Underinvestment and inadequate sewers

This is the first of two articles considering judges’ powers to review the way in which the water regulator, Ofwat, exercises its enforcement powers and complies with its statutory duty to police sewerage companies. On 18 October 2022 the High Court refused permission to hear a judicial review claim against Ofwat for alleged failures to act in safeguarding natural coastal and river waters across the UK. This article considers a fundamental question that deserves a considered answer: where does the fair apportioning of blame and responsibility lie for unacceptable levels of untreated sewage pollution? In the second article we look at what the decision in Wild Justice v Ofwat [2022] EWHC 2608 (Admin) means for access to environmental justice.

Unacceptable levels of sewage pollution

The office of Director General of Water Services, now the Water Services Regulation Authority (abbreviated to Ofwat) dates back to the 1980s. Ofwat is an economic regulator meaning it has powers to regulate sewerage companies (i.e., market operators). It supervises those companies in their management of sewers (i.e., assets), and is under a duty to ensure the companies comply with certain standards.

The last few years have seen untreated sewage pollution reach ‘an unacceptable level’ (Defra 31 March 2022 ‘Consultation on Overflow Reduction Plan’) and the government has now admitted ministers have no idea how many beaches in England shut following 2022’s “summer of sewage” (Guardian 6 November 2022). Hazards include disease (from hepatis to leptospirosis) and methane and other fumes lead to environmental damage. The public are, rightly, disgusted at the idea of sewage content including untreated excrement and toilet paper in our streams, rivers, and coastal waters.

Statutory scheme: Sewerage Companies, Ofwat and the Environment Agency (EA)

The Water Industry Act 1991 (1991 Act) is the statutory scheme governing sewerage companies’ functions. It sets out duties on both market operators and Ofwat. Ofwat’s duty includes regulating sewerage companies’ general duty to provide a sewerage system (“section 94 duty”). The section 94 duty is supplemented by the Urban Waste Water Treatment (England and Wales) Regulations 1994 (1994 Regulations). Sewerage companies must comply with performance standards ensuring the sewers they operate are ‘constructed, operated and maintained to ensure sufficient performance under all normal local climatic conditions’ (regulation 4(4)).

Under the 1991 Act Ofwat has enforcement powers to prosecute non-compliance by sewerage companies. To police those companies there is a duty on Ofwat to collect information on sewerage companies’ functions which goes to the heart of performance standards i.e., how well the sewers are ‘constructed, operated and maintained to ensure sufficient performance’.

Ofwat has a share of the responsibility through co-extensive duties with the EA, or NRBW in Wales, who can grant discharge consents. In the event of abnormal local climatic conditions, which might include excessive rainfall leading to overspills, companies can obtain consents to lawfully discharge untreated sewage.

Inadequate sewerage: who is responsible?

First, Ofwat regulate sewerage companies to ensure they comply with their section 94 duty to provide adequate sewers (i.e., sufficient performance under all normal local climatic conditions). As the economic regulator, Ofwat are under a duty to gather data that might show financial and asset mismanagement leading to inadequate sewers and, if there is evidence of mismanagement (e.g., failure to comply with the section 94 duty), police the sewerage companies by taking enforcement action.

The question then is: are inadequate sewers the reason untreated sewage has reached ‘an unacceptable level’? In abnormal conditions sewerage companies may get consent to lawfully discharge untreated sewage. In normal conditions, however, discharge would be unlawful and, assuming it has not resulted from a failure at operational level (in other words, human error), they are, on any view, not “effectually dealing, by means of sewage disposal works or otherwise, with the contents of those sewers” (section 94(1)(b)). Put simply, the cause and effect for untreated sewage is the inadequacy of sewers. This appears to be the unequivocal position…

• In 2004 the House of Lords looked at the compositive system of sewers that takes away surface run-off rainwater, together with foul water and remarked ‘The only solution, in the event of overload into a public sewer of inadequate capacity, is to improve or extend the system so that there is no overload’ (Marcic v Thames Water Utilities Ltd [2004] 2 A.C. 42).
• In November 2021 Ofwat wrote to the sewerage companies stating the discharge of untreated sewage “…could indicate that there are companies that are not meeting their general duty under section 94 of the Water Industry Act 1991 (WIA91) to provide a sewerage system to the requisite standard.”
• In March the then government stated “We are the first government to take action to tackle sewage overflows, a historic infrastructure issue” (Defra 31 March 2022 p.4)

To look at this properly and understand where the blame lies, it is important to remind ourselves that Ofwat’s responsibility to oversee the sewerage companies is (as above) shared with other public bodies. Is there any merit in the allegation that Ofwat is guilty of structural failure through taking a passive stance to investigating financial and asset mismanagement and towards taking enforcement action, and therefore for any consequent breach of the section 94 duty?

In our view, this is the right moment for an Ofwat mea culpa. The problem was identified by the courts in 2004 and the current situation shows nothing has or something hasn’t been done. Moreover, it is mainly an economic question.

Professor, Sir Dieter Helm published a shocking analysis of privatised utilities operators in 2008 (‘RABs and the split cost of capital’ [pay wall]). He lamented a system where sewerage companies, left to own, run and develop their assets, had led to customers being ripped off. Perversely those companies face chronic insolvency risk meaning they underinvest. Accordingly, there is little hope they will properly manage their sewerage assets. Ofwat can’t claim general ignorance of inadequate sewerage as it is not a new issue (as recognised by the courts) and Helm’s prescient analysis remains worryingly to-the-minute (Financial Times [pay wall]28/8/22 ‘Utilities and regulators ‘not fit for purpose’, says UK government ex-adviser’).

The Government accepts that the reason for inadequate sewerage is underinvestment (Defra 31 March 2022 p.4).

That is clearly an economic question which engages Ofwat as economic regulator to police sewerage companies to ensure compliance with the section 94 duty which requires collecting information and taking enforcement action. The duty is not prescriptive as to how Ofwat collects information and scrutinises financial and asset management.

However, to say Ofwat effectively regulate compliance with the section 94 duty by merely telling the companies they regulate that it appears they are not complying with that duty would be a contradiction in terms. Worryingly, that is precisely what Ofwat argued in the High Court placing heavy reliance on a letter dated 18 November 2021 in which they wrote:

“In response to ongoing analysis by the Environment Agency of flow data from wastewater treatment works in England, and information which companies themselves have collated, which has recently been shared with Ofwat, we have significant concerns about the possible scale and extent of companies’ non-compliance with the Flow to Full Treatment (FFT) conditions set out in the environmental permits for their wastewater treatment works in England. This could potentially be leading to significant numbers of unpermitted storm overflow spills, potentially resulting in environmental harm to local watercourses and communities. If so, this is wholly unacceptable. It could indicate that there are companies that are not meeting their general duty under section 94 of the Water Industry Act 1991 (WIA91) to provide a sewerage system to the requisite standard.”

The next Article “Should judges hold Ofwat accountable”  goes on to consider the refusal to grant permission in Wild Justice v Ofwat, the scope of judicial review and wider issues of access to environmental justice.