Recent judicial reviews in the water industry illustrate challenges the sector is facing

There has been considerable press interest in the water industry recently with intense scrutiny on regulation of water companies. In two recent judicial reviews in this area, the High Court has considered the breadth of discretion afforded to decision makers in such complex fields.

In R. (on the application of Wildfish Conservation) v Secretary of State for Environment, Food and Rural Affairs ("Wildfish") the High Court dismissed two sets of judicial review proceedings against the relevant Secretary of State over the lawfulness of the Storm Overflows Discharge Reduction Plan (the "Plan") published pursuant to the Water Industry Act 1991 ("WIA"). In R. (on the application of Northumbrian Water Limited) v Water Services Regulation Authority [2023] EWHC 2410 (Admin) ("Northumbrian Water") the court considered a challenge to a price control determination.

Key points

• In an irrationality challenge, the court will adopt a relatively light intensity of review for a plan setting strategic or high-level policy on environmental and socio-economic considerations, particularly where the legislation affords the decision-maker broad discretion on the contents of the plan and where there is opportunity for Parliament to scrutinise the plan.
• In areas involving economic predictive judgments the courts continue to afford expert regulators a significant margin of discretion.
• As a starting point, courts will begin from the position that public authorities are familiar with statutory frameworks and relevant provisions and have understood them correctly unless there is express evidence to the contrary.
• The court will not be easily persuaded by analogies with other regulated sectors since it does not follow that what is appropriate in one regulated sector is appropriate in another.

Wildfish

Background

Storm overflows are the mechanism that release sewage into waterways to prevent it from overflowing into homes and streets. When the capacity of a storm overflow is exceeded, untreated sewage may be released into rivers, estuaries or the sea which may have an adverse impact on public health and the environment. It was noted in the judgment that storm overflows have been used regularly in dry weather conditions which is a "use for which they are not intended".

The WIA required the Secretary of State to prepare a plan for the purposes of reducing discharges from the storm overflows and minimising the adverse impacts of those discharges.

The Plan set the following three targets:

1. by 2050, water and sewerage companies ("WASC") will only be allowed to discharge from a storm overflow where there would be no local adverse ecological effect;
2. by 2035, WASCs must significantly reduce harmful pathogens from overflows either by carrying out disinfection or by reducing the frequency of discharges; and
3. a backstop target for 2050 whereby storm overflows will not be permitted to discharge above an average of 10 heavy rainfall events a year.

The two claimants raised a number of grounds of challenge between them, including that the defendant failed to understand and properly give effect to the statutory scheme and acted irrationally/failed to take into account obviously material considerations.

Interestingly there was also a challenge based on Article 8 (right to private and family life) and Article 1 of the First Protocol (right to protection of property) ("A1P1") to the European Convention on Human Rights ("ECHR"), and an argument that the Plan breaches the "public trust doctrine" which was said to impose a duty on the defendant to maintain coastal waters in a fit ecological state to safeguard the public's right to fish.

Judgment

Holgate J dismissed all the grounds of challenge brought by both claimants.

There was no evidence that the defendant misunderstood the relevant Regulations. The requirements in the WIA envisage a long-term strategic plan rather than specific issues relating to individual overflows or indeed enforcement and the carrying out of regulatory functions by the Environment Agency ("EA"). The Plan was entitled to set targets that went beyond the existing legislative requirements, and was not a policy telling WASC's how to comply with those requirements or in any way contradicting or mis-stating those existing obligations or targets. In attempting to go further than the minimum requirements the Plan could not be said to frustrate the legislative purpose.

Since the legislation did not impose a mandatory list of relevant considerations, it was for the defendant to determine what was material and what was not, subject only to review on the grounds of irrationality. The court found no such irrationality in this or any other aspect.

In relation to the human rights grounds, the second claimant submitted that the Article 8 imposes a positive obligation on the State to take reasonable and appropriate measures to protect individuals against severe environmental pollution posing a serious and substantial risk to the health and well-being of individuals. The submission went further in arguing that this is not limited to specific individuals but extends to society or the population as a whole. The A1P1 claim was based on the reduction in the size of oyster catches by the claimant oyster business and the additional costs incurred as a result of pollution events. The claimants submitted that there was a legitimate expectation that regulatory requirements would be properly enforced by the exercise of regulatory powers, especially where they affect ECHR rights. However the court noted that the challenge was to the Plan, and not to the compatibility of the WIA with the ECHR. There was ongoing regulatory work and investigation being undertaken by both the EA and Ofwat, which was not a matter for the court in these proceedings. Holgate J reiterated that even where Convention rights are engaged, the decision maker is entitled to a wide margin of appreciation. The court did not accept that existing case law established that environmental protection against pollution afforded by Article 8 is owed to society or the population of the country as whole. Therefore Article 8 rights were not shown to have been engaged, let along violated, as the problems did not involve a hazard of such severity as to impair significantly the ability to enjoy family or private life. The second claimant had not demonstrated that the proper application of existing statutory requirements would be insufficient to protect any A1P1 rights which might be engaged.

