
Table of contents
Approximate read time: 10 minutes
The House of Lords is due to consider the following topical question for short debate from Baroness Grender (Liberal Democrat) on 6 February 2025:
To ask His Majesty’s Government what steps they are taking to ensure that fines paid by water companies are used to repair the damage done by sewage pollution.
1. How are water companies regulated and how can they be fined?
1.1 Performance of water companies in reducing sewage pollution
Privatised water companies in England and Wales have been criticised for failing to prevent the pollution of waterways in recent years, including discharges of sewage into rivers. Generally, the sewerage system operated by the water industry transports wastewater to sewage treatment works. This is then treated, and the water returned to inland waters and the sea.[1] However, in certain circumstances, water companies are allowed to release untreated or partially treated sewage into inland waters and the sea through storm overflows (referred to as storm overflow discharges). Storm overflows are designed to act as ‘safety valves’ for the sewerage network, in order to prevent wastewater backing up through pipes into homes and businesses when the system is overwhelmed by water during heavy rainfall.[2]
The use of storm overflows is monitored by the Environment Agency in England. The agency collects data on the performance of water companies using an environmental performance assessment (EPA) tool. The metrics used for the EPA include the total number of pollution incidents each year, including serious incidents. The most recent EPA report was published in July 2024, containing data for 2023.[3] The agency found that three water companies—Severn Trent Water, Wessex Water and United Utilities—had achieved a maximum four-star rating compared to only one company in 2022. However, it said the performance of most companies lagged “far behind”. Total pollution incidents had increased, and 90% of serious pollution incidents were caused by four companies—Anglian Water, Southern Water, Thames Water and Yorkshire Water—a situation the regulator described as “unacceptable”.
1.2 Regime for fining water companies
There are three main regulators of the water industry in England:[4]
- The Water Services Regulation Authority, also known as Ofwat, is the economic regulator for water companies.
- The Environment Agency regulates activities that may cause environmental pollution or harm through environmental permitting. This includes issuing permits for the use of storm overflows or emergency overflows.
- The Drinking Water Inspectorate is the water quality regulator.
All three regulators can issue fines for non-compliance with regulations.[5] Ofwat and the Environment Agency can issue fines directly. The Drinking Water Inspectorate can apply to the courts to impose fines.
Ofwat undertakes a five-yearly price review process for the water industry.[6] As part of the price review, water companies set targets (also known as ‘performance commitments’).[7] The targets generally have outcome delivery incentives (ODIs) associated with them, and when companies perform well, they may qualify for an outperformance payment. ODIs can also be negative; if a company performs poorly, Ofwat can require it to pay an underperformance payment or fine.
The Environment Agency has its own powers to prosecute individuals and businesses for committing offences against the environmental legislation it enforces.[8] Its enforcement action can include fines and civil and criminal prosecutions.
The Environment Agency’s July 2024 environmental performance report stated that since 2015 the agency had successfully concluded 63 prosecutions against water and sewerage companies for pollution offences, securing fines of over £150mn.[9]
However, concerns have been raised about the scale of these fines compared to the dividends that water companies have paid out to their shareholders in recent years.[10] In April 2024, the Financial Times claimed that water companies in England and Wales had paid out £2.5bn in dividends since 2021.[11] It also estimated that water companies had paid a total of “£78bn in dividends in the 32 years between privatisation in 1991 to March 2023”, based on regulatory data adjusted for inflation.
In May 2024, a study by the University of Greenwich found that the amount of dividends paid out since privatisation was even higher, at over £85bn.[12] However, Ofwat has refuted the figures. It said the £85bn figure was “simply wrong”, and its own estimate of dividends paid out since privatisation was £52bn.[13] Ofwat also claimed there had been “huge investment in the sector of over £200bn” since privatisation.
