The new draft Water bill was launched by the Environment Secretary Caroline Spelman for pre-legislative scrutiny on 10 July 2012, following its announcement in the Queen’s Speech. There has been much commentary about the measures introduced under the draft Bill that will see the non-domestic water market liberalised and opened up to wider competition. But what has not received so much attention are the measures in the draft Bill that will see changes to regulatory enforcement.

Under Section 22A of the Water Industry Act 1991, the Secretary of State, the Welsh Minister or Ofwat has the power to impose a financial penalty of up to 10% of turnover on licence holders and water and sewerage undertakers if, for example, there has been a breach of a licence condition or a failure to meet prescribed standards of performance.

Currently, unless a final or provisional enforcement order has been made in relation to a contravention or failure, Ofwat cannot impose a financial penalty more than 12 months after a particular contravention or failure occurred, unless, before the end of that period, they have issued a notice of intention to propose a penalty or a statutory request for information in relation to the potential contravention or failure. Section 18 of the draft Water Bill significantly extends this time limit for the imposition of a financial penalty from 12 months to five years after the contravention or failure has occurred. Whilst the 12 month time limit will apply to any contravention or failure that takes place prior to Section 18 coming into force, from that date Ofwat will be able to apply the longer limitation period.

The reasoning behind the extension appears to be to encourage the deterrent effect imposing a penalty on a water company has on the rest of the industry. The water industry’s regulatory framework is currently built around five-yearly reviews of price controls, with the information submitted at these price reviews being forward-looking, determining the prices companies can charge for the following five years. By extending the limitation period for a financial penalty to five years, Ofwat would be able to capture the full extent and scope of any contravention or failure in any penalty that it imposes, by reference to its impact on prices.

Given the increasing interaction between regulators, this change should not be viewed as surprising. In the energy sector, on 8 June 2010 the time limit for imposition of a financial penalty was extended from 12 months to five years by virtue of Section 24(1) of the Energy Act 2010. Therefore, the new measure under the draft Water Bill simply brings the water industry into line with energy; with both limitation periods now being more akin to the general six year limitation period for breach of contract and tortious claims.

Another recent change in energy sector regulation which brings regulatory enforcement closer to litigation practice and procedure is the introduction of Ofgem’s formal settlement procedure in its new enforcement guidelines, which aims to deal with particular contraventions in a quicker and more efficient manner. With continued pressure on funding, it is likely to be only a matter of time until Ofwat adopts a similar process for settlement.

Whilst the move towards an enforcement system more akin to litigation may not be unexpected, in light of this, other aspects of Ofwat’s enforcement framework might also require reconsideration to ensure equality of arms, such as a more rigorous appeals process. At present, the lack of a mechanism to allow water companies more extensive rights of appeal against enforcement actions is uncharacteristic not only when compared to traditional litigation, but also to many other regulated sectors, many of which have more efficient merits-based appeals systems. It seems the recent changes may not go far enough to achieve a process that both parties feel is fair and reflective of forward looking enforcement.

The Department of Environment Food and Rural Affairs (Defra) said that the Bill will be introduced to Parliament when Parliamentary time allows, and it expected the Bill to achieve Royal Assent in 2014.