Bill. I was not fully clear from her introductory remarks about the actual benefits. Secondly, does she believe that this change to winding up a water company or any other relevant undertaker will provide a fairer winding-up process?

While we are focusing on water companies and the processes for them, we all want to ensure that the clause provides, again, protection for the consumers, who, as we agree across the Committee, have for too long faced unsatisfactory levels of service from the water industry and the practices of some water companies, so could the Minister please explain whether consumers were considered when this clause was drafted? I and others have outlined in Committee that the performance of water companies in financial resilience, as well as many other matters, has not been satisfactory and has been very upsetting for the British public. Therefore could the Minister please respond and assure the Committee that there can be no unforeseen repercussions for consumers from this clause? That is a recurrent theme as we go through line-by-line scrutiny of the Bill: are there any unintended consequences whereby the taxpayer and the end point consumer will be unfairly penalised by the legislative changes? With that in mind, we have no formal objections to this clause but again we seek clarification that the end point consumer will not inadvertently suffer detriment from this legislation.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

To be clear, this is literally just a point of process. The provision, which is not currently available in law, says that in the event of an application to the court for a SAR, the Government will be notified at the same time. The reason, as I outlined in my opening remarks, is that we do not believe that creditors are likely to protect the public interest as comprehensively as the Government. It is a mere process clause that provides that in the event of an application to the court for special administration, the Government and Ofwat need to be informed at the same time. The Government maintain the importance of ensuring that the Government and Ofwat are notified in the event of a winding-up petition. For that reason, I urge that the clause stand part of the Bill.

Clause 15 - Extent, commencement, transitional provision and short title

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move amendment 20, in clause 15, page 21, line 22, leave out subsections (2) to (8) and insert—

“(2) The provisions of this Act come into force on the day on which this Act is passed.”

Rupa Huq (Labour, Ealing Central and Acton)

With this it will be convenient to discuss the following:

Government amendment 5.

Clause stand part.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

We recognise and, indeed, strongly believe that patience is a virtue, but on these Benches we are also a bit impatient. Our concern regarding this clause is simply about implementation. There are two categories of things to be delivered. Some are to be done straightaway, and with others it looks like we are preparing to drag our heels. Therefore our amendment seeks to simplify implementation with one clear and immediate deadline for all provisions of the Bill.

Clause 15 provides that issues to do with remuneration and governance, pollution incident reduction plans, emergency overflows and nature-based solutions, for example, will come into force

“on such day as the Secretary of State may by regulations appoint”—

in other words, not right now. That troubles us, given that there is this great sense that there has been a lot of talk about reform of the water industry and we run the risk, at least when it comes to those provisions, of getting just more talk. Making things subject to consultation, further navel contemplation, does not feel like the way to radically reform our industry. Our single deadline would cut through all that and bring the urgent change that the water industry desperately needs, so we commend amendment 20 to the Committee.

Neil Hudson (Conservative, Epping Forest)

I support Government amendment 5, as it is a privilege amendment in accordance with the procedure for the passage of Bills between the other place and this place. We wish to raise no formal objections to this and we have no opposition to the amendment.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank all hon. Members for their contributions. Amendment 20, tabled by the hon. Member for Westmorland and Lonsdale, seeks to make all provisions in the Bill come into force on the day it receives Royal Assent. I share his urge to get on with things, which is why I am a little confused by the desire elsewhere for another water review, but we will get to that when we get to it. First and foremost, I would like to reassure the hon. Member that the Government have carefully considered the appropriate method and timing for the commencement of each clause and have made provision accordingly in clause 15. A one-size-fits-all approach cannot be justified.

For example, the emergency overflows provision will be implemented over the course of two price review periods to protect bill payers from sudden cost increases. Therefore, the commencement provision for clause 3 has been designed to allow for a staged implementation where it is needed. The Government have already committed in clause 15 to the immediate commencement of the civil penalties provisions on Royal Assent. I assure the Committee that the Government and the water industry regulators are dedicated to ensuring that all measures in the Bill are commenced and implemented as soon as possible and appropriate, to drive rapid improvements in the performance and culture of the water industry.

The hon. Member for Westmorland and Lonsdale tempts me to read through a list of every provision and when they will be enacted, but I am going to save that treat for another time and instead list the clauses, rather than going through them in detail. The provisions in clauses 5 to 8, and in 10 to 15, will all come into force automatically either on Royal Assent or two months later. Clauses 1 to 4 and clause 9 will not commence immediately after Royal Assent and will require secondary legislation to come into force, which is due to the need for regulations required to commence the powers. I am sure that the hon. Member will have thoughts to share on those provisions involving statutory instruments after Royal Assent.

I trust that the hon. Member for Westmorland and Lonsdale is reassured by the Government’s careful consideration of the commencement of each clause, which has the best interests of bill payers in mind and recognises the need to debate and discuss some of the exact details under secondary legislation. I therefore ask the hon. Member to withdraw his amendment.

Government amendment 5 removes the privilege amendment made in the other place. I like this amendment, because one of the quirks of how British politics has evolved is that we have the amendment in the Bill—I found it quite amusing. The privilege amendment is a declaration from the other place that nothing in the Bill involves a charge on the people or on public funds. It is because the Bill started in the Lords that we have to have the amendment to remove that. It recognises the primacy of the Commons, and I think it is quite fun. It is standard process for that text to be removed from the Bill through an amendment at Committee Stage.

Clause 15 sets out the extent of the Bill, when and how its provisions are to be commenced and its short title. The Bill extends to England and Wales only. As set out in the clause, the provisions of the Bill will variously come into force on Royal Assent, two months following Royal Assent, or in accordance with regulations made by the Secretary of State or Welsh Ministers. The clause makes specific provisions, such as that the commencement of clause 3 may make reference to matters to be determined by the environmental regulators.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I am happy to accept many of the assurances that the Minister gave, particularly on the role of Government amendment 5—I learn something new every day. The Liberal Democrats retain concerns about the delay in implementation of some of the good things in the Bill. All the same, I beg to ask leave to withdraw the amendment.

New Clause 1 - Special administration for breach of environmental and other obligations

Adrian Ramsay (Green, Waveney Valley)

I beg to move, That the clause be read a Second time.

Rupa Huq (Labour, Ealing Central and Acton)

With this it will be convenient to discuss:

Adrian Ramsay (Green, Waveney Valley)

It is a pleasure to serve under your chairship, Dr Huq. I reiterate my apologies for not being able to be present at the Committee last week due to illness. I am pleased to be here today to speak to new clause 1, which would clarify that water companies may be subject to special administration measures should companies be guilty of significant and sustained environmental breaches.

I commend the commitments the Minister made during last Thursday’s sitting that the legislation will have a meaningful impact to ensure that water companies deliver for customers and for the environment. That echoes the Secretary of State’s pledge to the House in December to bring to the water sector

“reform that puts customers and the environment first.”—[Official Report, 16 December 2024; Vol. 759, c. 78.]

The new clause provides a mechanism to hold companies accountable for breaches that endanger the environment and public health, and extends the statutory obligations to standards of performance as well as mismanagement and financial viability. By making special administration an available sanction, we signal to water companies that consistent environmental negligence will no longer be tolerated. That is what the public demand. This is not about punishment for punishment’s sake; it is about tackling the culture of impunity in which companies operate. The new clause is necessary because the current framework is insufficient; special administration is triggered only if a water company becomes insolvent or fails to carry out its statutory duties.

New clause 1 offers a practical solution for restoring accountability to a sector that has too often placed profits over people and nature. The evidence submitted by Wildlife and Countryside Link underlines the scale of the challenge: every river in England is polluted, with sewage spills a major contributing factor. New clause 1 is about protecting our fresh waterways, coastal habitats, wildlife and communities. It ensures that enforcement against persistent malpractice has real consequences and shows that environmentally neglectful practices and chronic under-investment are no longer tolerated.

The persistent failings of Southern Water, for example, demonstrate why this tool is so urgently needed. The company has faced enforcement action for widespread and deliberate under-reporting of waste water pollution, leading to £126 million in fines from Ofwat and £90 million in Crown court penalties. Ofwat’s investigation exposed that senior management concealed unpermitted and premature waste water spills, undermining environmental monitoring and public trust. What is deeply troubling is that fines alone have failed to change the company’s behaviour. Last year, Southern Water was one of only two companies that Ofwat rated as lagging, citing continued failures in pollution control and sewer collapses. This is not unique to Southern Water; it is a pattern across the sector, where financial penalties are absorbed as a cost of doing business.

The Bill must put environmental issues and pollution at the core of water industry regulation. To borrow the words of Baroness Hayman, that would demonstrate that

“the interests of customers and the environment”

are the

“primary and fundamental objective.”—[Official Report, House of Lords, 20 November 2024; Vol. 841, c. 244.]

Charlie Maynard (Liberal Democrat, Witney)

New clause 31 would make the process of putting a company into special administration much easier and clearer. There are two steps in the provision: making it easier to apply for special administration and giving more guidance to judges on whether to grant special administration.

Proposed new section 24(1B) of the Water Industry Act 1991 states:

“Where a company which is a qualifying water supply licensee or qualifying sewerage licensee…is required, as a condition of its licence, to maintain two Issuer Credit Ratings which are Investment Grade Ratings from two different Credit Rating Agencies, and…fails to comply with that requirement, the Secretary of State must make an application to the High Court by petition under this section.”

That states that if a company does not have investment grade credit ratings, the Secretary of State will apply for special administration.

Proposed new section 24(2)(ca) of the 1991 Act states that special administration may be granted if a company

“is required, as a condition of its licence, to maintain two Issuer Credit Ratings which are Investment Grade Ratings from two different Credit Rating Agencies, and…has failed to comply with that requirement.”

That gives guidance to the judge. It says, “You’ve got to have those credit ratings. If you don’t, special administration is much more likely to be granted.”

At the moment, we have some bizarre situations. Thames Water, which I will use as my standard example, has £17 billion of debt and cash flows of £1.2 billion; its debt is 14 times higher than the cash flow it generates every year. By financial standards, that is somewhere between ludicrous and ridiculous. In an unregulated sector, the company would have gone bankrupt long ago. I believe—people may contest this—that our Government are keeping it alive because they are worried about being sued by the bondholders if they put it into special administration, because the criteria are not very clear.

If we are serious about fixing our rivers, we have to deal with the debt. We cannot spend the money our rivers require if we do not fix the debt, but we are still digging. Thames Water’s proposed £3 billion of special restructuring is going through the courts right now, so we are adding even more debt—an even bigger millstone around that company’s shoulders. Its debt will go from £17 billion to £20 billion. The Government have the opportunity to say, “That is the last Administration’s trick. We are going to do something different,” but at the moment they are not saying that. I really hope that we will change course. If we do not, all we will do is add more debt on to these companies; that will keep them alive for another 12 or 18 months, but we will be back in the same place again. Customers in Witney and in every constituency are paying through the nose just to cover the interest expenses.

Ofwat has just thrown Thames Water the great big juicy bone of a 35% price increase. That is great news for lenders, but not such great news for customers. It means that instead of 46% of my bill covering the lenders’ interest expenses, it will be only 38%, but I will be paying 35% more. I do not believe that is helping, so the purpose of the new clause is to make it easier to get water companies into special administration.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I emphasise to Committee members that special administration is the ultimate regulatory enforcement tool; as such, the bar is set high.

To respond to new clause 1, tabled by the hon. Member for Waveney Valley, and new clause 31, tabled by the hon. Members for Witney and for Westmorland and Lonsdale, a water company can already be placed into special administration on performance grounds where it is, or is likely to be, in serious breach of its principal statutory duties or an enforcement order—in other words, where it is inappropriate for the company to retain its licence—as set out in section 24 of the Water Industry Act 1991.

The Secretary of State and Ofwat will consider all aspects of a company’s performance and enforcement record, including environmental and financial performance, when considering whether to pursue an SAR on performance grounds. Licence breaches, such as the loss of an investment-grade credit rating, are considered as part of that holistic review of a company’s performance. Ofwat will consider the circumstances around any loss of an investment-grade credit rating to identify the actions that the company must take to address associated licence breaches.

Regulators have a range of enforcement mechanisms to ensure the delivery of performance, including environmental performance. Water companies can also be required to make clear plans to address failures. I gently point out that this Bill does an awful lot to give more powers to address environmental performance. As we have discussed, our pollution reduction implementation plans address some problems relating to pollution.

Special administration must be a last resort, as it has significant consequences for a company’s investors. If special administration could be triggered without allowing a company to rectify performance issues and licence breaches, investors would have low confidence and would not provide the necessary funding. That could create instability in the market, potentially affecting the entire sector.

Although we recognise the concern behind these new clauses and others tabled by the hon. Gentlemen that highlight concerns that the system is not working, they address the symptoms rather than the underlying causes. In October 2024, the Government announced an independent commission that would be the largest review of the water sector since privatisation. That commission has a broad scope and will consult experts in areas such as the environment, public health, engineering, customers, investors and economics.

The governance of companies and regulatory measures to support financial resilience will be covered, including the operation of existing tools, such as the special administration regime. The review will report by quarter two in 2025. The UK and the Welsh Governments will respond and consult on proposals they intend to take forward. We expect those to form the basis of future legislation to tackle the systematic issues to transform the water sector fundamentally. On that basis, I hope that the hon. Member is content to withdraw the proposed new clause.

Adrian Ramsay (Green, Waveney Valley)

I thank the Minister for her response. I appreciate that special administration would only happen in extreme cases. We have, however, repeated failures and neglect, including on environmental performance, from a number of water companies. That is why I wanted to make the provision explicit in the Bill that environmental neglect could be a reason for special administration. I take her point that there are reviews and wider plans underway. Although I am happy not to push this to a vote at this stage, I will take a close interest in how the situation progresses. I beg to ask leave to withdraw the motion.

New Clause 2 - Establishment of Water Restoration FundNew Clause 2

Neil Hudson (Conservative, Epping Forest)

I beg to move, That the clause be read a Second time. The proposed new clause would introduce a legal requirement that money collected from water companies from financial penalties imposed by the Bill are legally required to be used by the water restoration fund. As with much of the Bill, the Government intend to build on the work begun by the previous Conservative Government. The water restoration fund is one pillar of that record that the Government would do well to advance. I look forward to hearing from the Minister what they plan to do with that excellent fund, which needs to be reinstated and progressed.

