The affluent and the effluent: cleaning up failures in water and sewage regulation Contents

Chapter 6: Fines, penalties, and enforcement

Fines and penalties

242.The Environment Agency’s annual water and sewerage company performance assessment for 2021, published in July 2022, found that the performance of water companies was at its lowest ever level and most companies’ performance was declining. The Environment Agency argued that despite continuing enforcement action against those breaching environmental laws, water companies remain undeterred by the penalties currently being issued by the courts, calling for courts to impose much higher fines for serious and deliberate pollution incidents.253

243.The Agency’s then-Chair, Emma Howard Boyd, said that the Environment Agency “would like to see prison sentences for Chief Executives and Board members whose companies are responsible for the most serious incidents”, and for company directors to be “struck off so they cannot simply delete environmental damage from their CV and move on to their next role”.254

244.On 3 October 2022, then-Secretary of State for Environment, Food and Rural Affairs, the Rt Hon Ranil Jayawardena MP, announced that he would bring forward proposals to raise the limit on civil penalties that the Environment Agency can directly impose on water companies from £250,000 to up to £250 million. The Variable Monetary Penalties (VMPs), which offer a quicker method of enforcement than lengthy and costly criminal prosecutions, can be issued for more serious offences, including where there is evidence of negligence or mismanagement or when there is a serious environmental impact.255

245.Prof Barker said that the Environment Agency has moved towards having fewer prosecutions and more civil sanctions, noting that civil sanctions provide a direct benefit in that sums are paid to benefit the environment, but that they do not have the same level of publicity or reputational damage as prosecutions.256 Guy Linley-Adams, of Salmon and Trout Conservation, suggested that civil penalties should not be used in cases of water pollution, arguing that they are “extremely attractive” to companies because they avoid the “useful stigma” that is attached to prosecution.257

246.Professor Catherine Waddams, a member of the Centre for Competition Policy at the University of East Anglia, said that fines “may not be” at the right level and there is some evidence that it is “worth risking the fine” by not meeting standards. She said that she is “personally in favour of much stronger sanctions for individuals”, arguing that it might concentrate minds if there was a risk that those responsible could be unable to participate in boards as a result of their actions.258. She noted an occasion during her time on the board of Ofwat where she was involved in fining a water company that had deliberately lied to the regulator. In this particular case, she explained that the entire management and board of the company had been replaced by the time the fine was levied.259

247.Alan Lovell, Chair of the Environment Agency, said that the Agency has the opportunity to take matters through the courts but this takes time and has to be proved to a criminal standard, noting that the current investigation into combined sewer overflows will be “a very long process”.260 He said that he was “quite delighted” with the Government’s proposal to increase the amount that the Agency can levy in Variable Monetary Penalties, arguing that this will give the regulator “a much bigger stick with which to go after bad behaviour among water companies”. He said that this still requires a criminal standard of evidence and is not a simple process, but that it will “tip the balance” in terms of discussions with water companies and should make a significant difference. He said that he hoped the Government “will rapidly be able to deliver on that commitment”261.

248.Sir James Bevan, Chief Executive of the Environment Agency, said that the Agency normally always prosecutes when there is evidence of serious wrongdoing. However, he said that the Environment Agency has increasingly been using enforcement of undertakings as an option. He emphasised that prosecution is a “key weapon” for the Agency but explained that while they are doing less of it, this is partly down to resource constraints, as well as because it is “broadening the palette of options” available to it.262

249.David Black, Chief Executive of Ofwat, said that the regulator’s power to fine companies 10 per cent of their turnover is “quite substantial” but there “may be further scope for change” given that water companies are asset-intensive businesses. However, he argued that the current penalties imposed by Ofwat and the Environment Agency provide “very serious challenge to companies and their investors”, stressing that it is “now getting very painful for shareholders and regulators are seeing changes”263. Mr Coucher said that Ofwat would like to see greater powers to debar directors from companies that are “egregiously and continually poorly performing”, meaning that they cannot take up new, senior positions within the regulated sector.264.

250.The Secretary of State felt that regulatory fines and penalties are adequate, stressing that the Government had “listened to Ofwat” and provided it with powers to modify licences. She explained that while Ofwat does not have the power to debar companies or executives, “the Environment Agency does, where appropriate”.

251.The Secretary of State said that she was “very keen” for the Environment Agency to use the powers that it has. She noted that for criminal prosecutions by the Environment Agency, “unlimited fines are possible, but the judge decides what the fines will be. To date, the largest fine a judge has given has been about £5 million”. She outlined that the Government is intending to consult on its proposals in relation to Variable Monetary Penalties in “this quarter, or perhaps stretching into just the other side of Easter [2023]”.265

252.It appears that for some time, regulatory deterrents such as penalties and fines have been insufficient to ensure an acceptable level of performance by water companies, particularly in relation to the environment, where performance is at its lowest ever levels. We welcome that some recent fines and penalties have been at a more appropriate level but remain concerned that they may not be a sufficient deterrent. The length of enforcement processes can result in those in penalties being applied long after those responsible have left the company.

253.Recent Government proposals to increase substantially the limit on the Variable Monetary Penalties that can be directly imposed by the Environment Agency on companies could help to provide strong enforcement in a more reasonable timeframe. However, it is concerning that the Environment Agency has not used these powers often in the past, a situation possibly brought about by the Agency’s shortage of resources for enforcement.

254.While civil penalties can help to bring about enforcement more quickly, it is important that regulators prosecute criminal behaviour. It is alarming that the Environment Agency is prosecuting less due to resource constraints.

