High Court examines the “don’t pay twice” mantra for sewerage charges and storm overflows

The increases in water and sewerage charges for the period 2025 to 2030, required to address the water sector's £104 billion investment in infrastructure enhancements agreed as part of the price review of 2024 (PR24), has gained a good deal of attention. Among the voices protesting at the rising cost are those who argue that customers should not “pay twice” for these upgrades, particularly the upgrades required to reduce the use of storm overflows. Often, these voices want increased performance and better environmental outcomes, but argue that water companies have already been paid for these improvements through previous bills, and have not delivered. The catchy phase “won't pay twice” has caught on as an expression of frustration by customers but, like other famous three-word slogans, it masks a far more complicated reality.  

That more complicated reality was examined in a recent case before the High Court, R (on the application of River Action UK) v Water Services Regulation Authority. The claimant argued that the Water Service Regulation Authority (better known as Ofwat) had adopted a “don't pay twice” policy in its price control methodology, but had failed to deliver on that promise in the way it had calculated ‘enhancement’ expenditure for storm overflow discharge reduction projects.

Ofwat accepted that it had set itself a policy that customers should not pay twice: “…where customers have already paid companies to provide certain services (i.e. to attain certain permit levels) they should not have to pay again by way of the prices charged under the PR24 price control in order for companies to regain compliance with their environmental permits”.

The dispute between the parties concerned Ofwat's reliance on ‘hydraulic simulation modelling’ to examine an asset's performance before and after improvements to determine whether this was ‘enhancement’ expenditure. The claimant argued that water companies should prove to Ofwat that real-world performance of the asset meets the required standards before meeting the condition to be ‘enhancement’ expenditure, so as to ensure previous failures to invest resulting in underperformance against current legal standards are not swept into ‘enhancement’ expenditure.  Ofwat argued that the ‘modelled’ approach did have sufficient safeguards, because the model distinguished between “as is” (how the asset is performing) and “basis of design” (how the asset should be performing). Ofwat used the “basis of design” as the baseline for assessing enhancement expenditure, so that if an asset was not performing as it should do (for example, due to lack of maintenance), the costs to bring it back up to design would not be included.

Mr Justice Swift found in favour of Ofwat's argument and dismissed the application for judicial review. Mr Justice Swift agreed that, having made “don't pay twice” a policy objective, it would be unlawful for Ofwat to act contrary to that policy without good reason. However, Ofwat's case was that its approach to price control deliverables was entirely consistent with the “don't pay twice” principle, and as such, the question for the Court was whether there was a logical basis for Ofwat coming to that conclusion. Mr Justice Swift held that using a “basis of design” model (rather than evidence of actual performance) in the hydraulic simulation model was not a clear error, and was logical. 

It is telling that the case became a rather technical assessment of the correct approach to modelling when assessing whether something is enhancement expenditure. The price review process took 2 ½ years and involved a huge amount of technical work, designed to ensure (among other things) that customers do not pay for historic underperformance. It is therefore not surprising that the Court was reluctant to intervene in Ofwat's decision-making, provided that Ofwat had a logical explanation to underpin its approach. 

This case provides an important validation for Ofwat's approach and a detailed and technical counter-argument to the public perception that it is being asked to pay twice. However, whether this cuts through to the public discourse remains to be seen.

“applying the “don’t pay twice” principle is not a hard-edged matter” Mr Justice Swift