I have personally championed the water restoration fund, not only in my present role as shadow DEFRA Minister, but before that as a member of the Conservative Environment Network. I pay tribute to that body for its successful campaigning, which in led no small part to the previous Conservative Government introducing the excellent water restoration fund. In 2022, I was proud to sign the Conservative Environment Network’s “Changing course: a manifesto for our rivers, seas and waterways”. That was its first public declaration, setting out the ambition to introduce this policy recommendation.

In addition to the Conservative Environment Network, I would like to namecheck and thank the good folk of Wildlife and Countryside Link for their support and campaigning for the fund and this proposed new clause. I also pay tribute to the Angling Trust for the discussion we had on this matter, and give a big shout-out to our former colleague Philip Dunne, who was respected across the House. The former MP for Ludlow and Chair of the Environmental Audit Committee made assiduous efforts to see this fund introduced, as well as wider measures to protect our precious waterways.

As we have discussed with the Minister, there is considerable consensus on what we can do collectively and on a cross-party basis to protect and nurture our watercourses and waterways. I hope the Government will take forward and continue the water restoration fund because it is pivotal to what we are trying to do.

Jerome Mayhew (Conservative, Broadland and Fakenham)

I have a slightly cheeky intervention. Is the shadow Minister aware that there is a debate in Westminster Hall at 4 o’clock tomorrow led by yours truly on nature-based solutions for farmland flooding? The fund is central to improving the situation.

Neil Hudson (Conservative, Epping Forest)

Yes, I was aware of that. I am acutely aware of it now and congratulate my hon. Friend on securing it. It highlights the fact that there is a lot of agreement. I am sure that his debate will demonstrate cross-party consensus on the use of nature-based solutions. We debated flood mitigation in Committee last week, but the water restoration fund is pivotal to trying to improve the situation at the local level and at the local catchment level as well.

Since being introduced by the previous Government, the water restoration fund has provided £11 million for communities to repair their local waterways and restore them to the quality that they should be at—the quality to which local communities should be entitled. At the heart of the proposal is simply this: those who are at fault for the damage done to our waterways must make restoration for it. Given the facts, I find it disappointing that, despite the cross-party efforts in the other place to enact such measures, they were not listened to by the Government. I hope that in a spirit of consensus the Government will look at that in this Session.

The arguments made by the Government in the other place were not satisfactory. They objected to the principle of ringfencing the funding and to the need for the Treasury to have flexibility in how it spends the money, but in this specific case the argument does not quite stack up. Where money comes from taxation, ringfencing is not always the most reliable way to ensure the Treasury has the spending power it needs to deliver public spending, but we are talking about something completely different. Fines are much more uncertain and provide less guarantee regarding the amount of money that they will bring in. To rely on funds such as these for day-to-day broad Treasury spending simply does not make sense.

Ringfencing penalties for the water restoration fund is a much more sensible measure that allows Governments to guarantee that they can meet a specific need. In other words, those who are at fault for harming the quality of our rivers, seas, coasts and lakes make restoration for the damage caused by their action—or inaction. Given all that we have outlined, there cannot be a more justified way of directly making restoration for damage to our previous water system than the mechanism laid out by the water restoration fund. Water companies pay the fines for the damage that they have done, and local communities that are affected are empowered to restore the precious waterways that they live near.

A finer detail of the amendment that should not be ignored is the fact that we will improve chalk streams. It is unfortunately clear that, despite the Government’s pitch to the British public that they would do better than the previous Government in protecting our waterways, their actions on chalk streams do not bear that out. It was very disappointing that over the Christmas period it was revealed that plans from the Conservatives to recover our chalk streams have been laid to one side by the Government. Given that England is home to over 80% of the world’s chalk streams, the failure to act on this issue is neglect of a vital duty to protect a not only a key part of the UK’s environment, but a feature in the environment of the world. They are a precious resource that very few countries are lucky to have access to. Members across this House represent areas with chalk streams. It is a dereliction of duty to ignore that category in the UK environment.

The plans that the previous Government proposed would have given chalk streams a new status of protection. Special consideration would have been given to watercourses in road guidance, and supporting the physical restoration of the streams as key pillars of our plan would have put chalk streams back on the road to the recovery that is needed. As the deviser of the plans has said publicly, although the Government may want to focus on chalk streams in national parks and landscapes, they risk ignoring chalk streams in most need of recovery across the country. Can the Minister explain why this vital plan of action, which was ready to go, has not been fulfilled? I hope that this decision was not based on politics. We need to look at this in terms of evidence and what is best for our environment.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I wonder whether there has been some confusion, given that the debate on chalk streams comes later on.

Neil Hudson (Conservative, Epping Forest)

It is actually part of our amendment.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

Well, have a go again then.

Neil Hudson (Conservative, Epping Forest)

Good. We are all for talking about and raising the issue of chalk streams, but it is clear that we wanted to include that in our amendment. Our amendment will therefore be a chance to give chalk streams the attention they need from this Government. The previous Government were ready to deliver that and hand the baton over to the new Government, so that they could follow through on the explicit requirement that chalk streams be considered.

The amendment is a chance for the Government to reconsider their stance on the water restoration fund. I would be grateful for clarity from the Minister about what they are planning to do. If they are serious about improving our waterways and if the money from penalised water companies is allowed to go back into the local area to improve those waterways, we could agree about that. If the Government do not face up to this, that might be a negation of the various promises they made to the electorate when in opposition and send a message that their words are merely soundbites. I hope that the Minister will consider the points I have made and support this amendment to restore the water restoration fund—for the sake of not only our waters, but the democratic and local accountability on which they rely. We will seek to push new clause 2 to a vote.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I rise briefly to support the new clause. Among many other reasons, it bears great similarity to one proposed by my noble Friend Baroness Bakewell. We consider everything in it to be right. As the hon. Member for Epping Forest has said, we should be deeply concerned about the Treasury seeking to hang on to money that, if there is any justice, ought to be invested back into the waterways that have been polluted by those who have been fined for that very offence.

I talked earlier about the deep sense of injustice felt across the country about those who pollute, who are getting away with polluting and who even—far from being found guilty—are getting benefits from that pollution. The measure would simply codify a move towards the establishment of a water restoration fund, supported, at least in part, by the fines gathered from those guilty in the first place. There would be a great sense of justice being done for folks concerned about how Windermere is cleaned up, how we make sure that Coniston’s bathing water standards remain high and how we deal with some of the issues I mentioned earlier on the River Lowther, River Eden and River Kent.

The water restoration fund should in part be supported by funds gained from those who are guilty: that is basic justice. We strongly support the new clause and will be voting for it if it is put to a vote.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for Epping Forest for tabling new clause 2, which seeks to establish a water restoration fund in legislation. I accept his invitation to do better than the previous Government when it comes to pollution in the waterways, and welcome the low bar that they have set me.

A water restoration fund is already being established to direct water company fines into water environment improvement projects. This arrangement does not require legislation, because it exists. Defining a water restoration fund in legislation would create an inflexible and rigid funding mechanism, with the amendment requiring specific detail on the scope, operation and management of fines and money. We need to maintain flexibility in how water company fines are spent, to ensure that Government spending is delivering value for money.

The hon. Member can already see from the Bill and the discussions we have had that the cost recovery powers that we have introduced for the Environment Agency are an example of how we can ensure that water companies pay for enforcement. It is continuing to work with His Majesty’s Treasury regarding continued reinvestment of water company fines and penalties, and water environment improvement. A final decision on that will be made when the spending review concludes later this year. On that basis, I ask the hon. Member to withdraw his amendment.

Neil Hudson (Conservative, Epping Forest)

I am not reassured by those comments. The Minister says that the water restoration fund does not need new legislation, but we are concerned that the fact that the fund is not in the Bill shows that the Government are not doing anything with it. They are completely silent about it. I fear that they are going to drop the baton they are being handed and let it pass away. The fund needs to be in the Bill. I am not reassured by the Minister, so we will press a vote on the establishment of a water restoration fund in the Bill.

New Clause 3 - Civil penalties: equivalent reduction to customer bills

Neil Hudson (Conservative, Epping Forest)

I beg to move, That the clause be read a Second time.

New clause 3, which His Majesty’s Opposition will again push to a vote, has at its heart the people we want to protect—the very individuals who this Committee has acknowledged are most affected: the consumers and bill payers. They are the pivotal reason why we have tabled the clause.

The clause would require the Secretary of State to make provision so that where a water company has faced financial penalties for failure to comply with the law, a financial amount equal to those penalties must be removed from the bills of that water company’s consumers. Of course, one might suppose that it is difficult to make an equivalence between the amount of a financial penalty and the amount to be reduced on the bills, but subsection (2) sets out that it must be calculated by dividing the total financial penalty by the water company’s number of customers. We have laid out a formula that the Secretary of State could follow in fulfilling the duties under the clause.

The Government might object that the clause would create additional duties for the Secretary of State on top of their existing ones, but the Opposition believe that the measure is relatively simple, can be calculated and is worth adopting for the very principle of accountability for which all of us across this House are striving.

I have already mentioned that, when the Conservatives were in government, we took action to set out that water bosses would be banned from receiving bonuses if a company had committed serious criminal breaches. The Bill copies that and takes it forwards, but the new clause takes the principle of accountability, which has been raised in the Committee’s last couple of sittings, even further.

Helena Dollimore (Labour/Co-operative, Hastings and Rye)

It is a pleasure to serve under your chairship, Dr Huq. The hon. Member referred to the record of his party while in government for the last 14 years, and said that it set the threshold for a water boss being denied a bonus at the level of criminal activity. Does he agree that many of our constituents would find it strange to set a bar for not having a bonus at the level of committing criminal activity, given that in many workplaces up and down the country a bonus is based on good performance and on serving customers? The last Government set the bar for banning bonuses far too high, and that is why, despite repeated failure, the boss of Southern Water still received a bonus, as the boss of Ofwat confirmed to the Select Committee.

Neil Hudson (Conservative, Epping Forest)

The Conservative Government were the first Government to start addressing this issue by actually evaluating the data, monitoring overflows and monitoring outflows. I gently remind the hon. Member that when her party left power, only 7% of storm overflows were measured; when the Conservatives left power, 100% were measured. We were the first party to find that there was a problem.

To return to the dental analogy, in the last parliamentary Session we tried to give the regulators more powers—more teeth—to go after the water bosses. We need to firm up how the regulator has been using those powers, so that we can hold the water companies to account. I agree that there is outrage across the House about how water companies have breached their terms of reference and broken the law. We have tried to hold them accountable. The Bill will try to take things further, but I gently say to the Government that we were the party that started collecting the data, which allowed us to realise the scale of the situation and try to introduce measures to sort it.

The new clause ensures fairness for customers and ensures that fines on water companies will not impact customers, who are not at fault for the water companies’ mistakes or the bad practices that led to the fines. We believe that customers should not be impacted by fines imposed on water companies. The clause attempts to remedy that. In the name of accountability and trust between the public and Governments—of all colours—that seek to address this issue, subsection (3) states that the reductions to customer bills imposed under the clause will be indicated on the statement of account for each consumer who has received the reduction. We believe that that is important.

For too long, a toxic cocktail of water companies’ poor behaviour and rising bills has led too many people to feel that they are getting poor value for money, and that they are not getting the quality water services they deserve for the price they are paying—hard-working people, up and down the country, who work consistently to pay their bills and do the right thing, while the water industry’s negative practices continue. Given the amount of time we have spent talking about this issue, they may also feel that the new Government are not willing to act to protect the consumer in this area.

Subsection (3) seeks to break that cycle and send a signal to bill payers that actions to regulate water companies have a real, tangible effect. Showing the reduction in consumer bills directly on the statement of account will provide a real, tangible sign that the poor behaviour has been looked at, people are going after the water companies and consumers will benefit from that. It also serves as compensation for those who have been directly affected and as an example of justice in action—the principle being that those who harm pay a penalty, and those who are harmed receive restitution.

I return to my comments about the water restoration fund. Fines being re-circulated into the local area will be good for local accountability.

Dan Aldridge (Labour, Weston-super-Mare)

It is a pleasure to serve under your chairmanship, Dr Huq. The hon. Gentleman talks about the outrage across the House, and I also feel outraged as a member of the public. The vast majority of my constituents are incredibly outraged at the situation they find themselves in. One of the things I am told when I knock on doors in my constituency is, “The previous Government have shown no contrition about their role in the degradation of our waterways.” The Opposition have a revisionist attitude that is incredibly perplexing to me and angering to my constituents, so I would just like to see a bit of contrition from them.

Neil Hudson (Conservative, Epping Forest)

Can I just say that the previous Government went and looked for the problem, and found the scale of it? We all agree that it is a huge problem that needs to be addressed; we are not downplaying the scale of it. We collected data and were brave enough to say, “There is a problem.”

Labour Members threw a lot of things at us during the passage of the landmark Environment Act 2021. They have made misleading comments about Conservative Members of Parliament, but we were the party that grasped the nettle and said, “There is a problem, and we need to look at it.” A lot of the amendments that were tabled to try to scupper the Environment Act were completely uncosted and would have cost taxpayers lots and lots of money. We tried to introduce practical, cost-effective, reasonable measures to address the scale of the problem that we unearthed.

Jerome Mayhew (Conservative, Broadland and Fakenham)

The shadow Minister is right that a lot of the supposed solutions were uncosted and had an impractical timeframe. One that springs to mind was the Liberal Democrat amendment that was costed: there was a tax that was supposed to pay for the improvements to water quality. Does he agree that, on a basic calculation, it would have taken more than 300 years to pay it back?

Neil Hudson (Conservative, Epping Forest)

I agree. Amendments are easy to table with a view to obstruction and making political points, and those were not affordable and would not have been deliverable in any realistic timescale. Governments have to make realistic, cost-effective decisions that honour the taxpayer, and they have to be clear with the public about how such measures will be implemented and paid for.

