Oct 9
As a result of Storm Arwen, a civil emergency within the meaning of section 1 of the Civil Contingencies Act 2004, the claimant water company’s supply of water to its customers was severely disrupted. Pursuant to the regulatory scheme implemented by the Water Services Regulation Authority (“Ofwat”), the default position was that the water company managed the risk of water supply interruptions. The interruptions in supply occasioned by the storm resulted in the claimant underperforming in relation to its performance commitments, with the result that Ofwat reduced the price the claimant could charge customers for the following year by £25.79m, pursuant to the price control settlement, the means by which Ofwat discharged its statutory duties in relation to pricing. The claimant made representations contending that it should be exempt form the price reduction since the circumstances of the storm fell within the civil emergency exemption provided for in the price control settlement. By its final determination, Ofwat, although accepting that the storm fell within section 1 of the 2004 Act, refused to apply the civil emergency exception, but did reduce the amount of the price reduction by half. The claimant sought judicial review of Ofwat’s refusal to apply the civil emergency exception on the grounds that: (1) the civil emergency exception applied automatically to relieve the water company of any underperformance caused by the civil emergency if the preconditions for the exception were met; (2) the regulator did not have a policy setting out how it exercised its discretion over the civil emergency exception and the regulator was under a duty to prescribe such policy; and (3) the regulator considered irrelevant factors when making its final determination and the final determination was irrational.
On the claim—
Held, claim dismissed. On a true construction of the civil emergency exception within the regulatory scheme contained within the price control settlement, Ofwat had a discretion whether or not to apply the exception where the preconditions for its application were met. The purpose of the regulatory scheme was to permit Ofwat to allocate risk to the party which it believed was best able to manage the risk, and the scheme was shifting towards limiting exceptions, in particular of water supply interruptions relating to severe weather. The existence of a discretion in relation to the exception was consistent with the purpose of the scheme and avoided the possibility of an absurd outcome whereby a no-fault interruption to supply following a weather event which marginally failed to fall within section 1 of the Civil Contingencies Act 2004 would not be exempt from a price reduction for under performance, whereas a period of supply interruption which was prolonged due to failures by the water company following a weather event which marginally did fall within section 1 of the 2004 Act would be exempt from such a price reduction. Although Ofwat’s exercise of the discretion caused significant financial implications, its exercise of the discretion was not unbounded. Rather, the discretion had to be exercised in accordance with Ofwat’s statutory duties under section 2 of the Water Industry Act 1991, which provided a sufficient template for consistency in decision-making, so that the requirement for a prescriptive policy for the exercise of the discretion did not apply. In the present case, Ofwat had had a discretion as to whether to apply the civil emergency exception to the interruption in supply by the claimant as a result of Storm Arwen. In reaching its final determination, Ofwat had clearly had its statutory duties in mind, had not taken irrelevant considerations into account and had reached a rational decision. Accordingly, the decision to refuse to apply the civil emergency exception had been lawful (paras 66–69, 90–92, 97–98, 102, 109, 127–128).
Thomas de la Mare KC and David Lowe (instructed by KPMG LLP) for the claimant.
Kieron Beal KC and Tom Lowenthal (instructed by Gowling WLG (UK) LLP) for Ofwat.