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With an increasing global focus on environmental sustainability, concerns about the ongoing impact of climate change and public anger over the performance of water companies, it is unsurprising that steps are being taken to strengthen the regulatory position.
In July 2024 the Environment Agency (EA) published its annual report on the performance of England’s nine water companies. It was reported that 2023 saw an increase in serious pollution incidents to 47, up from 44 in 2022 with over 90% of these being caused by four water companies. The report went on to give five of the nine companies reviewed a rating of two stars (requiring improvement).
Despite the EA having secured 63 prosecutions, collecting over £151m in fines against water companies for breaches of their regulatory obligations since 2015, an even more robust stance is being taken. In response to its annual report, the EA Chair declared its desire for the “biggest ever transformation in the way we regulate the water industry”. This transformation is set to impact every aspect of the regulatory landscape from the number of inspections carried out, which is set to quadruple by 2025, to an increase in the severity of penalties for offending companies.
Starting as they mean to go on?
Shortly after the publication of the EA’s annual report, Ofwat concluded its investigations into Thames Water, Yorkshire Water and Northumbrian Water uncovering what they refer to as “a catalogue of failure”. Ofwat have proposed fines for these companies totalling a combined £168m:
- Thames Water - £104m.
- Yorkshire Water - £47m.
- Northumbrian Water - £17m.
The proposed fine for Thames Water of £104m is the largest on record for a water company.
These fines are for the failure to manage wastewater treatment works and networks. Additionally, the companies failed to ensure they had appropriate information, processes and oversight in place to comply with their obligations to limit pollution.
In addition to these substantial fines, Ofwat intends to go further. Ofwat is consulting on potential enforcement orders against the companies which should provide assurance that these type of incidents will not happen again.
These enforcement efforts are also part of a wider investigation by Ofwat and serve as a warning of what is to come across the board. The fines are proof that Ofwat is willing to utilise its power to fine offending companies up to 10% of their turnover to penalise them and deter reoffending. These three latest fines are over 5% of the company’s turnover, with the Thames Water fine representing 9% of its turnover.
It is likely we will continue to see further enforcement action against water companies as the investigation continues.
Legislative changes
In the wider efforts to strengthen regulation in the water industry the Secretary of State for Environment, Food and Rural Affairs announced on 5 September 2024 the Government’s intention to intervene. The Water (Special Measures) Bill was introduced to Parliament on 4 September 2024 and, if enacted, will vastly expand enforcement powers and introduce tougher penalties for offences, including imprisonment. The overarching aims of the Bill are to cut sewage dumping and attract investment to upgrade infrastructure.
New penalties will be introduced for pollution and water resource offences, as well as for failing to comply with the regulator’s information requests and reporting requirements. The legislation will also provide Ofwat with the power to ban the payment of bonuses to executives and senior leadership if environmental standards are not met, increasing accountability for individuals.
The EA will be given the ability to recover the costs of its enforcement from the offending companies, bringing its powers in line with other regulators, such as the Health and Safety Executive.
Accountability is at the heart of the Bill, with independent monitoring of every single sewage outlet being implemented, as well as a requirement to install real-time monitors to achieve full transparency. Water companies will be responsible for publishing the data for scrutiny, along with the added requirement of publishing a statement annually setting out the steps taken to address any pollution incidents and prevent them from continuing.
The proposals create a picture of a robust regulatory future for the water industry and while these plans will take time to implement, water companies should heed this warning and ensure regulatory compliance before the regulator becomes involved.
United Kingdom