If the Government do not support our amendment, I hope they will clarify what steps they are taking to protect customers from the knock-on impact of fines. Unfortunately, in many industries when costs are imposed, customers sometimes pay higher prices. With the new clause, we want to ensure that when we rightly impose financial penalties on water companies there are no unintended consequences for the consumers we aim to defend by imposing the financial penalties in the first place. With that in mind, and given the aim of accountability, we sincerely hope the Government will support the new clause. Ultimately, we aim to press it to a vote.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for Epping Forest for tabling new clause 3, which would require a water company to reduce customer bills by an equivalent amount to the total monetary penalties paid in the previous year by that company. I will start by clarifying that we expect the cost of the penalties to be borne by the companies, not by the customers. However, I would also like to reassure the hon. Member that there are existing procedures in place to ensure that customers are reimbursed for a water company’s poor performance.

As the independent economic regulator of the water industry, Ofwat is best placed to ensure that customers are reimbursed appropriately if water companies perform poorly. Ofwat already sets specific performance targets for water companies in the five-yearly price review. Those performance commitments hold water companies to account for the outcomes that customers pay for. Where they are not met, companies must reimburse customers through lower water bills in the next financial year.

Those performance targets take a holistic view of water company performance and consider wider factors beyond companies receiving penalties. Performance targets include customer-facing commitments, such as water supply interruptions; environmental commitments, such as pollution incidents, storm overflows and bathing water quality; and commitments related to asset health, such as repairs to burst mains. As a result of underperformance in the last financial year, Ofwat is currently requiring 13 companies to return £157 million to customers.

The hon. Member’s new clause is therefore not appropriate for this Bill, given that it would overlap with existing procedures. However, there is simply not enough improvement in performance across the water industry. That is why we have launched the independent commission, which will look at issues, including performance, and make recommendations on how to transform the water sector.

I hope that the hon. Member for Epping Forest is reassured about how customers will be reimbursed for poor performance, and about the steps that we are taking to improve performance. On that basis, I ask him to withdraw his new clause.

Neil Hudson (Conservative, Epping Forest)

I thank the Minister for her comments. I am afraid that I am not fully reassured, and we would like to see provision in the Bill for any fines imposed on water companies to have a concomitant effect—a direct effect—on customer bills. This well-intended measure has been tabled to create a link between the two, so although I hear the Minister’s comments, we would still like to press new clause 3 to a vote.

New Clause 4 - Rules about borrowing

‘Chapter III - Rules about borrowing for undertakersChapter III

Neil Hudson (Conservative, Epping Forest)

I beg to move, That the clause be read a Second time.

New clause 4 amends the Water Industry Act 1991 to insert new rules regarding the limits to the amount of money that can be borrowed by a water company, which the Secretary of State for the Department for Environment, Food and Rural Affairs would be able to enact by means of statutory instrument. Although we have discussed statutory instruments in Committee, the Opposition hope that the Government will recognise that this proposed statutory instrument power needs to be made.

New clause 4 ensures that water companies are not excessively borrowing money, as that is ultimately bad for bill payers. At the heart of our concern about financial resilience is the borrowing in the industry and the over-leveraging because of that borrowing. It is clear that there is a direct link between financial resilience, problems connected to borrowing and the very survivability of the water firms. That should be of huge concern to all of us.

Consumers are concerned that the provision of their water is at risk, and we as legislators must work out how to deal with the issues, including the financial implications, relating to the risk of nationalising the water companies that have no other way of providing services. That can reverberate back to the consumers again, who may face increased costs because of the financial support that the Government have to provide to keep water companies afloat. In other words, tackling the choices that water companies may have made, and will make in the future, including borrowing choices, is an issue that we are required to correct for the very future of our water industry.

I reiterate my profound respect for the way that both the Minister and Baroness Hayman have conducted themselves in this debate. I note that Baroness Hayman expressed concern in the other place that putting a fixed percentage limit on borrowing could be a risk to investment at a crucial time for financial resilience and investment in the water industry. That is why my Conservative colleague, Lord Roborough, revised his amendment on that in the other place to give the Secretary of State the power to set limits by means of a statutory instrument. I pay tribute to my colleague and friend Lord Roborough for working so hard to raise the issue of financial resilience in the other place through this amendment.

We are not saying that a hard limit has to be set on borrowing levels, but merely giving the Secretary of State the option to do so if they feel it necessary to protect consumers from the negative effects of the water industry. I come back to the point I made in previous sittings: giving the powers to the Secretary of State, a democratically elected Minister in His Majesty’s Government, through statutory instrument, improves democracy and accountability for the water companies. I do not think the Labour Government need to shy away from this constructive amendment, which gives the Secretary of State the ability to hold the water companies to account, as we all want to do.

If the Minister does not see the need for the amendment —I am not pre-empting her, but I imagine that is how her response will go—can she clarify how much borrowing the Government consider acceptable for a water company, and what they will do to reduce the impact on the consumer of excessive borrowing and spending? The new clause also limits the amount of dividends that can be paid out to shareholders if the water company has exceeded the borrowing limit. Should a limit be set, it would therefore make water companies fairer in their practices to bill payers, as when a company borrows it will have less of an impact on consumer bills.

While in government, the Conservatives gave Ofwat the powers to link performance to payouts to shareholders and water company management. New clause 4 further aims to protect consumers from companies that are failing to prioritise their customers. Considering those points, the Opposition believe that the Government could move a bit on this, and enact democratic accountability with the statutory instrument. We hope that they will look on new clause 4 favourably.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for Epping Forest for tabling the new clause, which would implement a limit on borrowing by water companies. I note that Baroness Hayman had multiple discussions with Lord Roborough on the similar amendment that he put forward in the House of Lords, and that Lord Roborough was satisfied with our reasoning for not introducing restrictions on borrowing in the Bill.

Debt has been rising in companies since privatisation, and it of course accelerated under the previous Administration. In some instances, levels of debt have reached a point at which the financial resilience of companies could be threatened. We have been clear that Ofwat must continue to have a strong focus on company financial resilience to secure efficient long-term investment and deliver long-term value for money for customers and the environment.

I assure the Committee that Ofwat is already taking steps to closely monitor debt levels as part of its annual monitoring financial resilience report, and it will take action where the financial resilience of a company is threatened. Ofwat published its final determinations for the 2024 price review in December, which included a confirmed £104 billion upgrade for the water sector. Investment in the water sector is financed up front by investors, and repaid by customers over time to smooth the impact on bills. Borrowing is therefore a key part of the process.

David Reed (Conservative, Exmouth and Exeter East)

I agree with many of the points raised by my hon. Friend the Member for Epping Forest on debt. He raised the serious question of how much debt is too much. Does Ofwat have a firm number on how much companies should be borrowing, and at what point it should intervene?

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for his helpful intervention to look at what the borrowing and debt limits should be. We think that placing new borrowing limits on companies at this late stage in the price review process would disrupt business planning. However, taking on board the points that have been made and the concerns about companies’ levels of debt, I refer Members to the fact that we have announced an independent water commission, which will be a more appropriate vehicle for considering longer-term reform options such as the proposals from the hon. Member for Epping Forest. Company financial structures are one of a number of areas that could be explored under the commission, and we do not want to pre-empt the outcome of the commission through this new clause.

Charlie Maynard (Liberal Democrat, Witney)

With respect, I feel that we are living in parallel universes. I will take Thames Water as an example, whose debt is 14 times the level of its cash flows. The Minister is saying that financial resilience could be threatened, but I spent 25 years in finance, and that ratio is very threatening. Is Ofwat closely monitoring that? Moody’s and Standard & Poor’s have put Thames Water into junk bond ratings—seven ratings under the investment grade—and we are pedalling on regardless. Could the Minister give a view on Thames Water’s levels of debt, and whether they are threatening to the company?

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I hope that the hon. Gentleman has not misunderstood. There is certainly no desire from me to keep pedalling. Instead, what we want to do is look at the entire financial situation of companies—he knows that we have had that conversation outside this room. We need to look at some of the longer-term reform options for how companies are structured financially, which is why we have the deputy governor of the Bank of England leading our review, and using his knowledge and expertise to look at how companies are structured.

I do not think that the new clause is the appropriate place to pre-empt the outcome of the commission before it has had an opportunity to report, or even to listen to the hon. Member for Epping Forest through the call for evidence that is yet to be announced. I want to stress that I support sentiment of the hon. Member for Witney, but I express caution around the risks of putting through changes of this magnitude without giving full and proper consideration. We believe that the commission is the appropriate way to do that.

Jerome Mayhew (Conservative, Broadland and Fakenham)

Okay, perhaps the Minister is right—perhaps the detail of what percentage of debt or what multiple of revenue is appropriate should be established by the commission and the wider review—but surely the principle can be established now. From any investigation in this area, we can say that the principle will be that debt will need to be capped or managed, or have some oversight, because we have seen what happens—particularly with Thames Water—when there is no cap or oversight. Does the Minister not agree that the new clause just sets out the principle, and the amount would be set out by an SI?

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I respect the hon. Gentleman’s contributions on matters of finance, and I recognise his knowledge in this area. However, I think he would probably acknowledge—even if not publicly—that using a new clause to determine the level of debt that we think is appropriate is not the best way to make legislation for our country, or for the financial resilience of the water sector. I am entirely confident that the best way to look at this seriously, taking contributions and recommendations from all the wider stakeholders, is through the water commission. The commission might draw similar conclusions but it is not for us to pre-empt them now, without having first taken on board the opinions of many other stakeholders. I trust that the hon. Member for Epping Forest is reassured by the steps being taken by the Government, and by Ofwat, and I ask him to withdraw the clause.

Neil Hudson (Conservative, Epping Forest)

I thank the Minister for the constructive tone with which she has engaged in this whole debate, but I think we are going round in circles. We are trying to hold the water companies to account, and the Government are saying, “It is okay, Ofwat can do that,” but we have heard contributions saying that Ofwat is not using its powers and we need to give it more powers.

All we are doing, with this new clause, is putting in place the principle that the Secretary of State has the capability to oversee that. If the Secretary of State and the Government felt that Ofwat was doing what the legislation intended, they would not need to activate the new clause’s provisions. If, however, they did not feel that Ofwat was doing that, the new clause would give them that particular power. We are again talking about—I know the Government Back Benchers are going to wince—teeth. In this case, regarding Ofwat’s and the Environment Agency’s capabilities, we are saying to the democratically elected Government of the day that there is an extra tooth to hold over Ofwat, and that if Ofwat is not doing its job then the Government can, potentially, step in.

I take on board the comments about the commission but, to echo some of the comments of the hon. Member for Witney about being impatient for change, if this issue is going to the commission, and the can is being kicked down the track, that is disappointing. With this new clause, we are trying, constructively, to give the Government and the Secretary of State of the day the capability to act if they feel that the processes set up under the previous Administration and the new Administration are not working well. I urge the Minister to think again on this matter, and we will press the clause to a vote.

New Clause 5 - Licence conditions about nature recovery

New Clause 6 - Reporting of impact of the Act on pollution

Neil Hudson (Conservative, Epping Forest)

I beg to move, That the clause be read a Second time.

New clause 6 is a fair and reasonable request to strengthen the Bill. Quite simply, it would do what it says on the tin by requiring the Government to report on the impact that they expect the Bill to have on water pollution and on the actual and verifiable effects that the Bill, when it becomes an Act, will have on our water quality.

It is completely agreed that accountability for addressing the quality of our water system should be at the heart of how we tackle water pollution and related issues. That should be true of every actor involved: not just the water companies, but the Government whose regulation they are expected to abide by. We cannot rightly say on the one hand that water companies should be expected to meet criteria to restore public trust, while suggesting on the other hand that the Government should not likewise work to be accountable and to uphold public trust on the issue.

Furthermore, the new clause feeds into the basic fact that ensuring that our water systems are being improved is not a one-time event that can be magically resolved with a single piece of legislation every now and then. It must be a consistent focus for the Department for Environment, Food and Rural Affairs and for all the agencies under whose remit the issue falls.

The work of agencies such as the Environment Agency is vital. I pay tribute to its hard work, not least when flooding hits, as we have discussed. We should not underestimate those on the frontline who do so much to keep people safe, to make sure that the environment is protected and to ensure that the quality of people’s water is safe and suitable.

To improve our water systems, however, the buck must stop not with the EA, but higher up: with DEFRA and the Government. The new clause would help to provide that accountability. As in our earlier discussions regarding the online publication of implementation reports, if the measures set out in the Government’s approach do not meet their targets, for legitimate reasons, the Government would have a chance to lay out exactly why not and to give a justification for their findings on the Act’s impact. Our new clause would provide a natural mechanism to ensure that long-term planning and reviews of the Act are taking place and that the Government are looking at water pollution and the actions that the water industry has taken or needs to take to further improve the situation.

We should not shy away from the fact that the new clause would build on the previous Government’s efforts to look at that point. Our plan for water set out a 25-year plan to ensure that our water companies were investing in our water system for the long term, not just while the issue was in the headlines. Again, that is why our new clause matters: because it would ensure the continued focus of Governments of all parties on the protection of our waters. That matters all the time, not just when it becomes a political or media issue.

We must also consider the evolving factors that affect the water industry and its ability to reduce water pollution. The flooding that we have seen in the past weeks has highlighted once again that our country is facing more regular extreme flooding events. In simple terms, more flooding means more excess groundwater and surface water that can enter the network, which creates more of a risk that sewerage overflows will be required to maintain our water systems.

With such events becoming more unpredictable in their timing and yet more commonplace because of extreme weather events and the effects of climate change, looking at the evolution of issues such as this will be crucial to ensuring that any measures to improve overflows and water quality are successful in the long term. We need to make decisions now that have an impact in the future, because in the long term we all want water quality to improve and to be protected for future generations. To achieve that, we need long-term and consistent attention and reflection on the policies being enacted and their effects. The new clause would help to facilitate that.

Once again, transparency is not a hindrance; it helps everybody involved in managing the quality of our water system. Trust can be maintained only if everyone tries to do what is right and the Government, of whichever political party, are no exception. We need to be trying to do the right thing. Given that, His Majesty’s Opposition believe the new clause to be a highly reasonable and fair amendment to the Bill, and we hope that the Minister might support it.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I will quickly note the constructive and nice way in which the hon. Member for Epping Forest is taking part in these debates. I also want to come up with more dentistry analogies, so I will be thinking of those as we keep going.

