Making waves: Understanding key changes in the Water (Special Measures) Bill

Expected to come into force early next year, the Water (Special Measures) Bill will introduce significant changes to the regulation and governance of water and sewerage companies.

Passage through Parliament

A second reading of the Water (Special Measures) Bill (the "Bill") took place in the House of Commons earlier this week, and the Public Bill Committee (the "Committee") for the Bill subsequently published a call for written evidence ahead of its first meeting on 9 January 2025. Individuals or organisations with relevant expertise and experience or a special interest in the Bill are invited to share their views with the Committee as soon as possible, with the Committee set to scrutinise the Bill and report to the Commons by Thursday 16 January 2025. A third reading in the Commons will be the final chance for MPs to debate the contents of the Bill before it returns to the House of Lords, which will consider the Commons' amendments. The Bill is then expected to receive Royal Assent. Provisions in the Bill could, therefore, start to take effect from as early as January or February next year.

Key changes

The Bill has four key aims, which align with four commitments outlined by the Labour party in its 2024 manifesto:

1. Block bonuses for water company executives "who pollute our waterways";
2. Bring criminal charges against "persistent law breakers";
3. Impose automatic and severe fines for wrongdoing; and
4. Enable independent monitoring of every sewer overflow outlet.

The key changes that the Bill is expected to introduce are broadly consistent with these aims. 

Remuneration and governance

The Bill inserts provisions into the Water Industry Act 1991 that will enable Ofwat to make rules about pay and governance which apply to water companies on an industry-wide basis. Ofwat will be required to make rules on:

1. Performance-related pay: in any given financial year, companies will have to meet certain standards in order to award performance-related pay to chief executives and directors. Ofwat will set these standards following consultation, but they must include standards relating to consumer matters, the environment, financial resilience and criminal liability.
2. Fitness and propriety of chief executives and directors: Ofwat will set standards of fitness and propriety which chief executives and directors will have to meet to be appointed and stay in post. Ofwat will have the power to extend the standards to individuals in other senior roles.
3. Consumer involvement in corporate decision-making: companies will be required to have arrangements in place for involving consumers in decision-making including, potentially, having a person(s) representing the views of consumers on their board or another relevant committee.
4. Reporting to Ofwat on financial structuring: on at least an annual basis, companies will be required to report on financial structuring / restructuring, including debt levels, commercial strategy and any associated risks, including to the long-term sustainability of their operations. The precise nature of the reporting requirements will be outlined by Ofwat in their rules.

Ofwat will be required to publish the first set of rules within six months of the Water (Special Measures) Act coming into force, so we can expect a final version of the rules to be published mid-next year. Ofwat recently consulted on its initial proposals for the rules, gathering feedback to inform the rules' design and related guidance. Ofwat's response to that consultation is yet to be published. Further consultations are expected over the coming months, as Ofwat works towards finalising the rules.

Criminal charges

The Bill includes provisions to extend the sentencing power of the Courts to include imprisonment in all cases where individuals have obstructed inspections by organisations such as the Environment Agency. It also introduces corporate liability: if an obstruction offence is committed by a company with the consent or connivance of, or is attributable to the neglect of, company executives or other senior individuals such as chief executives, those individuals can also be criminally liable.

Fines

The Bill includes a duty on the Environment Agency to impose automatic fixed monetary penalties for certain offences including pollution control, failure to comply with information and reporting requests, and offences relating to water resources. The Government will specify the list of offences and the monetary value of penalties in secondary legislation, following consultation.

Once passed, the Bill will also lower the standard of proof required for certain minor to moderate Environment Agency civil offences from the criminal standard, "beyond reasonable doubt", to the civil standard, "on the balance of probabilities", to enable the Agency to issue fines more rapidly for those offences.

Sewer overflow outlets

Water companies will be required to publish the fact of a sewer overflow, as well as its location and information as to when it began and ended, within one hour of the overflow starting, and within one hour of it finishing. Ofwat will be responsible for bringing enforcement proceedings against water companies which fail to comply.

Other measures aimed at strengthening regulation

The Bill includes a new statutory requirement for water companies in England to publish annual "pollution incident reduction plans" and report on the implementation of these plans each year. Chief executives will be required to approve the plans prior to publication and will be liable for this duty. Environmental regulators will be required to consider a company's record for implementing the plans when carrying out their regulatory functions, including, potentially, when they are considering what enforcement action to take in response to a pollution incident.

Comment

The Bill represents a significant step up in the regulatory oversight to which water companies are subject. Water companies, other organisations and affected individuals should monitor developments closely, including keeping an eye on the consultations on remuneration and fines referred to above, and ensure that if they are affected by these issues, they respond fully to the consultations within the stipulated timescales. Careful regard should be given to Ofwat and the Government's published responses to the consultations, including whether they appear to have taken consultees' responses into account and are consistent with the Bill.