UK water companies face a potential £250 million penalty for polluting UK waters: Is this the shape of things to come?

On 3 October 2022 the Environment Secretary (‘ES’), Ranil Jayawardena, announced proposals to raise the maximum civil penalty for water companies who pollute the environment by 1,000-fold, from £250,000 to a proposed £250 million.  The proposals are subject to consultation, but if they are implemented, it is hoped they would help to prevent water companies from causing serious polluting incidents and preserve public and environmental health for future generations.

These changes could be the shape of things to come, with the possibility of more powers being given to the Environment Agency (‘EA’) to issue larger civil penalties for other environmental offences across different sectors.

What are the proposed changes and who do they apply to?

The new measures, if introduced, will allow the EA to issue civil penalties of up to £250 million to any water company causing a serious polluting event. Although a serious polluting event is yet to be defined, we expect any legislation to adopt a similar approach to existing EA assessment schemes. Under the EA’s Environmental Performance Assessment methodology, for example, a Category 1 incident has a serious, extensive or persistent impact on the environment, people or property, and may, for example, result in a large number of fish deaths. A Category 2 incident has a lesser, yet significant impact on water quality. In our view, both Category 1 and Category 2 incidents could properly be described as “serious”. In order to categorise a polluting event, the EA considers, amongst other factors, the persistence (time), extent (area affected) and effect (impact) of the pollution.

The ES’ proposal would increase the powers of the EA to impose penalties on water companies whose conduct results in a serious polluting event. At the moment, the maximum financial sanction which can be imposed is £250,000, under a Variable Monetary Penalty (‘VMP’). It is likely that the figure of £250 million would be a new maximum VMP.

Why are new penalties being proposed?

Over recent years there has been increasing concern about the way in which water companies are managing their risks and assets. In 2020, there were 44 serious pollution incidents caused by water companies. This rose to 62 in 2021. The accelerating rate of such incidents puts public and environmental health at risk.

In September 2022, the ES asked water companies to write to him, setting out their plans for improving environmental performance and infrastructure. Responses have now been received from all water companies and are currently being scrutinised by the government, the EA, and the consumer-facing regulator Ofwat.

At the end of August 2022, the government published the Storm Overflows Discharge Reduction Plan (‘SODRP’) in line with the requirements of the Environment Act 2021.  The aim of the SODRP is to reduce the risk posed to public health and the environment from storm overflow discharges. Storm overflows are safety valves built into the combined sewer system to discharge excess sewage to rivers, lakes, or the sea when rainfall exceeds capacity. With a growing population, an increase in hard surfaces and more frequent and heavier storms caused by climate change have increased pressure on the system, bringing the frequency of discharges to an unmanageable level. The SODRP introduced strict new targets on sewage pollution and requires water companies to deliver their largest ever infrastructure investment.

The announcement of a potential increase to civil penalties up to £250 million for water companies who cause serious polluting incidents would act together with the SODRP, encouraging water companies to comply with regulation and invest in measures to reduce the risk of environmental incidents.

Civil penalties can be imposed directly by the EA using administrative powers, rather than having to pursue a criminal prosecution and rely on the courts to impose a fine. Prosecutions take time and cost money for all parties involved. If the EA is given the ability to impose higher civil penalties, this will not only save time and money by avoiding criminal proceedings, but it will also allow it to issue VMPs for more serious offences than currently appropriate, with aggravating factors such as negligence or mismanagement.

It should be noted, however, that the EA has yet to issue a VMP to a water company for a pollution offence. This maybe because the maximum penalty has, to date, been low in comparison to the size of fines imposed by the criminal courts. Since 2015, criminal prosecutions brought by the EA against water companies have resulted in total fines of over £138 million, with a record £90 million fine imposed on Southern Water in 2021 for serious and longstanding pollution offences.

Could this potential change shape the future for sanctioning environmental offences?

Water companies must now consider how they can better prevent pollutants from entering the water system. Every water company should carry out its own due diligence to ensure that it has mitigated the risks of pollution, and that it is investing in the right infrastructure in line with the target imposed by SODRP.

Although the measures proposed are said to be aimed specifically at water companies, we believe they are likely to herald broader changes to the EA’s powers to issue civil penalties. Given the relative administrative and cost efficiencies of civil sanctions as compared to criminal prosecutions, we would expect the EA to be granted increased powers to impose higher value civil penalties on other sectors and for other environmental offences.

All organisations whose operations carry a risk of causing environmental pollution should take time to ensure their Environmental, Social & Corporate Governance (‘ESG’) processes and policies are up to date. It is important for companies to ensure they comply with environmental legislation and expectations and are prepared for similar changes to be implemented across their sectors.

References: 

• Water companies face new penalties up to £250million - GOV.UK (www.gov.uk)
• Water and sewerage companies in England: Environmental Performance Assessment (EPA) metric guide for 2020 - GOV.UK (www.gov.uk)
• Consultation on the Government’s Storm Overflow Discharge Reduction Plan - Defra - Citizen Space / Storm_Overflows_Discharge_Reduction_Plan.pdf (publishing.service.gov.uk)
• Record £90m fine for Southern Water following EA prosecution- GOV.UK (www.gov.uk)