The Bill will drive meaningful improvements in the performance and culture of the water industry. In line with that, it will introduce many measures to disincentivise pollution. For example, it will provide Ofwat with legal powers to ban bonuses where companies fail to meet standards on environmental performance, financial resilience, customer outcomes or criminal liability. The Bill will also enable automatic and severe fines, allowing regulators to take swift action. It will enable the public to hold companies to account through a new requirement for water companies to produce annual reports on pollution incident reduction. Collectively, these measures will strengthen enforcement, improve transparency and disincentivise water company pollution.

The Committee and the wider public are able to see a more detailed assessment of the expected impact of the Bill via the published impact assessment. I reassure the Committee that my Department is committed to post-legislative scrutiny of primary legislation. The Department for Environment, Food and Rural Affairs will work with the cross-party Select Committee on Environment, Food and Rural Affairs to assess the impacts of the Act three to five years after Royal Assent as part of the standard practice for all new legislation. I welcome that scrutiny.

The Government therefore cannot accept new clause 6. Although we agree on the importance of understanding the impact of the Bill on environmental pollution, adding further reporting requirements to the Bill would be duplicative and unnecessary.

Neil Hudson (Conservative, Epping Forest)

I thank the Minister for her constructive response, but the Opposition still feel that this is an important new clause in relation to the impact on water pollution, so we would like to proceed again to a formal vote.

Rupa Huq (Labour, Ealing Central and Acton)

It is votes à gogo this afternoon.

New Clause 7 - Abolition of the Water Services Regulation Authority

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move, That the clause be read a Second time.

Rupa Huq (Labour, Ealing Central and Acton)

With this it will be convenient to discuss new clause 20—Review of the water industry—

“(1) The Secretary of State must consider as part of any review into the water industry the following—

(a) the functions and performance of the Water Services Regulation Authority, and the case for its abolition;

(b) whether a public benefit company could better perform the role of current undertakers.

(2) The consideration under subsection (1)(a) must analyse the case for replacing the Water Services Regulation Authority with a new corporate body known as the Clean Water Authority, with the following general duties—

(a) to issue guidance to undertakers, and enforce the implementation of that guidance, requiring undertakers to meet excellent standards concerning—

(i) the provision of clean drinking water,

(ii) the maintenance of bathing waters of excellent quality,

(iii) the maintenance of lakes, rivers and beaches of high ecological status,

(iv) the conservation of water resources, and

(v) the charging of reasonable water bills;

(b) to issue rules prohibiting a relevant undertaker from giving to persons holding senior roles performance-related pay in respect of any financial year in which the undertaker has failed to meet any relevant targets set by the Authority;

(c) to swiftly revoke the licence of water companies that have performed poorly, as defined by the Authority, with particular regard to the standards set out in paragraph (a);

(d) to require relevant undertakers to have arrangements in place for environmental experts to be members of a board, committee or panel of the undertaker;

(e) to issue stringent and legally-binding targets concerning sewage discharges affecting bathing waters and highly sensitive nature sites;

(f) to mandate that undertakers publish publicly-accessible live time data on the recorded volume, duration and number of sewage spills on a single site maintained by the Authority;

(g) to perform unannounced inspections with regard to the duties under this subsection.”

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I will try to be brief and speak to both new clauses. For the Committee’s information, we will not seek to press new clause 7 to a vote, but we will seek to press new clause 20.

I know that the Minister will talk about the Cunliffe review as the time when these things will be considered. Nevertheless, we have all spent enough time in opposition to have come to some conclusions before this Parliament. Even if nothing else had happened beforehand, there was Ofwat’s signing off of the bill increases last December. This is a 21% increase in bills, and that is 14 times larger than the current inflation rate. In my part of the world, it is a 25% price rise. As I said earlier, 11% of the bills being paid by my constituents will go to finance company debt.

We have seen bonuses signed off regularly despite shocking performance. We see Ofwat as a failed regulator with a culture and presumption of non-intervention. Nearly four years on, Ofwat still has not collected £168 million-worth of fines. We see a culture of weakness and an organisation that the water companies consider to be weak and for which they do not have respect. It is partly the fault of Ofwat and its leadership, but it is also that the powers given to it are not sufficient.

It is also about the balkanisation and fragmentation of the regulatory framework, with the EA, the Drinking Water Inspectorate and Ofwat. We have a proposal in new clause 7, with more detail in new clause 20, to abolish Ofwat and set up a clean water authority that would merge the regulatory powers of the Environment Agency and Ofwat. In my constituency, I see that as particularly relevant.

By the way, despite what I have said about the culture of Ofwat, the people working in the sector deserve our praise and thanks. Those people work very hard with limited resources and are doing really important work for us. That includes people on the frontline in our water companies. I worry very much about the demonisation of everybody working in the water industry, which is not fair or accurate. I probably speak for everybody when I say that we want to pay tribute to those people. It is not their fault that the system is broken.

In my constituency, I see the distraction in the Environment Agency. We had Storm Desmond more than nine years ago now. The flood defences are being built in Kendal, overseen by the Environment Agency. Meanwhile, eight miles up the road, we have Windermere, which is a centre of great concern because of pollution there. There are only so many things that a small group of people can keep in their head at any given time.

Catherine Fookes (Labour, Monmouthshire)

I think we can safely say that Ofwat is already under review. In my mind, it has until 2030 to deliver everything that we want. We have an independent commission coming up, so I would say that the hon. Member’s new clause is not necessary. We should let the commission report and say what extra steps are necessary.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I thank the hon. Member for her very reasonable intervention. In the extremely unlikely event that the Committee rejects my new clause today, we will of course submit our ideas to Sir Jon Cunliffe and take part in the review, which we welcome. Nevertheless, my point is that the division of responsibility and division of attention, particularly in the Environment Agency as a regulator dealing with flooding and so on, means that it does not have the resource; I know that we will talk about that later. Also, the fact that the regulatory set-up is so fragmented means that the water companies simply run rings around the various regulators.

One final point arising from new clause 20 is that we must outline a potential way forward. We are not convinced at this stage that renationalisation would be affordable or wise. I am not saying that I am opposed to it in principle; it just does not seem wise at this stage to do something that will cost the taxpayer a vast amount and put money in the hands of people who have fleeced us once already. Unless people can come up with a different model, that does not feel like the right way of doing it.

At the same time, the current model of ownership has clearly failed. We suggest a not-for-profit, a community benefit company model or looking at mutuals, but there may be a way of migrating the system towards that model of ownership via what happens at the end of the administration.

Jerome Mayhew (Conservative, Broadland and Fakenham)

The hon. Member says that privatisation has demonstrably failed. I challenge him on that. There are elements of privatisation that have failed: the refinancing, the imposition of debt and the removal of money through dividends in the noughties and, I am sorry to say, between 2010 and 2015. That is a failure, but I hope that the hon. Member accepts that privatisation as a whole has delivered more than £160 billion of capex investment into the industry, which simply would not have happened if it had been up against schools, hospitals and the other calls on the public purse.

I know that I am straying too far, but subsection (1)(b) of the new clause refers to

“whether a public benefit company could better perform the role of current undertakers.”

As I am sure the hon. Member will know, we have an example of that: Welsh Water. Is he able to point to a single metric by which Welsh Water has outperformed its private sector comparators?

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I am not wedded to one model or another. Having said all that, water is blindingly obviously a natural monopoly and should not have been privatised in the first place. Can I give one metric? Yes. Of the 16 water companies, Welsh Water is among the minority that are financially sound. Performance is not necessarily and always a function of ownership absolutely: it is a combination of ownership, culture and regulation.

We are simply saying that we should look at migrating the system to this model. Let us bear in mind that for all the additional money we can say we leverage in through private investment, a vast amount of money leaks out of the system to shareholders, often through holding companies overseas and in bonuses, which could otherwise have been spent internally.

New clause 7 is an attempt to come up with a constructive alternative. We would abolish Ofwat, take the water regulatory powers off the Environment Agency, create a single regulator in the form of the clean water authority and seek to migrate ownership within the water industry towards a mutual and community benefit model. As I say, we will not push new clause 7 to a vote, but we will seek a vote on new clause 20.

Neil Hudson (Conservative, Epping Forest)

As we have gone through the Bill, there has been a lot of cross-party consensus on trying to get measures in place. I respect the efforts of the hon. Member for Westmorland and Lonsdale and the third party in trying to improve the situation, not least in such matters as nature-based solutions. From the official Opposition’s perspective, however, the hon. Member’s new clause 7 is perhaps an overly eager response. Throwing out Ofwat completely at this juncture when we want it to do its regulatory job would create more problems than he wants, whatever the intention of the new clause.

I know that the Liberal Democrats have argued that steps should be taken to set up a new regulator in some way. New clause 7 does not really introduce a specific requirement or measures to enable a transition from Ofwat to the purported new regulator. If we were to proceed with the new clause, we would simply be left in limbo and in the lurch with regard to regulation of the industry. It is not that we believe that the situation is perfect: we have debated the powers of the Environment Agency and Ofwat, and we have agreed that things are not perfect with the water industry and regulators. We have all heard at first hand about issues that we are not happy with, such as executives moving into higher-paid roles within water regulators, of which we heard evidence in the EFRA Committee in the last Parliament.

The hon. Member for Westmorland and Lonsdale generously shouted out the people who work in Ofwat and the Environment Agency, but although he will not push new clause 7 to a vote, he still talks about abolishing Ofwat. In doing that, we would be left with a vacuum while a new regulator was set up—something we can ill afford when we all agree that there is so much work to be done. A new regulator could not be established overnight; it could take months or even years while structures were being established, the personnel needed to do its everyday work were appointed and the like. Let us be honest that making such a move would not come without financial cost.

Even if that money could be raised through Government resources—ultimately, that means taxpayers’ money—we would be using it to establish a completely new infrastructure for the water regulator, rather than trying to enhance and give more power to the regulator we already have. In addition, we have to remember that its role as a regulator affects consumer bills, too. While none of us wants to see water bills rise for any of our constituents, particularly in difficult economic times, bills would have only been higher if a regulator had not been there at all. If we are left with a vacuum until a replacement mechanism is put in place, and if that takes a lot of time, do we really want to run the risk of unregulated companies raising prices even further in the meantime?

We are in agreement that the status quo has not been good enough when it comes to water companies, but progress has been made and continues to be made in that seismic task. Water companies are starting to face the financial penalties for their failures to both people and our precious environment. For example, back in November, Wessex Water was ordered to pay £500,000 for the loss of thousands of fish because of a sewage pumping failure. That very same month, Thames Water was fined over £18 million for its failure to obey rules introduced on the spending of dividends. Those incidents are not good news stories, and we should never say that they are, but they are signs that the mechanism is working. Ofwat is holding the companies to account and trying to act—it is trying to use the teeth that are there.

There are early signs that giving the regulator those teeth—which we have heard a lot about in this Committee —means that there are clear consequences for the water companies that break the rules that have been implemented. That is not the end of the story, but it is the start of the journey, as we try to hold those water companies to account. As I have also mentioned, the pathway for inspections into water company activity is increasing. It is the whole approach—from incident, to investigation, to penalty—that needs to be examined and reviewed in order to drive change, and that is what has been done and what this legislation is trying to take forward.

Although things are not perfect, we need to allow the existing legislation, as well as this new legislation, to take effect so that the regulator can get on and do its job. We should not put things in jeopardy by completely abolishing things. I note that the Liberal Democrats have tabled this new clause, and they are not pushing it to a vote, but I want to put on record the Opposition’s reservations about what they are suggesting.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for Westmorland and Lonsdale once again for his thorough consideration of the Bill. I will turn first to new clause 7, which was tabled in his name and which proposes the abolition of Ofwat. As the hon. Member will be aware, and as he already mentioned in October ’24, the UK and Welsh Governments launched the independent commission to fundamentally transform how our water system works. The commission, led by Sir Jon Cunliffe, will be broad-ranging and will make recommendations in line with eight objectives, which include specific objectives considering the role, structures, responsibilities and powers of the regulator.

It is right that the commission, rather than this Water (Special Measures) Bill, is the vehicle for considering the water regulator’s roles and responsibilities. This Bill focuses on strengthening the powers of the regulators to drive improvements in performance. The Bill will not, and cannot, fix all the sector’s problems. The commission is the right place to consider the long-term future of the regulatory system and the role of the regulator. Indeed, I would argue that the Labour Government want to move away from sticking-plaster politics to fundamentally reset and transform the problems facing our country for good. I hope therefore that the hon. Member for Westmorland and Lonsdale is content that this new clause is unnecessary.

New clause 20 was also tabled by the hon. Member for Westmorland and Lonsdale. It sets out requirements for a water review that is undertaken by the Secretary of State. I think we are all agreed that we have seen years of water company underperformance, and we all agree that there is a clear need to fundamentally reset the water sector. Although I understand that the hon. Member is seeking to ensure that any review of the water sector is sufficiently thorough, the Government are confident that the commission’s scope is broad and comprehensive. Sir Jon will be supported by a range of experts from the regulatory, environment, health, engineering, customer, investor and economic sectors to effectively examine this sector as a whole, including the regulatory framework.

By setting out considerations for a water review in primary legislation, we risk prejudicing or pre-empting the outcome of the current commission, as well as its independence. The sector is facing complex challenges that require the support of customers, environment groups, investors and companies alike to address. An independent review is best placed to find solutions to those challenges, and it is critical that its independence is preserved. The commission will report its findings in summer 2025, and the Government will consider them in full before outlining the next steps. I therefore hope that the hon. Member for Westmorland and Lonsdale understands that to avoid duplication and, importantly, maintain the independence of the commission, the Government will not accept the new clause.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

As I said earlier, we will not press the new clause to a vote at this stage, but we will press new clause 20 later. Notwithstanding all that has been said about Sir Jon Cunliffe’s review—we want to proactively engage with it, and believe it has great potential to do good—there is no harm in proposing solutions at this stage, and that is what we seek to do. I beg to ask leave to withdraw the motion.

New Clause 8 - Duties of water regulators for clean water

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move, That the clause be read a Second time.