2. What has the government’s policy been on this issue?
2.1 Previous Conservative government
In response to concerns about the environmental performance of water companies, the previous government announced in November 2022 that environmental fines would be ringfenced for water restoration projects. The Department for Environment, Food and Rural Affairs (Defra) said:
At present, money from these fines is returned to the Treasury. Under the new plans, ringfenced funds will go to Defra and will be invested directly back into environmental and water quality improvement projects.[14]
The Conservative government’s 2023 ‘Plan for water’ described the scheme as the ‘Water restoration fund’ (WRF). The WRF was formally opened to applications in April 2024.[15] Defra said £11mn would be made available for “local projects in regions where fines and penalties have been issued between April 2022 and October 2023”. The application process for projects ran until June 2024.
However, in January 2025 the current Labour government said no grants had been allocated by the fund since it had been set up.[16] The current government has also said the future of the WRF—in particular whether the funds would remain ringfenced or would be returned to the Treasury—would be dependent on the outcome of the spending review expected later this year.[17]
For further information on measures introduced by the previous Conservative government to reduce sewage pollution, see the House of Lords Library briefing, ‘River pollution and the regulation of private water companies’ (19 February 2024).
2.2 Current Labour government
The Labour Party manifesto for the 2024 general election said it would “put failing water companies under special measures to clean up our water”.[18] Specifically, Labour said it would enable regulators to impose “automatic and severe fines for wrongdoing” and ensure the independent monitoring of sewer outlets.
Since taking office, the Labour government has introduced the Water (Special Measures) Bill [HL], which it says would fulfil these manifesto commitments.[19] Among other provisions, the bill would:
- enable Ofwat to block the payment of bonuses to chief executives and directors if water companies fail to meet specific standards
- establish new statutory requirements for water companies to publish annual pollution incident reduction plans and provide timely and accessible information on sewage discharges from emergency overflows
- enable the introduction of new automatic penalties for offences committed by water companies and give regulators new powers to recover costs for their enforcement work
For further information on the bill, see the House of Lords Library briefing ‘Water (Special Measures) Bill [HL]: HL Bill 17 of 2024–25’ (3 October 2024). The briefing summarised the bill’s provisions and reaction to the bill from stakeholders.
The bill was introduced in the House of Lords on 4 September 2024, received its second reading on 9 October 2024 and completed third reading on 26 November 2024.[20] During report stage on 20 November 2024, amendments were tabled by Baroness Bakewell of Hardington Mandeville (Liberal Democrat) (amendment 46) and the Duke of Wellington (Crossbench) (amendment 47), which sought to put the water restoration fund on a statutory footing and maintain it as a ringfenced fund.[21] The Defra minister, Baroness Hayman of Ullock, said the government opposed the amendments because they would “instil inflexibilities” about how the funds were spent. The amendments were ultimately not moved, and were not added to the bill.[22]
The bill was introduced in the House of Commons on 27 November 2024 and completed third reading on 28 January 2025. The House of Lords is due to consider House of Commons amendments to the bill on 5 February 2025.
During House of Commons committee stage on 14 January 2025, a Conservative amendment (new clause 2) to put the WRF on a statutory footing was opposed by the government.[23] The Defra minister, Emma Hardy, said legislating for the WRF would make it an “inflexible” funding mechanism, and she reiterated that the future of the fund would be decided as part of the spending review.[24] The proposed new clause was negatived on division.[25]
During House of Commons report stage on 28 January 2025, another attempt was made to amend the bill to include the WRF (new clause 16).[26] Again, the government opposed the amendment, and it was negatived on division by 181 votes to 322.[27]
For further details on the bill’s House of Commons stages, see the House of Commons Library briefing, ‘Water (Special Measures) Bill 2024–2025’ (22 January 2025).
Separate to the bill, in October 2024 the UK and Welsh governments launched an independent commission on the water sector.[28] It said the commission would be the “largest review of the industry since privatisation”. The government said the commission would report back in 2025 with recommendations on “how to tackle inherited systemic issues in the water sector to restore our rivers, lakes and seas to good health, meet the challenges of the future and drive economic growth”. It added the commission’s recommendations would “form the basis of further legislation”.
