Reed to crack down and partner up with water firms as Special Measures Bill launched

Environment secretary Steve Reed last week paired public-pleasing water company ‘crackdown’ messaging with a conciliatory offer of a “reset” and to work in partnership with the water sector, when he announced the Water (Special Measures) Bill and promised further reform.

The Bill was introduced in the House of Lords on Wednesday by Baroness Hayman of Ullock ahead of a speech on Thursday by Reed to an audience of interested parties. It contains assorted measures, as summarised at the bottom of the page.  

Crack down

It was the crackdown elements that grabbed the headlines. These included the possibility of jail terms for water leaders, a bonus ban for the bosses of underperforming companies and “severe and automatic” fines for a range of offences. There was accompanying criticism from Reed, including reference to £41m of bonuses and benefits for chief executives since 2020 “despite the damage their companies have been causing” and a mention that “companies may need to remove executives from post or take other corrective actions” if standards are not met. 

Partner up

However, the speech set these elements in a broader context of the need to cope with growth and climate change, boost water supplies and attract private investment to deliver the desired improvements.

Reed confirmed that “PR24 will proceed as planned to bring in much-needed investment” and that his government will “create the conditions needed in a well-regulated private sector model to attract the global investment required to rebuild our broken water infrastructure”. Bloomberg reported that Reed and Treasury minister Spencer Livermore will this week meet with debt and equity investors to discuss what guarantees they will need to provide the billions needed in AMP8, and that this would be followed by a larger national investment summit where water investment will be a focus.

Reed also indicated that customers will have to pay higher bills, lamenting: “I am angry that over a decade of Conservative failure means customers will now have to pay higher bills to fix the system – this did not need to happen.”

He offered a positive vision, that “A sector that has been associated with decline and cover-ups will become one of growth and opportunity” featuring “the biggest ever investment in our water sector, and the second biggest private sector investment into any part of the economy for the entirety of this Parliament.” Reed said:  “I’m offering the water sector a reset and a new partnership to help us achieve that together.” He added: “These are systemic issues that require a proper reset with a reformed water sector in a new partnership with government to bring in the vast quantities of investment that are needed.”

Listed company share prices rose on the news, indicating this had been well received. 

Three stage reform

Reed said the Special Measures Bill was step two of three in Labour’s plans to reform the sector. Step one was achieved in his first week in office; practical measures including ring fencing investment and boosting compensation for customers that have been badly served.

Step three will be a full review, informed by stakeholder views, “to shape further legislation that will fundamentally transform how our entire water system works and clean up our rivers, lakes and seas for good.

“We will ensure the framework that underpins our water sector delivers long-term stability, with clear, achievable targets that reflect the needs of customers and the environment at a catchment, regional and national scale, as well as enabling housing delivery and supporting the government’s growth mission.”

He said details would be set out in autumn, but ruled out nationalisation as expensive, slow and a deterrent to investment. “I am more interested in a model that works,” he said. 

Reaction

Special Measures were welcomed by the Environment Agency and Ofwat as the recipients of the new powers, and attracted supportive comments from parties including The Rivers Trust, CCW and the Angling Trust.

However, critics pointed to the absence of new resourcing for the regulators, and some to the fact that new fines should not go to the Treasury but to the Water Restoration Fund for direct use on delivering improvements to the water environment.

Some clean water campaigners including Feargal Sharkey, Hugo Tagholm and Windrush Against Sewage Pollution seemed angry and disappointed by the conciliatory tone and what they perceived to be “window dressing” measures, as one called the provisions in the Bill. Among their arguments on X and other channels were that some offences covered in the legislation are already illegal but not enforced; that no water boss will ever go to jail; that the public is being asked to “bail out” the offenders; and that the share price rises that followed the announcement tell you everything you need to know. 

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Measures in the Bill include: 

Criminal charges   

The Bill will significantly increase the ability for the EA to bring forward criminal charges against law-breaking water executives. It creates new tougher penalties including imprisonment for water executives when companies fail to co-operate with or obstruct Environment Agency and Drinking Water Inspectorate (DWI) investigations, with offences triable in both the Crown and Magistrates’ Court.   

Bonus ban

The Bill will give Ofwat powers to ban the payment of performance-related pay including bonuses to chief executives and senior leadership of water companies unless they meet high standards when it comes to protecting the environment, their consumers, financial resilience and criminal liability.

Ofwat will be required to set rules requiring water companies to appoint directors and chief executives and allow them to remain in post only when they meet the highest standards of ‘fitness and propriety’, and to ensure customers are involved in company decision-making.   

Severe and automatic fines for offences   

Currently, the regulators have to conduct lengthy investigations to the criminal standard of proof (“beyond reasonable doubt”) before they can impose financial penalties, even for minor to moderate offences. They cannot impose Fixed Monetary Penalties for most water sector offences and the current maximum penalty is just £300. This means it is not cost effective for regulators to impose financial penalties for frequent, more minor offences.

The Bill lowers the standard of proof to the civil standard (“on the balance of probabilities”) and enables Fixed Monetary Penalties to be imposed as Automatic Penalties for specific offences – allowing regulators to issue penalties more quickly, without having to direct resources to lengthy investigations.

The list of water industry offences that will be subject to Automatic Penalties will include pollution offences, failure to comply with information requests and reporting requirements, and water resource offences.

These offences and the increase in the value of the penalties (from £300) will be set out in secondary legislation, following consultation. 

Regulators’ cost recovery

The EA and Natural Resources Wales will be able to recover their costs for enforcement from water companies.

The DWI will be able to recover its Security and Emergency Measures Direction costs in full, and will revise its fee collection methods and fee structures.

Independent monitoring of every outlet   

Emergency sewage overflows are not currently fully monitored. Water companies will be required to publish real-time data (within an hour) for all emergency overflows in England in a clear, accessible format. This data will be independently scrutinised by the regulators and used as evidence in their investigations.

There will be a new statutory requirement for water companies to publish annual Pollution Incident Reduction Plans, setting out steps they are taking to address pollution incidents to ensure that, wherever possible, they do not happen again. 

Special administration (SAR)

The bill introduces a power for the secretary of state to modify water company licences to recover any shortfall in government costs at the end of a SAR, bringing water into line with energy arrangements. The recovery mechanism will be subject to consultation, with options including cost recovery from a single company or all water companies.

The bill will also require that government and Ofwat are notified of any winding-up petition presented to a court by company directors or creditors, and give both parties guaranteed representation rights at the subsequent court hearings. This is currently not the case.

Finally, the bill will introduce similar SAR provisions for Wales and provide the Welsh ministers with powers equivalent to those of the secretary of state.