The new clause is similar in scope to the last one, and I do not want to detain the Committee long. The clause refers to the duties of the water regulator under the Water Industry Act 1991, and lists duties against which the regulator would be able to mark water companies to see whether they perform. The duties would be to ensure,

“clean drinking water…bathing waters of excellent quality…lakes, rivers and beaches of high ecological status…the conservation of water resources, and…reasonable water bills.”

Interestingly, those are significantly more detailed than the 1991 Act currently provides. We are seeking to beef up Ofwat’s powers so that water companies are marked against these higher and more comprehensive standards. We do not think the clause should be controversial, and will seek to push it to a vote.

Rupa Huq (Labour, Ealing Central and Acton)

The Clerk keeps reminding me that—I think because we have a lot of new Members in the room; Tim Farron is not guilty of this—people keep saying “you”, which is a cardinal sin. You have to say “the hon. Member”, because “you” is me, and I am not doing anything except sitting here saying the “Unlock the doors” stuff.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

May I say—often said, not always meant—that it is indeed a pleasure to serve under your chairwomanship, Dr Huq? I thank the hon. Member for Westmorland and Lonsdale for the intention behind new clause 8. Ofwat has a range of primary duties, including protecting the interests of consumers, ensuring that companies properly carry out their functions and ensuring that companies can finance the delivery of their statutory duties. Removing Ofwat’s duty to ensure that companies are appropriately financed would put at risk companies’ ability to deliver for customers and the environment. The new clause also seems to contradict the others tabled by the hon. Member. For example, new clauses 19 and 23 seek to increase regulation around water company financial resilience, but new clause 8 seems to aim to reduce it.

Ofwat must continue to ensure that water companies can finance the proper carrying out of their statutory obligations, in line with the outcome the new clause seeks. Ofwat already has a primary duty to seek to ensure that companies deliver their statutory obligations, including environmental obligations. Ofwat’s existing duties, combined with the strengthened power for regulators provided by the Bill, will therefore drive the desired outcome sought by the new clause and ensure that the environment is at the heart of water companies’ activities. That is something on which we all agree.

In addition, the independent commission on the water sector will look at wider long-term reform of the water sector, including considering and clarifying the role of regulators, and we do not wish to prejudice the outcome of the commission by implementing the new clause. I hope that the hon. Member is reassured that Ofwat’s existing core duties capture the intent behind it, and that the independent commission will consider the duties of Ofwat more broadly. For those reasons, we will not accept the new clause.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I thank the Minister for her response. The new clause aims not to replace the business side of Ofwat’s regulatory framework and powers, but to supplement it. As I said earlier, it is odd that in the broadest sense—I know that this is not entirely true—Ofwat looks at the business side of the water industry and the EA looks at the environmental side. They are clearly one and the same, or they ought to be. We are simply trying to draw these things together. This is not about reducing Ofwat’s powers on one side in order to beef them up on the other; this is about additionality. We think it is entirely consistent.

I hear the Minister—if I were at that crease, my straight bat would be “Sir Jon Cunliffe” every single time. I get that, but surely, there has to be some point to this water Bill, and we are trying to push the Government to strengthen the regulators. We debated earlier the extent to which Ofwat should exist or not, but if we take it that the Government have a majority and therefore that Ofwat is likely to overcome my time on this Committee, what can we do to make it a more holistic regulator with more power and scope? We therefore think there is a very strong case for new clause 8.

New Clause 10 - Impact of the Act on the Environment Agency

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move, That the clause be read a Second time.

The Environment Agency will have more powers as a consequence of the Bill. There will be greater regulation and there will be an impact on the Environment Agency as an organisation. It is my privilege to represent large chunks of the English Lake district. We have an agency full of really good people—dedicated and qualified professionals, many of whom are from and love the area, and yet they already find themselves overwhelmed with their responsibilities. I made an allusion earlier, but it might help to give a sense of how the organisation copes with its challenges.

We are still in the process of having walls built around the River Kent to protect the town of Kendal and its businesses from a repeat of the devastation in December 2015, when something like 6,000 of my residents lost their homes and we saw just under 1,000 businesses devastated. The Environment Agency is looking after that, and just up the road are Windermere, Coniston, Ullswater and the other lakes, rivers and coastal areas of our beautiful part of the world. We are already stretching the capacity of those people, to say the least, and we are beginning to see that in real time, as we try to deal with sewage spills in the tributaries that lead into Windermere. We see many such failures, and although the Environment Agency is trying to find the time to regulate, observe and scrutinise them, it is understandably distracted by the huge civil engineering project that it is overseeing in Kendal to protect the town from flooding.

This is about paying tribute to people in the EA, but also recognising that they are already under enormous pressure. The Minister has said that there will be 500 new members of staff at the Environment Agency. That is one answer to the question. We are trying to recognise that that is still only one person per English constituency. We need to therefore test the extent to which the Environment Agency has the capacity to do its job, because part of the problem is insufficient regulatory powers, and the other is agencies without the resource to police the powers that they already have. This aims to be a helpful new clause. It recognises that the Government seek to and will do good through the Bill, but we need to ensure that the agencies there to deliver that good have the capability to do so.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for suggesting new clause 10 and agree it is important to understand the impacts of the Bill on the Environment Agency. I echo remarks made by all Members on the wonderful work that the Environment Agency does, particularly those who are working in the frontline and those who were working on new year’s day trying to support communities that had been flooded. I also pay tribute to the Wildlife and Countryside Link and to all the environmental groups, organisations and charities that have shown an interest in the Bill. Their tireless campaigning is probably what has led to many of us being here to discuss it today.

I reassure the hon. Member for Westmorland and Lonsdale that the current provisions in the Bill are sufficient to do what he wants. Through clause 10, the Environment Agency will be able to recover costs for the full extent of their water company enforcement activities, including for new provisions in the Bill. This will allow the Environment Agency to fully fund their water industry enforcement functions and meet the requirements of the Act, ensuring that polluters can be held to account for breaches of their obligations.

Environment Agency funding will continue to be closely monitored by DEFRA as a sponsoring Department, ensuring that the regulator is fully equipped to carry out its duties and functions effectively and to deliver for the public and the environment. The Environment Agency is already recruiting up to 500 additional staff for inspections, enforcement and stronger regulation of the water industry, increasing compliance checks and quadrupling the number of water company inspections by March. This increased capacity is funded by £55 million a year through increased grant in aid funding from DEFRA and additional funding from water quality permit charges levied on water companies.

I hope the hon. Gentleman is reassured that these measures will ensure that the Environment Agency consistently has the resources it needs to fund its regulatory activities. As such, the proposed new clause is unnecessary and therefore I ask him to withdraw it.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I am not entirely reassured but I am partially at least and we have no desire to push this new clause a vote. I beg to ask leave to withdraw the motion.

New Clause 11 - Duty to publish maps of sewage catchment networks

Charlie Maynard (Liberal Democrat, Witney)

I beg to move, That the clause be read a Second time.

This is a very nuts and bolts thing. I believe we are here to try to make a better water sector. I will rattle through the clause, which would mean that each relevant undertaker

“must publish a map of its sewage catchment networks”,

and that maps published under the provision

“must illustrate…pumping stations, pipes and other works constituting part of the undertaker’s sewerage network…must be published within 12 months of the passing of this Act…must be made publicly accessible on the undertaker’s website.”

I am a district councillor as well as an MP and in my ward of Standlake Aston and Stanton Harcourt, parish councillors, members of the public and campaigners have grappled for information and failed to find it. Many people do not know how to do a freedom of information request. This means that people do not know where the sewage is going from and to, and that leads to confusion and means that the problems are further away from us.

Putting these maps in the public domain, making them easily accessible and making sure that not only the pumping stations and the treatment works but the pipes connecting them all—which are not automatically clear —are always in the public domain and always easily accessible means that we are getting to a solution quicker. That is all this new clause is about. I am probably going to get a response saying, “We have to wait for the water commission”, in which case I would express some disappointment, because these things do not cost any money and they mean we move quicker to solve problems. I would really like a culture of, “If that’s a good idea, let’s do it”.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I understand the intent of new clause 11. The location and health of a water company’s assets is key to ensuring their maintenance and improvement. Under section 199 of the Water Industry Act, companies are required to keep records of the locations of many of their sewers, natural drains or disposal mains. Members of the public are able to request this information from water and sewerage companies in map form. Furthermore, the Environment Agency hosts a public register of information relating to all sites and assets permitted under the environmental permitting regulations. As of 1 January—this month—all water companies are required to publish discharge data from their storm overflows. Water UK’s centralised map shows that near real-time data for water companies across England in a publicly accessible format.

Clause 3 extends those requirements to publishing information on the frequency and duration of discharges from emergency overflows—again, I refer Members to the fact sheet that we have produced, which is available in the Committee Room. That is another big step towards information on all areas of the sewerage network that are discharging sewage being publicly available, creating world-leading transparency.

While I welcome the spirit with which the hon. Member for Witney makes his proposal, it would be impractical to map all the sewers installed pre-1989 in only 12 months as required by the new clause. To do so on that timescale would impact the £105 billion of investment and associated available resources to improve the sewer networks in price review 2024. Although I have no wish to revisit the debates that we had the other day, there is always a balance between the need for transparency and the need for action. In our debates on previous clauses, the hon. Member has mentioned his desire for action and asked why we do not move more quickly, and at the same time he expresses a desire to monitor and map more, which would impact our delivery of the required action.

The hon. Member will be aware that the independent commission—I am not just playing this with a straight bat; I think that is the best way to deal with the fundamental reset of the water industry—will look at transparency in the sector. However, I return to the point that there is always a balance to be struck between being as transparent as possible and getting on with fixing the problem. I said that I do not want to become the Minister who monitors everything and does not deal with the problem. I want to deal with the problems. The commission is the best avenue to explore the limitations of the current approach to asset mapping and the best way to achieve the outcomes the hon. Member is seeking, including, of course, being the best way to take advantage of new and innovative technologies.

While we agree that transparency in the sector is key to real change, the new clause would not build greatly on the existing requirements in section 199 of the Water Industry Act. As such, the Government cannot accept it.

Charlie Maynard (Liberal Democrat, Witney)

Frankly, it is pretty worrying that we do not have maps of sewer networks around the country. That is a pretty fundamental thing that we would want a water utility company to have. I acknowledge that they do not, though, and nowhere in the new clause am I proposing that the network is mapped. I am simply saying that we should take the existing maps and get them into the public domain by default. Currently, it is necessary to make a freedom of information request to access them.

I suggest that the Minister might be being a little disingenuous in saying, “We’re just being asked to monitor, but we want to act.” The Government can do both. It is not the case that if we are monitoring, we are not acting; there is plenty to be acting on and plenty to be monitoring. Also, when I hear, “If we put in flow monitors then we would need to cover the quality,” I think, “Yes—all of it. Let’s do it now.” It is not an either/or, and I do not like the occasional suggestion that there may be an either/or.

Having said all that, I beg to ask leave to withdraw the motion.

New Clause 12 - Environmental duties with respect to chalk streams

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move, That the clause be read a Second time.

Rupa Huq (Labour, Ealing Central and Acton)

With this it will be convenient to discuss new clause 27—Environmental duties with respect to national parks—

“After section 4 of the Water Industry Act 1991 insert—

‘4A Environmental duties with respect to national parks

(1) Where a relevant undertaker operates, or has any effect, on land within national parks or the Broads, that undertaker must—

(a) Secure and maintain “high ecological status” in the water in these areas by 2028;

(b) further the conservation and enhancement of wildlife and natural beauty;

(c) improve every storm overflow that discharges within these areas by 2028;

(d) reduce the load of total phosphorus discharged into freshwaters within these areas from relevant discharges by 2028 to at least 90% lower than the baseline as defined in Regulation 13(1) of the Waste Water Targets set under the Environment Targets (Water) (England) Regulations 2023.

(2) A relevant undertaker must be put into special administration, and not be eligible for a further licence, if it fails to—

(a) demonstrate adequate progress each year;

(b) meet the targets in subsection (1).

(3) Within one year of the day on which the Water (Special Measures) Act 2025 is passed, the Secretary of State must lay a report on the undertakers’ implementation of the environmental duties in subsections (1) and (2) before Parliament.

(4) Following the first report being published under subsection (3), a progress report on implementation must be included in the annual environment improvement plan, issued under section 8 of the Environment Act 2021.

(5) The Secretary of State must by regulations make provision requiring an undertaker to achieve bespoke objectives for specific iconic and the most culturally and ecologically significant waterways, including, where appropriate, complete removal of sewage discharge from the undertaker’s infrastructure.

(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.

(7) In this section—

“the Broads” has the same meaning as in the Norfolk and Suffolk Broads Act 1988;

“land” includes rivers, lakes, streams, estuarine and other waterways;

“High Ecological Status” means the classification of water bodies defined in Regulation 6 of The Water Environment (Water Framework Directive) (England and Wales) Regulations 2017.””

This new clause would require water companies to adhere to and deliver stronger environmental objectives and duties within National Parks and the Broads, so as to protect waters across National Parks from sewage. The new clause would give the Secretary of State regulation-making power to extend protections to specific bodies of water, such as Lake Windermere.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

New clause 12 is a short, and I hope consensual, measure relating to chalk streams, which we have already discussed, and new clause 27 deals more widely with the powers of national parks.

Some 85% of all the chalk streams on planet Earth are in the south of England. The impact that that has on the biodiversity of this part of the world—and more broadly—is hugely significant, creating pure, clean water from underground chalk aquifers and springs, which is ideal for wildlife to breed and thrive. They make a vital contribution to global biodiversity, providing natural habitats for many plants and animals. They will exist in many Members’ constituencies—not in mine, but, as a resident of planet Earth, I still reckon they are very important. I therefore think that they are worthy of specific attention and regulation in this Bill, so I commend new clause 12 to the Committee.

New clause 27 makes specific reference to powers regarding—and the importance of—national parks. It is my great privilege to represent a constituency with two of them: the dales and the lakes. We recognise the importance of natural national landscapes, which, of course, include areas of outstanding natural beauty, as they were known until relatively recently. We recognise many of the worthy inclusions and mentions in the Glover review for reform within our national parks—I remember meeting Julian Glover as he began that review. I agreed with much that he recommended, and was disappointed that the previous Government did so little with his recommendations.

