Ofwat urged to limit executive bonuses for pollution failures

The Environmental Audit Committee (EAC) has urged Ofwat to consider limiting bonuses to water company executives if they fail to drive down pollution incidents following a damning report into the health of England’s rivers.

The Water Quality in Rivers report set out a catalogue of failures by water companies, regulators and government over several decades that have contributed to the current poor health of the country’s waterways.

The EAC launched its inquiry into the matter in December 2020 after an Environment Agency (EA) report uncovered incidents of combined sewer overflows (CSOs) being used outside of periods of heavy rainfall and found that no river in England is free from chemical pollution, leading to a swell of public interest.

Following multiple evidence sessions last year, the committee’s report has recommended that Ofwat explores its powers to limit the payment of annual bonuses to water company executives until there are no longer major or persistent permit breaches.

Philip Dunne, chair of the EAC, told Utility Week the incoming chief executive and chair of the Office for Environmental Protection (OEP) had indicated this might be an area they would look at.

However, he said because of the independent nature of the OEP, the EAC had not made recommendations to the newly formed body.

“We are starting to see it seep into the active management of water company boards,” Dunne remarked. “We have talked about the need for water company boards to consider their bonus awards for senior executives where there are persistent breaches of regulations, which is quite emotive.”

The investigation pointed to “multiple potential points of failure in the regulatory arrangements for monitoring, governance and enforcement of water quality”. It said the high-profile case of Southern Water raised “obvious and urgent” questions about the use of operator self-monitoring leading to misreporting. The EAC said it could not discount the possibility that similar practices have been going on at other water companies but have not been detected.

The report called for an urgent review by the EA into how it audits the self-monitoring of wastewater treatment works and said the agency should reduce the amount of time it takes to prosecute a water company following detection of a permit breach.

It also suggested a review of the sentencing guidelines for water pollution offences and said penalties should be high enough to ensure that relevant risk assessments relating to pollution are routinely on the agenda for every water company board.

The investigation heard that the EA lacked the resources and technical capabilities to properly monitor overflows and incidents of permit breaches.

The EAC advised the agency to overhaul its approach to monitoring to utilise available technologies and citizen scientists. It said the EA should develop in-house capacity or hold tenders for external assistance to undertake analysis of data from event duration monitors (EDMs) and modernise its monitoring technology to be able to “rapidly introduce cost-efficient and effective sensors at an increased number of locations.”

Under the Environment Act, water companies will be required to publish data from EDMs, which record when CSOs have discharged into waterways.

Dunne said this is the first step in trying to fix the problem: “What we now need to see is the regulator step up and take action where there are persistent breaches and discharges. For too long they have either wished these away, not had the resources to identify them, or failed to act in a way that makes water companies take action.”

He said the Treasury had increased Defra’s budget beyond what was requested, and he was hopeful the EA would receive increased funding but said a lot could be done using technology.

“We can expect very significant improvements to take place in monitoring without huge increases in funding,” Dunne said.

The report advised reclassifying all significant sewage spills from CSOs in dry weather as pollution incidents, regardless of permit compliance to incentivise overall reduction in discharges.

The EAC additionally recommended that water companies’ licence conditions be revised to require the delivery of year-on-year reductions in the number of pollution incidents towards a target of zero serious incidents by 2030.

“We’re all trying to leave the natural environment in a better state than we found it and rivers are the arteries of nature,” said Dunne. “Government and ministers have heard that and we will see a relentless pressure to continue to improve, which will first be felt by the water companies but will spread across other polluters of watercourses and rivers.”

The committee said water companies should work with the EA to ensure the public can easily access near real-time information on discharges into waterways as a matter of urgency. It said popular bathing areas should be signposted if they are downstream from a sewage treatment plant and farmers close to designated bathing areas should work to minimise risk of faecal contamination.

At present there is just one designated inland bathing area at Ilkely in West Yorkshire but the EAC said the government should “actively encourage the designation of at least one widely used stretch of river for bathing” each water company’s water catchment areas by 2025. It said for the next price review period from 2025-30 companies should set out how they will support more applications for designated river bathing areas.

Ahead of PR24, Ofwat is awaiting the strategic policy statement from Defra. The report urged it to make clear that natural capital must be taken into account in all economic decisions.

A spokesperson from Ofwat said: “Water companies’ performance in releasing sewage into the environment isn’t acceptable. We have an active investigation underway, are working with the government and other regulators to tackle these issues and hold companies to account at the same time as backing green initiatives, too. It’s clear there is more to do so we welcome the publication of today’s report and will review the recommendations.”

A Water UK spokesperson added: “We support the committee’s urgent call for action to improve the health of England’s rivers. Many of the recommendations mirror proposals set out in our recent 21st Century Rivers report, which calls for government, regulators, water companies, agriculture, and other sectors to come together and create a comprehensive national plan to transform our rivers.

“Now is the time to have an honest conversation about whether the current approach is adequate for addressing the challenges faced by our environment, which is why we particularly support the committee’s call for regulators to take a long-term focus.

“The committee is also right to emphasise the need for further investment to eliminate harm from storm overflows and treatment works. Water companies want to invest more and are pushing the government to encourage the economic regulator, Ofwat, to enable this increased spending over the next decade.”