255.The Government should deliver on its proposals to increase the limit on Variable Monetary Penalties for serious offences committed by water companies. The Government should ensure the Environment Agency has adequate funding to use its new powers effectively and prosecute criminal behaviour in the sector.

256.There is a need for greater individual accountability for executives and directors of companies that are responsible for serious and deliberate pollution incidents, including criminal prosecution where appropriate. The Government should give Ofwat powers to prevent directors of companies that are responsible for serious pollution incidents from continuing to work in the sector.

Special administration and changes of ownership

257.Under the Water Industry Act 1991, Ofwat is responsible for granting water supply licences.266 Licences continue in force, unless revoked or suspended in accordance with their conditions, for the period specified in or determined by the licence.267 However, the Water Industry Act 1991 gives Ofwat the power to transfer businesses to new owners through a special administration process under certain conditions, including where a company fails to meet its legal obligations or where it is unable to finance its functions.268

258.Jonson Cox, a former Chair of Ofwat, outlined that in 2021 Ofwat brought about what was called a “virtual special administration” of Southern Water, as the company was “failing on many fronts, and we had given investors notice to put more money in or we would take control of the situation”. He said that Ofwat, with the assistance of the owners, ran a “competitive auction” to bring new capital into the company.269 In August 2021, Macquarie Asset Management announced that it had reached an agreement to acquire a majority stake in the company and would invest “over £1 billion in new equity to recapitalise the business”.270

259.Mr Cox explained that the company’s previous owners lost a “very large share of their investment” and stressed that it was an important message that if assets are not run well, investors will lose a “big part” of their investment.271 He argued that it would be good to have a more competitive process for licences and that licence powers “were underused by regulators”, given their ability to “control behaviour”. However, he was not sure that the current problems in the sector are best answered by looking at duties and licences, as there is a “simpler way forward”.272

260.Prof Waddams said that she does not think that Ofwat has a fundamental reluctance to take away a licence for serious infringements, and while it would lead to costs that would need to be carefully considered, Ofwat felt that it could find someone to take the licence on if necessary.273

261.Of licence removal, Sir James said that “the more stick and carrot there is, the better. That is an obvious stick”. He explained that the Environment Agency has had “those conversations” with Ofwat about particular companies and while the question is about how to sustain public water supply after a licence is stripped, “there are ways round that”. He noted that at a lower level, the Environment Agency does suspend licences and permits when water companies do not perform at the necessary level.274

262.Mr Black said that the special administration powers to take away water company licences are “part of the toolkit” for Ofwat but they have a high bar to be applied, requiring a high burden of proof and approval from the Secretary of State and the courts, so “they will not be used lightly”. He argued that Ofwat had used the threat of these powers to achieve changes at companies and has “come close to looking at the need” to use them.275

263.Mr Black said that introducing competition for water company licences is “certainly an idea worth considering” but emphasised that there are upsides and downsides. He argued that if licences were expiring ahead of a bidding process, it “might be difficult” to get companies to focus on and make provisions for the long term. He instead argued in favour of introducing more powerful incentives on companies in the existing model, with companies held to account. 276

264.The Secretary of State said that there have been examples of water companies being taken over, as “sometimes investors have come in and not realised quite the demands that may be made on them”. However, she expressed her view that “it is for Ofwat to decide how best to use its powers”.277

265.In relation to introducing greater competition for licences, the Secretary of State said that she is “not sure” that opening up the non-household water market “has had quite the impact that may have been hoped for”, and also pointed to the impacts of the introduction of competition to the retail energy market.278

266.Ofwat’s special administration powers allow it to change the ownership of water companies that are falling short in meeting their responsibilities. This a powerful tool that has the potential to be used more widely where companies have been found not to have been meeting their obligations.

267.Ofwat should consider whether to be more proactive in using these powers to change the management of continued poor performers in the sector.


253 Environment Agency, Water and sewage companies in England: environmental performance report 2021, (22 July 2022): https://www.gov.uk/government/publications/water-and-sewerage-companies-in-england-environmental-performance-report-2021/water-and-sewerage-companies-in-england-environmental-performance-report-2021 [accessed 22 December 2022]

254 Ibid.

255 Ofwat, ‘Water companies face new penalties up to £250million’, (3 October 2022): https://www.gov.uk/government/news/water-companies-face-new-penalties-up-to-250million (October 2022) [accessed 22 December 2022]

256 Q 14 (Annabelle Ong)

257 28 (Guy Linley- Adams)

260 Q 97 (Alan Lovell)

261 Ibid.

262 QQ 97, 103 (Sir James Bevan)

263 Q 119 (David Black)

264 Q 123 (Iain Coucher)

265 Q 138 (Thérèse Coffey MP)

266 Water Industry Act 1991, section 17A

267 Water Industry Act 1991, section 17F

268 Water Industry Act 1991, sections 23, 24 and 25

270 Macquarie Asset Management, Press Release: ‘Macquarie Asset Management agrees to acquire majority stake in Southern Water’ (August 2021): https://www.macquarie.com/au/en/about/news/2021/macquarie-asset-management-agrees-to-acquire-majority-stake-in-southern-water.html [accessed 1 February 2023]

274 Q 103 (Sir James Bevan)

275 QQ 119, 123 (David Black)

276 Q 123 (David Black)

277 Q 143 (Thérèse Coffey MP)

278 145 (Thérèse Coffey MP)




© Parliamentary copyright 2023