Finally the court saw no authority to support the contention that the public right to navigate and fish in common law necessarily entails the ancillary right for waters not to be polluted so that oysters and shellfish are fit for human consumption. Given that Parliament had enacted legislation to combat environmental pollution where it thought appropriate, there was no justification for extending the common law in this way.

Northumbrian Water

Background

This case involved a water company challenging the regulator, Ofwat. The regulatory scheme provided mechanisms to ensure that where companies underperformed in one year they would be subject to a reduction in the prices they could charge customers in the following year. The default position was that a water company managed the risk of supply interruptions and there were no exclusions, but it was possible for Ofwat to grant an exception in certain emergency situations.

The relevant decision concerned how far Northumbrian Water should reduce the prices charged to its customers because of underperformance of its commitments relating to water supply interruptions. These interruptions occurred as a result of Storm Arwen which seriously damaged part of its supply area. Northumbrian Water argued that this was an emergency and therefore an exception should be made rather than forcing it to reduce prices significantly. Ofwat took into account the financial impact relating to Storm Arwen, but also the severe disruption to customers' water supply. Having made an evaluative judgment that its overall conclusion would support resilience improvements by the claimant, it concluded that the financial impact of Storm Arwen should be split, on a broad brush, rather than a strictly mathematical, approach 50:50 between customers and the claimant. Northumbrian Water did not consider that sufficient.

Judgment

Northumbrian Water claimed that once the conditions for an exception were met Ofwat had to grant it and did not have any discretion in this regard, alleging that Ofwat had therefore misdirected itself. This ground turned on the proper construction of the exception and the court concluded that there was a discretion, meaning that Ofwat did not misconstrue the exception and there was no error of law.

Secondly, the claimant argued that Ofwat should have or publish a policy setting out how it would exercise any discretion. The court considered cases in other contexts involving unpublished policies where a "duty of prescription" was said to apply, i.e. a need to set out what criteria will be applied by a public authority when exercising a broad discretion to ensure consistency and guard against arbitrariness. The court did not agree that this case fell into that category. Although the financial implications of how Ofwat might exercise its discretion are great, its discretion is not completely unbounded. It must be exercised in accordance with its statutory duties, the ambit of which provide a sufficient template for consistency in decision-making. Nor is this a case where multiple private individuals are subject to decisions in similar circumstances. There are only a small number of water companies. Circumstances when this discretion might be exercised are rare and can vary greatly. Further, the draft determination was published and was consulted on, so that the claimant had the opportunity to challenge Ofwat's thinking about its particular case. The claimant was a sophisticated participant in the process able to call on lawyers and other specialists for support and knew, or ought to have known, that Ofwat would make its decision in accordance with its statutory duties.

Finally, the claimant challenged the decision as irrational. The court pointed out that Ofwat was required by its statutory duties to further objectives much broader than just focusing on this claimant. Ofwat is entitled to a wide margin of appreciation in respect of its evaluative judgment.

The court characterised the grounds as "in truth challenges to the merits" of Ofwat's decision. Issues raised by the claimant, such as whether granting an exception in these circumstances would lead to more or less efficient investment by water companies, were not judgments the court was able to make, being predictive economic judgments.

It is notable that the claimant sought to draw a comparison with other regulated sectors and contended that no other regulator had such as significant power as Ofwat in these circumstances, as well as pointing out how other regulators had dealt with the consequences of Storm Arwen which was said to show that Ofwat's approach was "manifestly disproportionate". Although Ofwat accepted that a reasonable decision maker would struggle to defend a manifestly disproportionate decision as rational, the court dismissed this argument in the plainest terms: "it does not follow from the fact that they may have made particular decisions, that those decisions are proportionate ones or that, comparatively, Ofwat's decision was disproportionate, let alone manifestly disproportionate".

Comment

In Wildfish the court noted the recent widespread public concern over issues relating to discharge of sewage, and reminded us that it is not responsible for making political, social or economic choices or decisions about the acceptability of environmental impacts. Those choices and decisions have been entrusted by Parliament to ministers and regulatory bodies. Such matters may be the subject of legitimate political and public debate, but they are not for the court to determine.

The courts reluctance to use different legal instruments such as the common law or the ECHR to extend the obligations of the Secretary of State beyond what legislation specifically prescribed was unsurprising in circumstances where Parliament has designed detailed schemes addressing these issues.

The court principally took a deferential approach in both cases, and emphasised the broad discretion afforded to a decision-maker authorised by legislation on environmental and socio-economic matters. This is particularly heightened when the matter involves predictive economic judgments, as in Northumbrian Water, and the court made it clear that it will not delve into the merits of such judgments where the high standard of irrationality is not made out.