Jerome Mayhew (Conservative, Broadland and Fakenham)

To save everyone’s time, I will not make a speech on this, but I am concerned about new clause 12 because it confers an absolute duty regarding chalk streams. I represent a constituency with several chalk streams, including the Stiffkey, which goes through Walsingham. The new clause says:

“Where a relevant undertaker operates, or has any effect on chalk streams, that undertaker must—”

so it is a direction—

“secure and maintain high ecological status of such chalk streams”.

We all want that outcome, but the problem is that water undertakers are not the only ones with negative impacts on chalk streams, yet the new clause gives them the requirement, which is absolute in its terms. We know that farming, and increasingly road detritus, also affects chalk streams, so how does the hon. Member square that circle?

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

The hon. Member makes a very good point, and we will later come to a new clause that we tabled about planning, because undoubtedly development and industrial activity also have an impact. However, this goes back to my original comment about the importance of singularity in regulation; while we recognise that the water companies may not be entirely responsible, we think that the regulator should have a responsibility across the piece.

However, the hon. Member makes a good point. We are not planning to push new clause 12 to a vote, but we are keen for the Minister to look at what we have said—and indeed what the hon. Member and his colleagues have said previously in Committee—about the importance of chalk streams, and for them to be included on the face of the Bill.

New clause 27 relates particularly to national parks. Every single lake, river and stream in England’s national parks—every single one—is polluted in one way or another. There has been no regard by water companies for national park status in this process. It is not that the lakes, rivers and waterways outside national parks do not matter—they absolutely do, and a vast part of my constituency is not in either of the national parks—but nevertheless, the lack of a higher bar for those in our national parks demands the question: what is the point in the national parks? We need to make sure that that stipulation is included. New clause 27 would therefore force water companies to specifically reduce pollution in those precious places.

To talk about my own community, United Utilities’ negligent treatment of Lake Windermere has been a standout example. Over the two years between 2021 and 2023, 165 hours of illegal sewage was pumped into Windermere, England’s largest lake and the centre of our hospitality and tourism economy, with 7 million visitors every year to that part of the Lake district alone, out of the 20 million who visit the lakes overall.

For the record, I should say that I still swim in Windermere and I do not think I am a complete lunatic, so it is not an open sewer by any means. Nevertheless, for many people, the reality is that so many of the 14—I think—assets that United Utilities owns on or around the tributaries of Windermere, or its connecting lakes, are not fit for purpose. I am thinking about the pumping station at Sawrey, for example, or the water treatment works at Ambleside. It is unconscionable that we have these assets, many of which are ageing and under-invested in, and the water company, United Utilities, failing to take action. Windermere is known globally and is part of Britain’s national brand. If its reputation becomes unfairly sullied, it will hit my constituents’ revenues.

Jerome Mayhew (Conservative, Broadland and Fakenham)

I am afraid I have to make the same point about new clause 27. Proposed new section 4A(1)(a) contains an absolute duty on the undertaker, which “must”—so this is a direction—secure and maintain high ecological status, and that has to be achieved within three years. I question the practicality of that.

I am also keen to highlight the fact that proposed new section 4A(7) includes the broads, which I am lucky enough to represent. The broads are affected by all sorts of factors: we have a high degree of recreational use, with boating as well as angling, and it is a farming environment, with grazing in the marshes, particularly down in the Halvergate marshes. Yes, Anglian Water has affected water quality negatively—as well as in some positive ways, to give it credit—but it would be a travesty to place an absolute duty on Anglian Water when it has only partial control of the answer, and over a three- year timeframe. Does the hon. Gentleman agree that that is unrealistic?

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I do not think it is unrealistic—we need to be ambitious—but I absolutely accept that there are multiple sources of pollution.

I promise to be brief in talking about my patch, which is not of interest to everybody. It is key to point out that pollution in Windermere generally comes from three sources. It is true that agricultural run-off is an issue but, sadly, the policies of this Government and the previous one, over a period of time, have effectively destocked the fells, meaning run-off has a massively reducing impact on Windermere and the broader catchment.

The bigger two problems are the 14 assets that United Utilities has either on or around the lake or its tributaries. There is also the best part of 2,000 septic tanks around the lake or its tributaries. Unlike septic tanks and, indeed, package treatment works in many rural communities, these are not scattered all over in the middle of nowhere; they are in a ring around the lake, most of them within yards of a mainline sewer. It is, then, entirely possible for the water companies, while gaining significant income benefit as a consequence, to mainline a massive proportion of the sources of sewage spillage into the lake, via the septic tanks and the package treatment works being brought into the system.

The new clause is of course slightly selfish, but it is really important that we seek to maintain national parks right across the country at the highest possible bar, and therefore make sure they set an example for others to follow. We will seek to press new clause 27 to a vote.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for Westmorland and Lonsdale for tabling the new clauses. It is always nice to have a conversation about the beautiful chalk streams and national parks in our country.

New clause 12 would have significant implications for existing legal frameworks and operational delivery, and would not necessarily result in environmental improvements for chalk streams, for which there are already established objectives to conserve and restore their ecological health. Under the water environment regulations, the default objective is to achieve good ecological status for all chalk streams in England. Good ecological status is a high standard that represents a thriving aquatic environment with only minor disturbances from natural conditions.

High ecological status equates to water that is almost entirely undisturbed from its natural conditions. If we set high ecological status as the objective for all chalk streams, overriding cost-benefit assessments, it would have wide-ranging impacts on future planning developments and human interaction with chalk streams, including by restricting farming and fishing. Any planning for housing developments that would have even a minor impact on the water quality of chalk streams would be restricted without impractical and disproportionately costly mitigation measures. The new clause would place achieving that demanding objective on water companies only, as the hon. Member for Broadland and Fakenham highlighted, regardless of the pressures that are actually impacting chalk streams. This would not allow for the consideration of technical feasibility or costs, which would ultimately be borne by water bill payers. The new clause would necessitate amendments to the water environment regulations and habitat regulations, creating complexity and difficult delivery implications.

The Government are carrying out our review to look at how we transform our water system and clean up our rivers, lakes and seas for good. This review is the appropriate vehicle for considering broader reforms, including to the overarching target for the water sector, which is why the Government will not accept new clause 12. However, I highlight that I recognise the intent behind it.

I thank the hon. Member for Westmorland and Lonsdale for tabling new clause 27. The Government agree that national parks form a vital part of our environmental heritage and must be protected. I have also been known to go for a swim in Windermere occasionally, so maybe I will bump into the hon. Gentleman there one summer. The Government have committed to strengthening the statutory purposes of national parks and national landscapes, giving them a clear mandate to recover nature. We will also strengthen the role that public bodies, including water companies, must play in delivering better outcomes for nature, water, climate and access to nature in national parks through new regulation.

For example, the Government will seek to use powers in the Levelling-up and Regeneration Act 2023 to ensure that relevant authorities, including water companies, deliver better outcomes in protected landscapes. Regulations made under powers in the 2023 Act will provide a holistic approach to conserving and enhancing our nation’s treasured protected landscapes. This is preferable to making piecemeal changes through several different pieces of legislation.

The Government are absolutely committed to ensuring significant reductions in sewage discharges in a way that ensures customers are not faced with unmanageable increases in their water bills. For example, through the storm overflows discharge reduction plan, we require the elimination of ecological harm from sewage discharges, and we require water companies to prioritise action at high-priority sites, such as sites of special scientific interest and bathing waters. Illegal sewage discharges are not permissible in any circumstances or at any locations—by their nature, they are illegal, including in the national parks. I want to assure the Committee that, where evidence of illegal action is identified, the regulators will not hesitate to take action. I would also like to assure the hon. Member for Westmorland and Lonsdale that the 2024 price review package will include allowances to fund projects to reduce pollution in Lake Windermere. The storm overflows discharge reduction plan also front-loads action in particularly important and sensitive areas, such as Lake Windermere.

New clause 27 also puts in place several other requirements, which I will turn to now. It suggests a special administration and licensed eligibility provision that means that, where water companies fail to comply with the other requirements of the new clause, or where they cannot demonstrate adequate progress in reaching the requirement, they must be put into special administration. This would be inappropriate and does not meet the high bar for use of a special administration regime. That can only be initiated from a performance perspective if the company can no longer fulfil its principal statutory duties or where there have been, or are likely to be, serious breaches of an enforcement order.

Like new clause 12, new clause 27 requires sites to maintain “high ecological status”. I have already spoken about the high standard that “good ecological status” represents, but I will touch on it further. Surface waters with good ecological status support a diverse group of aquatic invertebrates, fish, mammals and birds, and therefore I want to reassure the Committee that “good ecological status” is in fact a very high standard to achieve.

Jerome Mayhew (Conservative, Broadland and Fakenham)

I would like the Minister’s comments on the issue that we have, and I am focusing primarily on the Norfolk broads, of which I represent a good chunk. There is the requirement to make a mandatory obligation on the water undertaker to ensure “high ecological status”, which is above “good ecological status”—that is the point the Minister is making. Does she agree that, while they are a primary input into the quality of the water in the Norfolk broads, they are not the only influencer? While the intention to create and encourage high ecological status in the broads is a very good one, and it is one that I share, does the Minister agree that the drafting of this new clause is not appropriate?

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

The hon. Gentleman is right to highlight that the pollution caused in the Norfolk broads and in many other areas does not come from water companies alone. As has been discussed, it comes from the environment, road run-off and various other places. “High ecological status”, as we have stated, could involve not being able to fish in those waters at all, which I know is a recreational activity in his area. It may also restrict planning for housing developments with any minor effects on the water quality of water bodies in national parks. The Government therefore cannot accept either new clause, although I recognise the intention behind them. I hope that the hon. Gentleman feels able not to press both.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

In short, I am happy not to push new clause 12 to a vote now, nor will I seek to push new clause 27 to a vote when we get to that stage. I beg to ask leave to withdraw the motion.

New Clause 13 - Guidance on poly- and perfluorinated alkyl substances

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move, That the clause be read a Second time.

New clauses 13 and 14 are connected, so with the Chair’s permission, I might speak to both of them.

Rupa Huq (Labour, Ealing Central and Acton)

Yes, that would be fine.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

Thank you—I do not want to detain the Committee any longer than I need to. The new clauses are about a vexing and serious issue: the presence of polyfluorinated and perfluorinated alkyl substances in our waterways and in our drinking water, in particular. I pay tribute to my hon. Friend the Member for Twickenham (Munira Wilson) for championing this issue in this place and outside it.

The new clause attempts to raise the existing guidance from the Drinking Water Inspectorate on PFAS levels in drinking water to a statutory level; that is the key point. The Bill seeks to increase regulatory power over water companies, and the new clause will increase the Drinking Water Inspectorate’s power to enforce the guidance regarding PFAS. There is currently no legal limit on the amount of PFAS present in our drinking water. There is only guidance, even though the Environment Agency and the Health and Safety Executive have both recommended that there should be a legal limit.

New clause 13 would require water companies to prioritise and take a proactive stance on limiting PFAS in drinking water. Currently, if a water company were to breach PFAS guidance, its regulatory compliance score would not be affected as it would if, for example, lead was found in its water. This would encourage them to invest in treating water to remove PFAS. This is an important first step in prompting the Government to create a fully-fledged chemical strategy to deal with chemical pollutions of all kinds, starting with the most direct threat to human health, which is the direct consumption of PFAS through drinking water. PFAS are toxic, they are forever and they are very pervasive. Links have been found between PFAS chemicals and a host of health issues, such as, but not limited to, cancer, thyroid disease, fertility issues, lowered birth weight, weakened bones in children and immune resistance to vaccinations.

New clause 14 would put the duty on the water companies to take responsibility for the reduction and prevention of PFAS chemicals in water systems, ensuring that each water company is responsible.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for proposing new clauses 13 and 14 on this incredibly important issue, and for highlighting the importance of PFAS monitoring. I want to reassure everybody that the quality of drinking water in England is exceptionally high and among the best in the world. It is important to me that it remains that way.

Across Government, we are working to assess PFAS levels occurring in the environment, as well as their sources and potential risks, to inform future policy and regulatory approaches, safeguard the current high drinking water quality and ensure our regulations remain fit for purpose. Water companies have a statutory obligation under the Water Supply (Water Quality) Regulations 2016 to carry out risk assessments to identify anything that could pose a risk to health or cause the water supplier to be unwholesome. That includes the risk of PFAS.

I will explain which PFAS are tested for in drinking water. The Drinking Water Inspectorate issued a series of information letters to water companies to set out a risk-assessment methodology and associated monitoring strategies for up to 48 individual PFAS compounds. The guideline values of PFOS, or perfluorooctane sulfonic acid, and PFOA, or perfluorooctanoic acid, are agreed with the UK Health Security Agency, and have been applied to 48 individual PFAS. The DWI guidance will be reviewed and updated where necessary.

The Drinking Water Inspectorate has provided guidance on PFAS to water companies since 2007 and, as I explained, that is regularly updated as new research emerges. In July 2024, DEFRA announced a rapid review of the environmental improvement plan to deliver on our legally binding targets to save nature. That includes how best to manage chemicals, including the risks posed by PFAS, and we are working closely with the DWI on all matters, including PFAS.

I reassure the hon. Member for Westmorland and Lonsdale that the Water Industry Act 1991 already provides the necessary powers to amend existing regulations to deal expressly with PFAS, should the Government wish to do so. I will have a meeting with his hon. Friend, the hon. Member for Twickenham (Munira Wilson), on this issue. I hope that the hon. Gentleman is reassured that this new clause is not suitable for the Bill, so I ask him to withdraw it.

New clause 14 focuses on chemical contaminants entering our waterways. I agree with the hon. Member for Westmorland and Lonsdale about the importance of the issue, which is why, as I announced, we will have the rapid review of the environmental improvement plan to deliver on our targets to restore nature. That includes looking carefully at the risks posed by PFAS. The review will consider and set out effective measures to mitigate harmful chemical substances entering our water through the environment. Through the chemical investigations programme, we are working with the water industry to understand how levels of contaminants in treated waste water affect our water environment. The programme will provide valuable information to understand the effectiveness of different measures to tackle chemical contamination of our rivers.

