Baroness Hayman of Ullock (Lab)

My Lords, I thank the noble Lord, Lord Roborough, for his interest in Clauses 10 and 11 and also thank the noble Baroness, Lady Bakewell, for her support for them standing part. A special administration regime—or SAR—enables a company that provides vital public services to be put into administration in certain circumstances to ensure that the public service will continue to be provided pending rescue or transfer to new owners. An SAR would be required only when there is evidence that a company is insolvent or in serious breach of its statutory duties. It is the ultimate enforcement tool in Ofwat’s regulatory toolkit and, as such, as I said in the last debate, the bar is set high. Although government has had the powers to place water companies into special administration for over three decades, it is important that we regularly update legislation to reflect modernisation of law and experiences in other sectors. If a SAR occurs, government funding would be required to cover the costs of a special administration, including both operational and capital expenditure—for example, ensuring that statutory environmental obligations were met, as well as for paying the cost of the special administrator. In the unlikely event that the proceeds of a sale or the repayments agreed as part of a rescue at the end of a SAR are insufficient to cover repaying government funding, there is a risk of a funding shortfall. Clauses 10 and 11 introduce a flexible power, allowing the Secretary of State and Welsh Ministers to recover any shortfall in funding in a manner that is appropriate to the circumstances. They allow for modification of water company licences to recover any shortfall in financial assistance provided in a water industry SAR. These clauses will align the water industry SAR regime with the energy sector. Without this power, there is a risk that taxpayers will foot the bill for the water industry SAR. The Secretary of State and Welsh Ministers will be able to decide whether or not they should use this power and the rate at which the shortfall should be recovered from customers. This will include which group of customers it should be recovered from—for example, all water company customers, a subset of the sector, or only customers whose water company went into a SAR. Although the power is flexible, the design of a recovery mechanism will be subject to consultation with all relevant sector stakeholders. The Government must consider these views and explain our approach accordingly. If a SAR occurs and this power is ever required, this will allow a decision to be made, and be consulted upon, on what the fairest cost recovery option is, based on the evidence and circumstances at the time. I reiterate that the shortfall recovery mechanism does not mean that customers end up paying for water companies’ failures. Any intervention that would increase customer bills would be considered very seriously and as a last resort. In the first instance, the Government would seek to recoup all the funds spent on financing the SAR through the sale or rescue of the water company after the administrators’ conclusion. This new power would be utilised only if it were not possible to recover what the Government spent funding the administration. If there was a shortfall, Ministers would then decide whether they felt that it was appropriate to exercise this power. This power would allow the Secretary of State to decide, subject to consultation, the rate at which the shortfall should be recovered from customers and which group of customers it should be recovered from, as I just mentioned. This will ensure that the shortfall recovery mechanism is always implemented in a way that ensures that costs are recovered fairly. I hope that noble Lords agree that this power is essential to protect taxpayers’ money in the event of a SAR, and that these clauses should stand part of the Bill.