Water companies claimed to owe £163m in damages for sewage discharges

Water companies have been accused of abusing their monopoly position to overcharge customers by failing to provide the quality of service for which they were paid.

Fideres, a consultancy specialising in the investigation of corporate wrongdoing, suggested water companies in England and Wales may owe consumers £163 million in damages for sewage spillages over the last six years.

The firm said they may have also overcharged customers by £1.1 billion for sewage removal services they did not provide.

Although the price controls set by Ofwat prevent water companies from charging excessively high prices, Fideres said water companies may have exploited their monopoly position by providing an “excessively low quality of service,” specifically by underinvesting in their sewage networks.

It said the price controls should allow water companies to make sufficient investments to fulfil their regulated duties, including their environmental obligation to prevent sewage discharges from storm overflows, except after extreme weather and according to permits issued by the Environment Agency.

However, Fideres noted that the Environment Agency recently launched a criminal investigation into all ten English water companies to determine whether they have breached legal regulations on sewage discharges after earlier investigations by the agency and Ofwat concluded there may have been “widespread and serious non-compliance”.

It said serious breaches have already been identified, with Southern Water receiving a record £90 million fine in 2021 after pleading guilty to almost 7,000 unpermitted sewages discharges.

The firm cited recent research by the Financial Times, which found that water and sewage companies have cut investment in critical infrastructure by up to a fifth in the three decades since they were privatised, with post-privatisation investment hitting a peak of £5.7 billion a year between 1991 and 1999 and then falling by 15% to £4.8 billion between 2020 and 2021.

It also cited research by the Windrush Against Sewage Pollution campaign group, which through Freedom of Information requests to Ofwat found investment in wastewater networks has fallen by almost a fifth since the 1990s from £2.9 billion to £2.4 billion per year.

“Over the same period, the companies — which were privatised with no debt and handed £1.5 billion — have borrowed £53 billion, the equivalent of around £2,000 per household,” the consultancy added. “However much of that has been used not for new investment but to pay £72 billion in dividends.”

Fideres therefore suggested that water companies may have breached competition law, which is not limited to the abuse of monopoly power on the basis of price.

“An important question is whether the abuse is facilitated by, or coincident with the water companies undoubted dominance,” the firm stated.

“Here we would argue that the poor quality and under-investment by these profit-maximising firms would have been unsustainable if there had been effective competitive constraints on their behaviour.

“Such effective competition is not straightforward to picture in a natural monopoly such as this. However, the regulated prices and quality standards are in place to ensure that the service is provided at a price and level of quality that bears a reasonable relation to its economic value, and that is precisely the applicable test on excessive pricing cases.

“This leads us to conclude that setting excessively poor quality through underinvestment, and hence excessively high quality-adjusted prices may not have been possible, either in a competitive market, or in a regulated market that effectively enforced the regulations that seek to ensure that despite being a natural monopoly, consumers are nevertheless protected from monopoly outcomes.”

Based on the number and seriousness of pollution incidents, Fideres estimated that there is a “reasonable case to be made under competition law” that water companies owe customers £163 million in damages for sewage discharges over the last six years. This figure includes deductions for penalties and payments already made by water companies for failing to meet pollution targets.

The firm also calculated that water companies may have overcharged customers by £1.1 billion for sewage disposal services they did not provide, instead releasing this sewage into rivers and onto beaches.

It said these discharges averaged 120 million cubic metres per year and lasted for a total of 14,000 hours, with approximately 10,300 being classed as pollution incidents that breached regulatory permits.

“We recognize here that some of these discharges did not breach the firms’ regulatory permits, and so are unlikely to represent an exploitative abuse of dominance,” it added.

“However, we understand that the firms have nevertheless charged consumers for the volume of service, when in fact they did not dispose of some of that sewage, they dumped it. Whether or not this dumping of the sewage was in breach of their permits, we argue that consumers were therefore charged for a service that was not provided.”

Fideres called on the Competition and Markets Authority to launch competition and consumer protection investigations into water companies and said consumers may also wish to consider filing a class action complaint to the Competition Appeals Tribunal to obtain redress.

Responding to the claims, a spokesperson for the industry trade body Water UK said: “Water and sewerage companies are currently putting in place the largest ever infrastructure programme the industry has ever seen to improve overflows, and tackle spills, at a cost of £56 billion.

“The next decade is critical if we are to bring about the transformation to our rivers we all want to see. Water and sewerage companies are getting on with these important improvements and interventions such as this are a distraction from that vital work.”