Significant costs are associated with end-of-pipe technologies at sewage treatment works to manage the more challenging chemicals, such as PFAS. We therefore need to prevent contaminants entering the water system in the first place, before they get to the waste water treatment works, where the cost for treatment will be unfairly borne by water customers, rather than the polluters. Work continues across Government to help us to assess the levels of PFAS occurring in the environment, their sources and the potential risks, so that those can inform future policy and regulatory approaches to safeguard our high drinking water quality and to ensure that regulations remain fit for purpose.

The DWI expects water companies to plan to reduce PFAS concentrations in treated water progressively by implementing a reactive and systematic risk-reduction strategy. That is why we need to need to prevent them entering the water in the first place. I hope that the hon. Member is reassured by the actions that we are taking and will not press new clause 14.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I am substantially reassured that the Minister is taking this issue seriously, and I am grateful that she is to meet my hon. Friend the Member for Twickenham, who has championed it so well. All the same, while I do not agree, I accept the Minister’s point about the way in which we are doing this—which, I guess, is contained in new clause 14, so I will not press that to a vote—but new clause 13 simply says what the Health and Safety Executive and the Environment Agency are already saying, which is that those chemicals are deeply dangerous and that the restrictions on them should therefore be moved from guidance to a statutory level. That ought to be a no-brainer, so we will press that new clause to a vote.

New Clause 15 - Citizen science

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move, That the clause be read a Second time.

I will try to be brief, I promise. The new clause is based on the fact that we seriously approve of the Government’s approach to monitoring. We want the regulatory bodies to be well equipped and resourced to be able to hold water companies and other potential polluters to account. But the Government have made a clear decision, of which I totally approve, to lionise and put front and centre citizen science and voluntary groups around the country—groups such as Windrush Against Sewage Pollution, Save Windermere in my constituency, the Clean River Kent group and the Rivers Trusts in Eden and South Lakeland. These are wonderful people, pretty much all of them acting in a voluntary capacity. The groups contain lots of incredibly clever, bright people who are passionate about our environment.

The Government are doing something we approve of by seeking to deploy and mobilise people in their communities. The new clause is about trying to make sure that we equip them, underpin what they do and provide resource to support them, and that the Government use some resource to proactively look to fill in the gaps. We are simply saying that we approve of the mobilisation of citizen science across the country to hold water companies to account through use of the real-time database and a variety of other tools. But if we are going to rely on a group of people, let us support them. We will seek to push this to a vote, because we think it is a central part of what the Bill should aim to achieve.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Gentleman for tabling new clause 15. We fully support greater involvement of citizen science to hold water companies to account. I thank them for all the work that they have done in this area up and down our country. Local people know their rivers best, and their campaigns on pollution issues have been crucial in bringing the scale of the issues to light.

The Bill already includes several amendments to support transparency to make it easier to scrutinise water companies. Clause 2 will enable the public to scrutinise the measures that water companies are taking to reduce pollution incidents. Clause 3 will make information on discharges from emergency overflows available in near real time. This data, in addition to the near real-time information already available on storm overflow discharges, will be provided in a way that will enable citizens to identify trends and key issues. That will supplement the significant information that the Environment Agency already publishes.

The Environment Agency also operates a 24-hour environmental incident hotline to enable the public to report incidents that they observe in their local area. The Environment Agency shares the enthusiasm and values the expertise and local knowledge of citizen scientists. It has recently funded an internal project supporting citizen science, which will run until March 2025.

I welcome the hon. Gentleman’s approval of the Government’s work on this issue. The question is whether we require primary legislation to continue doing something we are already doing successfully. This project, along with many others that are being supported by the Government or the Environment Agency, is considering how to facilitate better engagement with citizen scientists. The Government believe that the existing measures are more effective for supporting citizen science than creating a fixed legislative duty on the Secretary of State. We are already doing work in this area, so we will not support the new clause.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I am grateful for the Minister’s remarks, but we think that seeking to mobilise thousands of people around the country is so central to the ethos of the Bill that we should also seek to resource them and proactively seek to fill in the gaps, where they exist, so that every community has this level of scrutiny. We will press the new clause to a vote.

New Clause 17 - Introduction of single social tariff

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move, That the clause be read a Second time.

Water bill poverty is a reality, and many people will require greater water use because of disability, age or health conditions. Although WaterSure benefits exist, they are patchy and are something of a postcode lottery. Which benefits a person may receive under WaterSure depends on supplier and catchment, and whether someone qualifies depends on which water company they get water from. That is not right. There should be a single social tariff that is applicable and understandable for everyone. A postcode lottery should not dictate whether a person gets the support they may need, and which water company someone lives under should not dictate whether they can afford their bills.

Some water companies require three or four pieces of evidence and some just a quick assessment of finances, and the savings range from 15% to 90% off a bill. We would bring that under one simple tariff. We have certainly heard Government Members regularly talk about the value and importance of such a measure, and we simply want to put it on the face of the Bill. A unified and universal social tariff is about basic social justice. It would help those people for whom paying water bills is most difficult, for a variety of reasons—health and disability reasons, as well as financial ones. This is something that the Government should accept, or else we will seek to press it to a vote.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for tabling new clause 17. It is clear that consumers are concerned about their bills, and this Government want to do everything they can to help and support people who are struggling, particularly given that water bills are due to rise following Ofwat’s final determinations. Although this Government do not consider it suitable to adopt the new clause at this time, we will continue to consider all measures available to best support vulnerable customers, and we are exploring options to improve social tariff arrangements and improve fairness and consistency in who is eligible for support and in the levels of assistance provided.

There are already customer assistance schemes in place. WaterSure caps water and sewerage bills for vulnerable customers who have the higher essential water use requirement for family or health reasons. Under the scheme, £66 million of support was provided to 230,000 households in ’23-24, with an average bill discount of £286. That sits alongside debt measures, water efficiency measures and company social tariffs, which are all targeted at supporting customers who are struggling to pay. Company social tariffs, which water companies design themselves and offer to customers who are struggling to afford their water bills, are forecast to provide an average of £640 million a year in support between 2025 and 2030.

Prior to the introduction of any new support scheme, in-depth research and analysis must be completed to ensure a properly designed policy. Therefore, the Government are continuing to work with the water industry to explore options to improve affordability arrangements, including by holding the sector accountable for its public commitment to end water poverty by 2030. For that reason, I ask the hon. Member for Westmorland and Lonsdale to withdraw new clause 17.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

In-depth analysis is not going to tell us anything other than that there is massive inconsistency across the country. Of course, WaterSure provides benefits, but it is different depending on where someone lives. The benefits received by someone living in a Yorkshire Water area, United Utilities or Northumbrian Water area will differ, as will the qualifying criteria. That means that some people in poverty, and some people with serious disabilities or health needs, who therefore have higher water usage requirements, will be hit by higher bills simply because of the lack of a single social tariff. We think that the new clause is important to ensuring social justice and helping those most in need in our communities, and therefore that it is very important to put it to the vote.

New Clause 19 - Ofwat responsibility for the financial stability of water companies

Charlie Maynard (Liberal Democrat, Witney)

I beg to move, That the clause be read a Second time.

Rupa Huq (Labour, Ealing Central and Acton)

With this it will be convenient to discuss new clause 23—Ofwat to publish guidance on debt levels after administration—

“In section 2 of the Water Industry Act 1991, after subsection (2D) insert—

‘(2DZA) For the purposes of ensuring that relevant undertakers are able to finance the proper carrying out of their functions under subsection (2A)(c), the Authority must establish guidelines to be followed by relevant undertakers who have been in special administration.

(2DZB) Guidelines produced under subsection (2DZA) must—

(a) set out a maximum level of debt which can be accrued by the undertaker;

(b) set out a process for agreeing capital expenditure necessary for service improvements, bill increases, and changes to operating costs while the undertaker is subject to the Special Administration Regime;

(c) state the penalties which will be imposed for breaches of such guidelines, which may include –

(i) financial penalties;

(ii) prohibitions on the payment of dividends or other bonuses; or

(iii) such other special measures as the Authority deems appropriate.’”

Charlie Maynard (Liberal Democrat, Witney)

I will speak first to new clause 19, which has three parts. Proposed new section (2DZA), which I will cover very quickly, essentially ensures the financial stability of water or sewerage undertakers. I think we discussed that at length in the debate on new clause 4, which I will not rehash, as I think we all know each other’s views.

Proposed new section (2DZB) has two subsections, (a) and (b). Subsection (a) is

“a prohibition on water or sewerage undertakers having offshore holding companies”.

Why would a UK-regulated water company need an offshore holding company? Maybe to dodge some tax? Maybe to make it as untransparent as possible? I would like a straight answer as to why we are not going to kill this possibility off today. Do we really need to push this out another six, maybe 12 or maybe 24 months—until maybe never—with the water commission? I do not know. I think each of us could just find our way to saying that offshore holding companies are not good for our rivers, our citizens or our country. I really hope we get there.

It is getting a bit late, but there is something I would really like Members to engage their brains on. It is a difficult and complicated subject, but it is the key to understanding what is going wrong with our water companies. It is called regulated capital value. What is in proposed new section (2DZB)(b)? It would introduce

“a requirement that the Regulated Capital Value for each undertaker is annually reconciled against the market values of the undertaker’s equity and debt.”

What on earth is regulated capital value? The key thing to remember is that it decides how much money the water companies make, so a higher regulated capital value is good for water companies.

The bizarre thing is that regulated capital value has not really been a proxy for enterprise value, which basically means the equity value of the company—what the shareholders’ value of the company is worth—plus the net debt. That was set up—this is really one of the original sins—back in the mists of time, around 1989 and beyond, when the companies were originally privatised. It has been carried forward every year: “Take last year’s, and add a bit for inflation and a bit for capex. Never, never, never reconcile it with reality.” That is what has gone on for decades.

Now we have this thing called regulated capital value, which is the critical thing the water utility companies are focused on: “This is how we make money, so we want this number as big as possible.” What we are advocating here is taking that apart, because of the reality on the ground. I will take Thames Water as my usual guinea pig. Many, many of Thames Water’s equity shareholders have declared that their holding in Thames Water has no value. That includes OMERS—the Ontario Municipal Employees Retirement System—and the UK’s Universities Superannuation Scheme, and I think the Abu Dhabi Investment Authority may have done it as well. They have said, “Our equity is toast. It’s written off.”

The debt is not that hard to calculate either, because people can just look at what Thames Water is trading at; these are bonds, and people can see what discounts they are trading at. People can add that up, and they have a number that is much, much smaller than the regulated capital value of Thames Water today. But if it is a water company or Ofwat, they say, “Let’s just put a big pair of mufflers on and ignore that fact,” because it is safer to be in fantasyland.

This matters because, if that is the case, it is unreasonable to expect consumers to be paying prices that are artificially inflated purely to compensate investors, whether they are debt or equity investors, for the cost of their poor historical decisions. I believe that what Ofwat has just done by sticking a 35% price rise to all the customers in the Thames Water catchment is basically bail out, or attempt to bail out, the existing shareholders and particularly the lenders to Thames Water. That is wrong, and we should be doing everything in our power to stop it.

It is ridiculous that we are relying on the concept of RCV, which is found on calculations done more than 30 years ago, bears no relation to reality and is never reconciled against the company’s balance sheets. That is one thing. Secondly, the continued use of an inflated RCV works to the advantage of investors and lenders at the expense of consumers—bill payers—and enables lenders to avoid the economic consequences of their poor lending decisions. In crude terms, consumers are bailing out the banks. I sincerely doubt the balance sheet strength of the water companies, as the asset lives are entirely unrealistic, but they have enabled water companies to claim sufficient financial strength to be able to pay excessive dividends and management bonuses.

I am really keen to highlight another thing. Again, I feel a little sorry to bring this on the Minister, but I am going to do it. If we look at the asset depreciation rates of these water companies, they are the biggest I have ever seen in 25 years in finance. Let us say that someone has a waste water network asset—people might immediately think of Bazalgette’s great big pipe, which he built 150 years ago. They might think, “Well, that is pretty good for purpose,” and perhaps they do not need to depreciate it over more than 150 years. But let us think about places in my patch, such as Aston and Standlake, where pipes were put in 30, 50 or 70 years ago and are leaking hand over fist. We have half a million hours of sewage dumping, but do you know what the depreciation rate on that asset is, Dr Huq? It is not 20 years, 30 years, 40 years or 50 years. It is 150 years.

Jerome Mayhew (Conservative, Broadland and Fakenham)

This is a genuinely interesting point. I know it is late, but I would be grateful if the hon. Member could expand in further detail. While he is referencing regulated capital value and the difference between what is on the sheet and what is reality, could he explain in a bit more detail, for the benefit of the Committee, what that means in reality? If there were to be a rebase of regulated capital value, what would be the practical impact of that?

Charlie Maynard (Liberal Democrat, Witney)

I question what value regulated capital value, given how completely out of whack it is with reality, is bringing to the table. I do not have all the answers, but I question whether this has any utility to the conversation. What is happening here is that a business is generating £1.2 billion of cash flows, and it has this enormous balance sheet and this enormous regulated capital value. Because of those essentially false premises—I believe that we do not actually have assets of that value—regulated capital value is essentially a figment. We are grappling with things that have no basis, and we would do well to reconcile and to look at the facts—at what these assets are actually worth—and then to build out from there.

Jerome Mayhew (Conservative, Broadland and Fakenham)

One possible reason why regulated capital value is important is that the assessment of whether bills are reasonable or not relates—in part, at least—to what is considered to be a reasonable return on capital. Does the hon. Member agree that if one’s regulated capital value has depreciated to zero, there might be an adverse knock-on impact on what is considered a reasonable bill, to take account of the debt and the capital investment? Does he think that that might be something to do with it?

Charlie Maynard (Liberal Democrat, Witney)

The whole thing is reverse engineered—I am completely in agreement on that—and that is not necessary or useful in terms of where we are getting to, and that is causing a lot of the trouble. I would like to find a way out of that, and I would really recommend that the water commission digs into this to find a way out. I am on the Business and Trade Committee and I will be asking the Financial Reporting Council, which oversees the accounting body, to ask these accounting firms whether they actually think those numbers—those incredibly slow depreciation periods of 150 years—are valid and, if so, why.

