Defra ‘playing to the gallery’ on £250m pollution fines

Within his first month in office, the secretary of state for environment, food and rural affairs (Defra) has made clear his intention to clamp down on pollution entering waterways.

In his first speech to the House of Commons, Ranil Jayawardena took aim at combined sewer overflows (CSOs), revealing he had ordered water company bosses to set out their plans for tackling what has steadily become the most high-profile challenge for the industry. At the Conservative party conference at the start of this month, he promised to give the Environment Agency (EA) a much bigger stick by elevating civil fines for serious pollution incidents from £250,000 to £250 million.

As one industry source pointed out, the EA’s 2021 Environmental Performance Assessment showed there were 14 serious pollution incidents in Anglian’s region alone, so applying the top level fine for each of those would be more than double the organisation’s turnover for the year.

Industry experts have shared their concerns with Utility Week that the proposals will fail to speed up enforcement and imply greater severity for civil offences than criminal – undermining the system. Another suggested it was merely “another useful soundbite for a politician” without benefitting the environment.

One water company executive described the proposals as a “a monumental distraction and a play to the gallery”.

They told Utility Week: “Regulation is already working and has meted out some very significant fines. The civil sanctions regime works really well in that you get better outcomes from the approach.”

This has been the approach the EA has tended to take, which enables companies to deliver work through undertakings resulting in a better outcome on the ground. “There’s been really good stuff done with local partners as a result of those sorts of statutory undertakings,” the source said.

“This proposal risks further polarising the debate,” they added. “It is playing into the misinformation in this debate. And realistically isn’t going to drive the step change in behaviour and performance required because the underlying issues are actually about investment certainty and mechanisms to deliver and to enable that longer term investment. It’s not about people playing the system.”

Quicker method of enforcement

This 1,000x uplift would certainly make an unhealthy dent in the turnover of any company and far outstrip the total fines handed down through criminal courts for environmental prosecutions. In the past seven years the EA has secured £138 million of penalties from the sector, £90 million of which was a single fine to Southern Water.

The Department for Environment, Food and Rural Affairs (Defra) said variable monetary penalties (VMPs) “can offer a quicker method of enforcement” than criminal prosecution. It stressed that VMPs were only issued for “more serious offences, including when there is evidence of negligence or mismanagement or when there is an environmental impact”.

Discharging pollution into waterways breaches environmental permits and has for many years been a criminal offence, subject to prosecution in cases deemed serious enough.

For lesser offences, the EA has the power to impose civil penalties ranging from fixed monetary penalties for offences deemed lower level; variable monetary penalties (VPMs) for more serious breaches that are not considered serious enough to warrant criminal prosecution; and enforcement undertakings where a company informs the EA of a breach and agrees with the Agency how they will remedy it. This usually means money going directly to help the area affected by pollution.

The monetary penalties can currently be up to £250,000 while the highest enforcement undertaking was £1 million. For incidents deemed more severe, the proceedings are dealt with through the criminal court system and could lead to higher fines and custodial sentences.

Michael Barlow, partner at Burgess Salmon, explained to Utility Week that civil penalties were designed to bridge the gap between non-enforcement of regulatory breaches and the threshold at which criminal proceedings should be brought. However, the level of fines proposed by Jayawardena implies greater severity than criminal proceedings.

He explained serious offences that meet the threshold would still be subject to criminal proceedings that could lead to fines or imprisonment, based on sentencing guidelines.

These are used by courts to provide consistency in sentencing and to ensure the penalty was high enough to be a deterrent – because historically they had been lower and not considered a disincentive alone.

The three main factors a court takes into account when deciding a fine are, firstly, the size of the company and its turnover to set an appropriate fine. Secondly, the culpability of the offender – whether it was deliberate, reckless, negligent, or no fault but still a breach. Thirdly, what level of environmental harm was caused according to four categories.

“The consultation to lift the current £250,000 for VMPs to £250 million takes VMPs way beyond the likely fine if the matter was prosecuted in the criminal courts and no longer sits in the gap civil sanctions were intended to sit in,” Barlow said. “All the checks and balances in place around the standard of proof for a criminal offence – beyond reasonable doubt – and how to decide the level of the fine would be removed.”

Appeals inevitable

Barlow explained the move effectively hands the Environment Agency the power to slap a penalty notice of £250 million on an organisation. These could – and certainly would – be appealed, but it reverses the verdict, which then requires the culprit to appeal it, rather than requiring the prosecutor to prove beyond reasonable doubt that the offence took place.

“My view is this is unlikely to survive any scrutiny. Neither side will be happy: the companies are exposed to the risk of £250million without the checks and balances of the criminal process, which was always intended to be for the more serious offences. It significantly shifts the checks and balances in the existing process of enforcement,” he said.

Barlow described appeals as “complicated exercises” requiring detailed evidence and probably a number of stages and warned that tribunals were probably not set up to deal with such a volume of work at pace.

When civil sanctions were proposed, their introduction was delayed because they were considered a regulatory burden, however with checks and balances built into them, Barlow said they became recognised as a useful tool.

Given the size of water companies, they sit outside of the upper bounds of the sentencing guidelines and therefore the fine would be determined at the discretion of the court, which could mean the same £250 million proposed by Jayawardena.

“Serious offences should go through the criminal court system,” Barlow said. “This is suggesting cases would become a civil rather than criminal matter whereas the criminal process should always be used for the more serious matters. But if the fines can now be larger using a civil process then it flies in the face of the way the system is set up to work.”

Another industry source suggested to Utility Week the proposal was bluster and bravado from Jayawardena and did not anticipate such fines to be imposed. They stressed that the level of sanctions being proposed would go beyond impacting profits and could jeopardise companies’ ability to supply water and fulfil their licence requirements. They pointed out that breaches could occur multiple times in a year – for a variety of reasons – so issuing quarter of a billion pound fines would rapidly bankrupt the organisations.

They noted the EA’s 2021 Environmental Performance Assessment showed even the top performers Northumbrian and United Utilities had one serious pollution event each. The source suggested applying the top level fines could put essential services at risk, or at the very least frighten financiers at a time when investment is essential.

The EA’s chief executive James Bevan highlighted in January that the move away from European Union environmental laws presented an opportunity to give regulators a much-needed “bigger stick” and recently both he and newly appointed chair Alan Lovell welcomed the proposals.

The sector itself accepts urgent work is needed to tackle overflows. A Water UK spokesperson said: “Water and sewerage companies agree there is an urgent need for action to tackle the harm caused to the environment by spills from storm overflows and wastewater treatment works. They are investing over £3 billion to improve overflows as part of a wider national programme to improve the environment between 2020 and 2025.

“All water companies have written to the Secretary of State to outline their plans to enhance the environment, tackle leakage and protect customers. We look forward to seeing the detail of the government’s plan and working with them to bring about the transformation we all want to see.”

A quick turnaround on the consultation is unlikely so companies must hold their breath to see how it transpires, or if this becomes the government’s next U-turn.