Lord Remnant (Con)

My Lords, I will speak to Amendment 3 in my name and I apologise for the typo. I had noticed it, but only recently, and only a moment or two before the noble Duke, the Duke of Wellington, brought it to the Committee’s notice. As we know, Clause 1 contains rules about remuneration and governance. Most importantly, it contains provisions giving Ofwat the power to block the payment of bonuses to senior executives of water companies. My amendment clarifies that Ofwat’s powers under this clause cannot be exercised in a way which conflicts with its general duties with respect to the water industry and emphasises that the industry’s capital and human resources needs are of critical importance. I declare an interest as having been a non-executive director of Severn Trent, the largest of the listed water companies, for eight years, between 2014 and 2022, chairing the board’s remuneration committee for that time. Why is it that these clarifications are required? Essentially, it is because we are giving extremely wide powers to Ofwat to draft rules in a very complex area, seemingly at its discretion and without further scrutiny by this House, which may have many unintended and harmful consequences. There is no clarity in the Bill on the appropriate targets and performance standards, how they will be measured, when relevant triggers occur and which remuneration, in which year, will be affected. This will all be for Ofwat to determine—yes, Ofwat. I have huge sympathy for regulators—I was one myself for a period, running the Takeover Panel—and know that they attract only criticism and never praise. Having said that, I thought the mood of your Lordships at Second Reading was especially stark in expressing views about Ofwat’s past performance, and some of those views have already been reiterated in the short time we have had today. That was as regards its role as an economic regulator—its core competence. We are now effectively extending Ofwat’s remit into difficult areas of fine judgment best left to company boards and for which Ofwat is totally unsuited. Can we be so reassured by the integrity of the ensuing process and the safeguards built in that my concerns can be assuaged by leaving this clause unamended? I fear not. First, it offends the principles of natural justice, as there is no distinction between the legislative process and the judicial one. The powers will lie with one body, Ofwat. It will make the rules and then judge companies and individuals under them. Secondly, the Minister may refer me to the consultation process which Ofwat will undertake, to which she drew the attention of your Lordships in her helpful letter dated 25 October. I welcome that, although it would be a heroic achievement for Ofwat to decide definitively on such a wide range of questions and responsibilities that this Bill, if enacted, will impose on it. Yet we all know that consultation is no panacea. The responses will contain many conflicting views and the conclusions that Ofwat will reach will be influenced by the weight it gives to particular views and to some preconceived ideas that it will inevitably hold. Thirdly, there will be no opportunity for your Lordships to scrutinise the rules promulgated by Ofwat. For this reason, I support the thrust of Amendment 27 in the names of my noble friends Lord Roborough and Lord Blencathra and Amendment 25 from the noble Lord, Lord Sikka, which are designed to achieve such scrutiny. I will leave those noble Lords to talk to them in more detail. But is this enough? I suggest not, because the scrutiny so achieved would be after the rules had been made by Ofwat. There is a need to influence Ofwat’s thinking much earlier in the process. That is what my amendment is designed to achieve. It is drafted with an eye to the wider objectives to which this Bill should aim: the need for more innovation, the recruitment of new talent and, above all else, the greater investment required to raise standards. The amendment is in two parts. First, it is designed to ensure that Ofwat does not exercise its powers in a way that conflicts with its general duties under Section 2 of the Water Industry Act 1991. Such duties include a consumer objective, a duty to have regard to principles of best regulatory practice and a growth duty. Indeed, Ofwat refers to such duties in its consultation document when it says that one of its desired outcomes is that the rules should be proportionate. That is to be welcomed. The Minister may be tempted to say that existing duties in the Water Industry Act and Ofwat’s acknowledgement of them should satisfy me and render this part of my amendment redundant. Were she to do so, I would say that that might hold good if the Bill imposed some constraints on Ofwat rather than adopting a blanket “Over to you, Ofwat” line. In the same section of its consultation document, it appears to qualify its commitment to proportionality by saying that “we will be bound by statute”— presumably as a result of this Bill— “to introduce rules with the requisite effect”. It is therefore critical that there is not just implicit recognition of Ofwat’s duties under the Water Industry Act of over 30 years ago but explicit recognition of those obligations on the face of the Bill, linked directly to this new and additional power that we will be giving to the regulator. The second part of my amendment requires Ofwat to have regard to two further considerations in exercising its powers under this clause: namely, “the need for a relevant undertaker”— the water company— “to … attract the investment required for its capital programme, and … attract, motivate and retain persons holding senior roles”. I can find no reference to these considerations in Ofwat’s consultation document generally, nor in the specific questions it proposes, yet the scale of the investment in the industry that is required is such that we cannot afford to deter that investment, or experienced executives from working in it. Unlike in the past, much of that investment will have to come from equity investors, who assume a higher level of risk than debt investors and have more of a vested interest in, and so take a more critical attitude to, the prospects of a company, its financial plans and, importantly, the quality of the management tasked with delivery. There is a limited number of appropriately qualified and skilled candidates to take on the most senior roles in water companies, and one of the successes of privatisation has been the ability of such companies to attract successful individuals from outside the utilities sector. In a competitive world for talent, Ofwat should not introduce rules that put water companies at a significant disadvantage when recruiting and seeking to retain such staff. When launching the independent review of the water sector last week, the Secretary of State was at pains to stress the importance of attracting the investment needed to clean up our waterways and rebuild our broken water infrastructure—and, specifically, facilitating a regulatory environment that attracts investment. The least we can do is play our part in supporting the Secretary of State in this noble endeavour. I should have thought that this amendment would be music to the Minister’s ears, so I look forward to her response with a great deal of hope and expectation, and indeed no little optimism.