3. Read more
- House of Lords Library, ‘Water and sewage companies: Executive remuneration’, 16 February 2024
- House of Commons Library, ‘Economic regulation of the water industry’, 20 August 2024
- House of Lords Library, ‘Cleaning up failures in water and sewage regulation: Industry and Regulators Committee report’, 22 September 2023
- Oral question on ‘Thames, Yorkshire and Northumbrian Water: Ofwat proposed fines’, HL Hansard, 29 January 2025, cols 251–4
- House of Commons, ‘Written question: Water Restoration Fund (24770)’, 27 January 2025
Cover image by Rijk van de Kaa on Unsplash
References
- Environment Agency, ‘Pollution from water industry wastewater: Challenges from the water environment’, October 2021, pp 3–4 (link opens as Word document). Return to text
- House of Commons Environmental Audit Committee, ‘Water quality in rivers’, 13 January 2022, HC 74 of session 2021–22, p 14. Return to text
- Environment Agency, ‘Water and sewerage companies in England: Environmental performance report 2023’, 23 July 2024. Return to text
- Ofwat, ‘Water sector overview’, accessed 30 January 2025. Return to text
- House of Commons Library, ‘Water (Special Measures) Bill 2024–25: Progress of the Bill’, 22 January 2025, p 10. Return to text
- Ofwat, ‘Price reviews’, accessed 30 January 2025. Return to text
- House of Commons Library, ‘Economic regulation of the water industry’, 20 August 2024, p 16. Return to text
- Environment Agency, ‘Environment Agency enforcement and sanctions policy’, 12 December 2024. Return to text
- Environment Agency, ‘Water and sewerage companies in England: Environmental performance report 2023’, 23 July 2024. Return to text
- HL Hansard, 29 January 2025, cols 251–4; HL Hansard, 22 February 2024, cols 746–60; HL Hansard, 22 February 2023, cols 1657–60; and Julia Kollewe and Sandra Laville ‘Three water firms face record total £168mn fine after sewage investigation’, Guardian, 6 August 2024. Return to text
- Gill Plimmer and Ella Hollowood, ‘Water companies pay £2.5bn in dividends in two years as debt climbs by £8.2bn’, Financial Times (£), 15 April 2024. Return to text
- BBC News, ‘Water investors have withdrawn billions, says research’, 20 May 2024. Return to text
- As above. Return to text
- Department for Environment, Food and Rural Affairs, ‘Water company fines to be invested back into the environment’, 30 November 2022. Return to text
- Department for Environment, Food and Rural Affairs, ‘Launching our water restoration fund’, 9 April 2024. Return to text
- HC Hansard, 28 January 2025, col 254. Return to text
- House of Commons, ‘Written question: Sewage: Waste disposal (21934)’, 10 January 2025. Return to text
- Labour Party, ‘Labour Party manifesto 2024’, June 2024, p 59. Return to text
- Department for Environment, Food and Rural Affairs, ‘Water (Special Measures) Bill: Policy statement’, 5 September 2024. Return to text
- UK Parliament, ‘Water (Special Measures) Bill [HL]: Stages’, accessed 31 January 2025. Return to text
- HL Hansard, 20 November 2024, cols 289–90. Return to text
- HL Hansard, 20 November 2024, col 292. Return to text
- HC Hansard, 14 January 2025, cols 69–104. Return to text
- HC Hansard, 14 January 2025, col 100. Return to text
- HC Hansard, 14 January 2025, col 101. Return to text
- HC Hansard, 28 January 2025, cols 221–74. Return to text
- HC Hansard, 28 January 2025, cols 258–61. Return to text
- Department for Environment, Food and Rural Affairs, ‘Governments launch largest review of sector since privatisation’, 22 October 2024. Return to text