Allan Owen and Elizabeth Withers discuss the recent Water (Special Measures) Bill and how the changes will affect water companies in the UK.
Overview
The Water (Special Measures) Bill (Bill) introduces significant and wide-ranging changes to the regulatory framework governing water companies in the UK. The Bill aims to enhance the governance, accountability, and regulatory compliance of water companies in the UK.
By introducing stricter penalties and enhancing consumer involvement, the Bill seeks to achieve Labour manifesto commitments relating to the protection of public and environmental interests while holding water companies to higher standards of performance and responsibility. This article provides an overview of the key changes proposed by the Bill including to remuneration and governance, pollution incident reduction plans, emergency overflow, penalties, and special administration orders.
Banning bonuses
The Bill introduces provisions for Ofwat to issue rules regarding the remuneration and governance of water companies. These include provisions to ban performance related bonuses for senior roles if companies fail to meet required standards relating to consumer matters, the environment, financial resilience, or criminal liability. This rule can be applied retrospectively and applies principally to chief executives and directors, with the power to extend the ban to cover other senior roles within water companies. This new rule aims to incentivise senior staff at water companies to uphold high standards and to protect the environment, their consumers, and their company’s finances.
Fit and proper person test for executives
Water undertakers must only appoint persons to senior roles that meet specific fitness and propriety criteria. This rule will aim to ensure that persons to be appointed to key executive roles have demonstrably upheld high standards in the past and that they continue to uphold these standards in post. By ensuring those who carry out senior roles are competent and meet high ethical standards, this aims to enhance the ability of water companies to make sound decisions and manage risks effectively, while reducing the risk of legal penalties and reputational damage.
Consumer Involvement
In a significant change to existing practices, the Bill requires that relevant undertakers must include consumers in key decision-making processes. Companies must have arrangements in place to ensure that consumers are involved in decisions which will have a material impact on consumer interests. This change aims to ensure that water companies are mindful of and pay due regard to the views of customers. If water companies fail to comply with any new rules, Ofwat can issue directions, enforceable through enforcement orders under the Water Industry Act 1991 (WIA 1991).
Penalties for obstructing investigations
The Bill introduces stricter penalties for water companies that obstruct investigations by the Environment Agency and the Drinking Water Inspectorate, including:
- Imprisonment and fines: Individuals, including executives and directors, can face up to two years in prison and substantial fines.
- Automatic penalties: The Environment Agency can impose automatic penalties for specific offences unless exceptional circumstances apply, or alternative enforcement action is in progress.
- Lowered standard of proof: The standard of proof for civil sanctions by the Environment Agency is reduced to “on the balance of probabilities”, rather than “beyond reasonable doubt”.
Sewerage undertaker incidents
The Bill introduces provisions into the WIA 1991, requiring sewerage undertakers to publish an annual pollution incident reduction plan by 1 April each year. These plans must address the frequency, seriousness, and causes of pollution incidents, along with measures and timelines to reduce them. Non-compliance with this duty may result in prosecution and fines, with the Environment Agency responsible for enforcement and potentially issuing civil sanctions.
A new Chapter 5 (emergency overflows) is introduced into Part 4 (sewerage services) of the WIA 1991. Sewerage undertakers must report emergency overflow discharges within one hour of their occurrence, including the location and timing of the discharge. Compliance with this duty will be enforced by Ofwat.
Special Administration Orders
In cases where financial assistance is provided during special administration of a water company, the Bill allows the Secretary of State to modify a water company’s license to recover the funding shortfall. Special administration is a regime that allows a financially distressed or insolvent water or sewerage company to be placed under special administration to ensure the continued provision of essential public services and to protect customer and environmental interests until the company can be rescued, restructured, or transferred to new owners. Water companies may be required to raise funds from customers to repay the government, potentially holding these amounts in trust. Any money received by the Secretary of State will be paid into the Consolidated Fund operated by the Treasury (essentially the UK government’s general bank account at the Bank of England).
Allan Owen is a Partner and Elizabeth Withers is a Trainee Solicitor at Sharpe Pritchard LLP.
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