Jerome Mayhew (Conservative, Broadland and Fakenham)

I am grateful to the hon. Member for allowing me another intervention, this time on proposed new subsection (2DZB)(a), which refers to

“a prohibition on water or sewerage undertakers having offshore holding companies”.

He referenced some of the international investors who have holdings in Thames Water, and perhaps in the majority of the other water companies. Access to international markets is very important for raising investment into our water utilities. Does he accept that using offshore holding companies might be a mechanism that allows for easier transfer of funds, easier investment and easier access to international finance, and may therefore have a benign rationale? We always assume that offshore holding companies are somehow suspicious, or that their motivation is tax avoidance, and I believe that the hon. Member referenced that earlier. That might be the case—in which case, they should not be encouraged—but with his 25 years’ experience in finance, which he referenced, does he think that there is an argument for saying that offshore holding companies make it easier to access international investment?

Charlie Maynard (Liberal Democrat, Witney)

I have the name of one here: Thames Water Utilities Cayman Finance Holdings Ltd. Why Cayman? If I say “Cayman”, people say “tax haven”. That is why it is there. We should be doing our best to stop that. Last I looked, London was still a financial capital, and equity and debt could still be raised in this country, and I sincerely hope that remains the case. So I do not see a good reason to have holding companies offshore. Hon. Members might be happy to hear that that was all I wanted to say on new clause 19.

New clause 23 is also being considered in this tranche, and I will highlight proposed new subsection (2DZB)(b), which refers to

“a process for agreeing capital expenditure necessary for service improvements, bill increases, and changes to operating costs while the undertaker is subject to the Special Administration Regime”.

We have to spend a huge amount of money on our water utility companies, because they have not been spending enough over the last decade or two. When a special administrator is appointed in such instances, the goal is to ensure that the special administrator takes that future spend into account in considering how much debt needs to be cut. We do not want to come out of special administration with debt that is still high, which will prevent the investments from being made that will be required over the next. That is the goal of the new clause.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Member for Westmorland and Lonsdale for the intent behind new clause 19. As highlighted, it seems in parts to contradict new clause 18, which was also tabled in his name.

It is important to highlight that Ofwat already has a core duty under section 2 of the Water Industry Act 1991 to ensure that water companies are able to finance the proper carrying out of their statutory obligations. Ofwat already monitors information it receives about companies and their financial positions on an ongoing basis. That includes carrying out a detailed review of the financial information published by companies in annual performance reports, statutory accounts, interim accounts, investor reports and other sources. Ofwat also directly engages with companies where it sees an increased level of risk. Additionally, Ofwat has recently updated water company licences to require companies to take account of service delivery for customers and the environment, as well as financial resilience when deciding whether to pay a dividend.

More broadly, the independent commission into the water industry will look at long-term, wider reform of the water sector, as I have mentioned. Company financial structures are one of a number of areas that could be explored under the commission, and we do not want to pre-empt the outcome of the commission through this new clause. The former deputy governor of the Bank of England, Sir Jon Cunliffe, chairs the commission. As mentioned, he has decades of financial, investor and regulatory experience. His appointment demonstrates the Government’s ambition to fix the foundations of the industry. As I have mentioned previously, there will be a call for evidence, and the hon. Member will be able to make his points to Sir Jon Cunliffe and the commission. Given the existing monitoring of the financial resilience of the sector and the forthcoming recommendations of the independent commission, we do not believe that the new clause is appropriate, and I ask the hon. Member to withdraw it.

Turning to new clause 23, which was also tabled by the hon. Member for Westmorland and Lonsdale, a special administration regime enables a company that provides vital public services—water, energy or rail—to be put into administration in certain circumstances to ensure that the public service will continue to be provided pending rescue, via a means such as debt restructuring or transfer, via a sale, to new owners. There is no need for a company exiting a SAR to be placed under an enhanced regime regarding its debt levels. Water companies are allowed to raise debt to fund the delivery of their services, and it is for companies to decide their financial structures. I will resist the urge to repeat my previous comments about the water commission looking at the financial structures of all the water companies, and I hope the hon. Member will take what I outlined previously as read.

In relation to capital expenditure during a SAR, it is not necessary to establish a statutory process for agreeing that expenditure, as that would be agreed under a court-appointed special administrator in the lead-up to a SAR. The Government can provide funding support to a special administrator. Any company under a SAR will still be subjected to the same regulatory regime and expected to meet its statutory obligations.

I hope the hon. Member understands why we cannot accept his new clauses, but I repeat the offer made: he will be able to talk to Sir Jon Cunliffe and present to him the evidence he has just presented to the Committee, so that he can consider it as part of the wider evidence gathering. I therefore ask the hon. Member not to press his new clauses.

Charlie Maynard (Liberal Democrat, Witney)

It is very kind of the Minister to have so much faith in, and be so charitable towards, Ofwat, given its record over the last decade or two, particularly with regard to its management of water companies’ financials. We will not press new clause 23, but would like to call a vote on new clause 19.

New Clause 20 - Review of the water industry

New Clause 21 - Review of price review process

Charlie Maynard (Liberal Democrat, Witney)

I beg to move, That the clause be read a Second time.

Rupa Huq (Labour, Ealing Central and Acton)

With this it will be convenient to discuss new clause 29—Ofwat consideration of pollution targets for price reviews—

“(1) The Water Industry Act 2011 is amended as follows.

(2) After section 17I insert—

‘

When carrying out a periodic review for the purpose of setting a Price Control in respect of one or more relevant undertakers, the Authority must have regard to the performance of the relevant undertaker or undertakers against pollution targets across the previous five years.’”

Charlie Maynard (Liberal Democrat, Witney)

I will be brief. We just want to highlight the five-year price review and the shoehorning in of that time period. It might have worked for Lenin—maybe not—but we do not think it works well in the water sector, so we want to see whether we can release ourselves from it. We will come to new clause 35 later, but in certain situations we will all be better off if we look over a longer time period. We have some really big problems and we need to think about reducing them not just over the next five years, but over a 10 or 15-year period. We need to work towards some really big fixes over a longer period. If we are always locked into these five-year cycles, we are not serving ourselves well. That is the point of new clause 21.

New clause 29 states that

“the Authority must have regard to the performance of the relevant undertaker or undertakers against pollution targets across the previous five years.”

At the moment, how companies do is not very well linked to their reward. Most of the time, with water companies, everybody is thinking about sticks—I certainly am—but we ought to think a little about carrots as well. Let us say that ultimately we do good things such as setting pollution reduction targets. If companies beat those targets, we should work towards a solution whereby they do well out of that. They could have a carrot as a reward for doing well, as opposed to endlessly being given the stick. That is the point of new clause 29. We will not push either new clause to a vote.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Members for Witney and for Westmorland and Lonsdale for the intention behind their new clauses. The water sector is facing multiple challenges and growing pressures. Resolving them will require transformational change.

The Government agree that it is crucial to conduct a fundamental review of the water industry regulatory system. We want to ensure that we have a system that supports strategic planning and investment, with fairness to customers and environmental improvement at its core. I reassure the hon. Member for Witney that such a review is already under way—I might have mentioned this once or twice before—through the independent commission, led by Sir Jon Cunliffe. That comprehensive review is addressing the three elements that the new clause raises: planning, financing and investment. It is taking a holistic approach to assessing the system, and it will make recommendations to ensure that the water sector is better equipped to ensure clean rivers, lakes and seas and a sustainable water supply for the future.

The commission will report to the Government by the second quarter of 2025, ahead of the timeframe recommended in the new clause. I trust that the hon. Member for Witney is reassured that the requirements of the new clause are already being addressed through the work of the independent commission.

On new clause 29, which was also tabled by the hon. Members for Westmorland and Lonsdale and for Witney, I reassure them that the Government are fully aware of the scale of damage that pollution is causing to our waterways. We are committed to working with the water industry regulators to address that.

As a regulator, Ofwat has a range of primary duties, including ensuring that companies properly carry out their functions and can finance the delivery of their statutory obligations, including environmental obligations. Ofwat sets the total spending envelope for companies through its price review process and it reviews company business plans to ensure compliance with statutory obligations. I am pleased to inform the Committee that Ofwat published its final determinations for the 2024 price review on 19 December, which included confirmation of £104 billion-worth of expenditure over the next five years. That is the highest level of investment in the water sector since privatisation and will fund reducing the number of spills from storm overflows by 45% through upgrading 2,800 storm overflows.

In addition, companies will improve river water quality by improving more than 1,700 waste water treatment works. Furthermore, Ofwat has increased the number of outcome delivery incentives against which companies must deliver, including targets on reducing serious pollution incidents, such as a reduction in storm overflows and operational greenhouse gas emissions. That means that serious pollution incidents will lead to clear and robust financial penalties for companies. I trust that the hon. Member for Witney is reassured that his new clause is not required, as pollution targets are already closely factored into the current price review model, and I ask him not to press it.

Charlie Maynard (Liberal Democrat, Witney)

I beg to ask leave to withdraw the motion.

New Clause 22 - Prohibition on bail-out of water company shareholders and creditors

Charlie Maynard (Liberal Democrat, Witney)

I beg to move, That the clause be read a Second time.

We have covered this already, so I will be brief. I highlight subsection (2):

“The special administrator of a water company may reduce the debts owed by the regulated entity to its creditors by up to 100 per cent, taking into account the future forecast expenditure over the short, medium and long term and subject to the administrator’s confidence in the company’s ability to accommodate this spending.”

We have already discussed this. I am not going to go through it further, and I am not going to push it to a vote, so I will leave it at that.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Members for Westmorland and Lonsdale and for Witney for tabling new clause 22. As the hon. Member for Witney says, we have already had a debate on this issue. I hoped that we had made the situation quite clear about what the special administration regime is and what it is not, but here we go again.

I must reject the new clause, because it would jeopardise the main purpose of the water special administration regime: the continued provision of vital public services. The role of a special administrator does not include a power to cancel debt, and the purpose of the administration is not to bail out water company creditors or shareholders. The new clause is therefore unnecessary. It would divert from long-established insolvency principles of treating creditors equally according to their rights as commercial entities. When a water company enters special administration, creditors are unable to enforce their debt repayments unless they seek leave of the court or receive permission from the special administrator. When a water company exits from special administration either by rescue, such as debt restructuring, or by transfer, such as a sale, the special administrator determines the level of repayment to credits. That will be calculated according to the statutory order of priority.

It is very unlikely that all debt would be repaid at the end of a special administration, because of the order in which payments are required to be made. Debts can be cancelled only according to a restructuring plan or under court supervision. The Government do not directly or indirectly make any decisions relating to the exact quantity of debt recouped by creditors or equity recouped by shareholders.

I must reject the new clause, because the changes that we are making align the water industry special administration regime with regimes in other sectors. We do not intend to alter the regime’s relationship with the existing framework of insolvency legislation.

Charlie Maynard (Liberal Democrat, Witney)

I beg to ask leave to withdraw the motion.

New Clause 26 - Rules about performance-related pay

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I beg to move, That the clause be read a Second time.

I do not really want to press this new clause to a vote, but we tabled it because my noble Friend Lady Bakewell withdrew it in the Lords after being given assurances by the noble Baroness, Lady Hayman, for whom I have enormous respect and of whom I think very highly. It seeks to ban bonuses for senior company executives who have been found guilty of a category 1 or 2 discharge. It would prevent any loopholes such as pay rises and share options that might enable bonuses to be paid under those circumstances.

From the Dispatch Box in the other place, Baroness Hayman said:

“However, we are very aware that water companies need to attract investment so, as outlined in Ofwat’s consultation, the circumstances under which performance-related pay bans are being proposed represent very serious failures by a company. I reassure the noble Baroness, Lady Bakewell of Hardington Mandeville, that this includes instances of criminal convictions, credit ratings falling below investment grade and Ofwat’s proposed metric for bonuses to be prohibited if a company has had a serious category 1 or 2 pollution incident in the preceding calendar year…I would like to be clear with all noble Lords that we are not asking companies to meet any higher or new standard than that which is already expected of them.”—[Official Report, House of Lords, 20 November 2024; Vol. 841, c. 247.]

We were grateful for that assurance, but nothing of that sort has appeared in the Bill since. Will the Minister give me some reassurance as to why we should not press the new clause to a vote? I do not see anything in writing that gives us confidence, other than the words of the noble Baroness.

Emma Hardy (Labour, Kingston upon Hull West and Haltemprice)

I thank the hon. Gentleman for tabling new clause 26. The Government agree that we need to rebuild trust in the water sector and that executives should be firmly held to account for companies’ serious failures to meet environmental standards. That is why clause 1 will give Ofwat new powers to issue rules on remuneration and governance. The legislation requires Ofwat to set rules that make the payment of bonuses contingent on companies achieving high environmental standards. It is more appropriate for Ofwat, as the independent regulator, to determine the performance metrics to be applied when setting the rules for performance-related pay.

As outlined in the initial policy consultation, Ofwat is currently considering prohibiting bonuses where companies have had a serious category 1 or 2 pollution incident in the preceding calendar year. That is not on the face of the Bill, but it is very clearly in Ofwat’s consultation. It is looking to consult on prohibiting bonuses after a category 1 or 2 pollution incident, as my noble Friend outlined. That provides an early indication of the direction of travel on the environment metric.

Ofwat would be able to use its direction-giving power and wider enforcement framework to hold companies to account where it has reason to believe that they are in breach of the rules. However, banning bonuses, even in cases of unwanted but legal spills, would effectively ban bonuses for all companies. That could unnecessarily threaten the sector’s ability to attract and retain talent. I refer the hon. Member for Westmorland and Lonsdale to the consultation that Ofwat has launched so that he can see for himself the pollution metric that I have mentioned. On that basis, I hope that he feels able to withdraw new clause 26.

Tim Farron (Liberal Democrat, Westmorland and Lonsdale)

I am reassured to a large degree by what the Minister says, but I am concerned that it is not on the face of the Bill. Simply handing this over to Ofwat, given its track record, does not fill me with confidence. We will reserve our position on this one—we may potentially talk about it further on Report—but we will not press new clause 26 to a vote. I beg to ask leave to withdraw the motion.

Written evidence reported to the House