Do public authorities have to publish a policy explaining how they will exercise discretion?

In Northumbrian Water Ltd v Water Services Regulation Authority [2024] EWCA Civ 842, the Court of Appeal dismissed Northumbrian Water Limited's (''NWL'') appeal relating to the financial penalties for water supply interruptions caused by Storm Arwen. The judgment considers the extent to which a public authority should adopt a policy explaining how discretionary powers will be exercised.

Key points

• The Court of Appeal upheld Ofwat's discretion to partially exempt NWL from penalties related to supply interruptions caused by Storm Arwen.
• It rejected the concept of a common law ''duty of prescription'', noting that the authorities do not establish a duty at common law to adopt a policy setting out criteria as to how a public authority's discretion will be exercised.
• However, it may be good practice for a public body to adopt guidance setting out the criteria for exercising discretionary powers, to enable those affected to know how the discretion is to be exercised, enabling them to make informed representations, and encouraging consistency and transparency in decision-making.

Background

The regulatory framework Ofwat oversees provides that companies that underperform each year are subject to a price reduction in the prices they can charge customers in the following year. While the default position is that a water company manages the risk of supply interruptions without exclusions, Ofwat can grant an exception during a civil emergency (the ''CE Exception'').

The dispute centred on the extent to which NWL should lower its customer prices due to underperformance of its commitments related to water supply interruptions. These interruptions were a result of Storm Arwen, which caused significant damage to parts of its supply area. NWL argued that this constituted a civil emergency, warranting an exception rather than a substantial price reduction. Ofwat considered both the financial impact of Storm Arwen and the severe disruption to customers' water supply. It concluded that the financial burden of Storm Arwen should be shared equally between customers and the claimant, based on a general, rather than a strictly mathematical, approach.

The High Court dismissed NWL's challenge against Ofwat's decision to not grant a full exception. See our previous blog post for more details.

NWL challenged the High Court decision on three grounds:

• Ground 1 (a):  The judge erred in his interpretation of the meaning and effect of the CE Exception when concluding that Ofwat had a discretion as to whether to grant the exception.
• Ground 1 (b): Alternatively, if the CE Exception did grant Ofwat any discretion, the judge was wrong in ruling that it allows Ofwat to consider factors other than NWL's performance in relation to supply interruptions.
• Ground 2: In a further alternative, if the CE Exception does provide Ofwat with broad discretion, the judge was incorrect in ruling that the duty of prescription does not apply in this context.

Judgment

The Court of Appeal dismissed NWL's appeal on all three grounds with Lewis LJ giving the leading judgment.

Ground 1 (a)

NWL argued that the CE Exception required Ofwat to exclude all supply interruptions caused by a civil emergency which were not the fault of NWL. They claimed that Ofwat did not have broad, or indeed any, discretion in this regard, and this submission was based on the language in Ofwat's reporting guidance and the broader context of the regulatory scheme.

Lewis LJ explained that this ground was dependent on the proper interpretation of the words in Ofwat's reporting guidance. The court's task was to ascertain the meaning of the relevant words in a process analogous to statutory interpretation, looking at the context and the underlying purpose. The regulatory system here represented Ofwat's view of the appropriate balance between the risk to be borne by the customer and the water company in relation to interruptions to supply. This was important context.

The natural and ordinary meaning of the words used was that a water company may ask Ofwat to make an exception. There was nothing in the words used to indicate that a request must be granted. It was implicit that Ofwat would then have to consider the representation and decide whether to grant an exception. This interpretation was consistent with the regulatory context.

Ground 1 (b)

NWL contended that Ofwat was only allowed to consider NWL's performance regarding water supply interruptions and no other factors, relying on wording in the licence between the two parties which stated that Ofwat "shall" consider NWL's performance for each relevant performance commitment.

Ofwat decided to exclude, in effect, 50% of the impact from the burden to be borne by NWL, which meant customers would still receive some recognition that their supplies were severely disrupted. The court held that Ofwat's decision did not involve any consideration of impermissible matters. Ofwat was entitled to consider, among other things, the impact that including the supply interruptions in the performance calculation would have on NWL. The court commented that Ofwat's approach, while generous to NWL, was one it was entitled to take.

Ground 2

NWL submitted that the judge erred in finding that the "duty of prescription" did not apply in the context of any discretion to grant an exemption in this case. The duty of prescription was said to be a common law duty to publish policy on the exercise of discretionary powers in certain circumstances. NWL argued that this duty was based on the need for consistent and non-arbitrary decision-making and required Ofwat to adopt a policy governing the exercise of its discretion in relation to water supply interruptions arising from a civil emergency.

Lewis LJ concluded that none of the cases relied on by NWL established a common law duty to adopt a policy setting out the criteria by, or the circumstances in which, a discretion is to be exercised. He acknowledged that it may well be good practice for a public body to adopt guidance setting out the criteria for exercising discretionary powers, as it would enable those affected to know how the discretion is to be exercised, enabling them to make informed representations, and would encourage consistency and transparency in decision-making. However, this ''falls short'' of holding that there is a duty at common law to adopt such policies.

Lewis LJ went further and commented that the language of a common law "duty of prescription" was unhelpful, inappropriate and, potentially, misleading. The issue is whether an exercise of discretion is lawful. That is to be determined by the application of the well-established principles governing the exercise of discretionary power. The mere fact that Ofwat had not adopted a policy in advance to indicate how the discretion will be exercised does not of itself determine whether the decision is lawful or unlawful.

Comment

It is not surprising that the Court of Appeal upheld the broad discretion of Ofwat as an expert regulator in technical matters impacting the economics of the relevant market.

What is more interesting in this case is the analysis of so-called "duty of prescription" cases and the rejection of a common law duty to publish a policy explaining how discretion will be exercised. Public authorities should however note the comments from the court as to good practice and the benefits from a public law perspective of a clear policy explaining how any discretion is to be exercised.