Creating financial accountability for regulatory failings

Businesses can be significantly affected by the behaviour of regulated utilities, such as those operating water or transport infrastructure, with failure of these infrastructures resulting in considerable costs for firms. Here we discuss the increased risk of private court actions against underperforming regulated utilities, spurred on by greater accessibility of collective actions.

16 January 2024

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There is an increasing risk of private court actions against regulated utilities due to their under-performance.

This comes in the context of a general uptick in actions against utilities, spurred on by an increase in the accessibility of collective actions. This can be seen across many areas, whether it be in relation to the water industry and the discharge of untreated sewage and wastewater into waterways or uncompetitive prices for residential landline services. A steady number of private cases are developing against regulated entities.

This is an evolving area, with some cases progressing through court while others are gaining publicity before they’ve even begun. Our Regulatory Risk and Compliance (RRC) team will keep this article updated to reflect any developments and provide an insight into useful trends.

Private damages against regulated utilities

Businesses can be significantly affected by the behaviour of regulated utilities, such as those operating water or transport infrastructure.

The underperformance of utilities can result in considerable costs for firms, users, and wider communities, but remedial action has traditionally been viewed as a matter for the relevant regulators, e.g. via enforcement action. However, we are beginning to see private claims being brought against regulated utilities that run in parallel to their regulatory remedies.

Nature of the claims

Most of these claims will likely be brought under competition law but there are examples of claims in nuisance/ trespass in England. We’ve set out some examples of these cases below. 

Competition claims

On 14 December 2023, the Competition Appeal Tribunal published an application to commence collective proceedings against Severn Trent Water Limited and Severn Trent PLC to claim damages for harm caused by an alleged abuse of dominance.

The collective proceedings allege that Severn Trent Water has committed, and continues to commit, an abuse of a dominant position as a natural monopoly providing sewerage services to consumers that have no ability to switch providers.

Ofwat, the Water Services Regulation Authority, operates an incentive system for sewerage companies that imposes penalties for poor performance and increases in revenue allowance for good performance. It is alleged that Severn Trent Water has provided the Environment Agency and Ofwat with misleading information as to the number of pollution incidents that have occurred under their watch. This, in turn, has led to Ofwat allowing Severn Trent Water to charge more to customers under the incentive system.

The Competition Appeal Tribunal must now decide whether to grant a collective proceedings order to allow the action to go ahead.

Similar claims are expected to be brought in the coming months against other water/ sewerage undertakers in England, including:

  • Thames Water;
  • United Utilities;
  • Yorkshire Water;
  • Northumbrian Water; and
  • Anglian Water.

The continuous instances of (alleged) illegal sewage discharge could lead to the conclusion that there has been an excessively low quality of service due to an underinvestment in sewage networks.

As in the case of the challenge against Severn Trent Water, an argument can be made that this lack of investment has not been reflected in the companies’ revenue cap, which envisages certain standards being met. The water/ sewage companies have continued to charge in line with the revenue cap but have failed to meet its assumptions regarding quality of service. This, therefore, leads to an increase in price relative to service levels that would be impossible without the presence of significant market power. For more detail on a possible abuse of dominance, see here.

It’s yet to be seen how the court responds to such arguments as in the Severn Trent case and there are many questions yet to be answered. For example, being a standalone claim, the claimant is required to prove the existence of the abuse. This may be difficult as Severn Trent Water and other water/ sewerage undertakers may argue that there are legitimate commercial reasons for the reduction of investment into sewage networks, e.g. according to a study published by Ofwat and the Consumer Council for Water in April 2022, customers prioritise the quality of drinking water over investment into sewage infrastructure, meaning that investment decisions could be argued as reflecting customer choice.

Nuisance/ trespass claims

An example of a nuisance/ trespass claim is The Manchester Ship Canal Company Ltd v United Utilities Water Ltd. Here, it was found that a sewage operator in England could not be subject to a nuisance claim relating to the unauthorised discharge of untreated water. This was because under section 18 of the Water Industry Act 1991, the only remedy available was regulatory enforcement. The case has been appealed to the UK Supreme Court and is currently awaiting judgment. Note that this restriction does not exist in Scotland, suggesting that nuisance claims against utilities may be possible.

This shows that barriers do exist that may slow the pace of private actions against regulated utilities. It also highlights a present tension as, ultimately, regulators are in place to ensure utilities perform to the expected standards and, if necessary, they have statutory powers to take remedial action. An increase of private claims could see utilities’ liability extend beyond what was envisaged by the applicable regulatory regime.

How has the tension previously been handled?

This tension can be illustrated by discussing actions relating to an abuse of dominance by way of pricing behaviour, as regulated sectors often involve some degree of price/ revenue control. As many of the competition claims against utilities allege unfair pricing, regulated utilities can argue that ex-post questions of their charges are inappropriate as they are already regulated ex-ante.

In fact, in Flynn Pharma Ltd and Flynn Pharma (Holdings) Ltd v Competition and Markets Authority, Pfizer Inc and Pfizer Limited v Competition and Markets Authority, the Competition Appeal Tribunal specifically noted that “price control is better left to sectoral regulators”.

However, in Deutsche Telekom v Commission, the EU General Court (the General Court) found that ex-ante price control does not prevent a claim of abuse of dominance. The case involved Deutsche Telekom (DT) appealing a European Commission decision which found that DT had abused its dominant position by way of a “margin squeeze”, i.e. where there is too narrow a margin between an integrated provider’s price for selling essential inputs to a rival and its downstream price such that the rival cannot survive or effectively compete.

German law (a) required DT to allow its competitors access to its network and (b) regulated the retail and wholesale prices that DT were allowed to charge. One of DT’s defences was that it could not have abused its dominant position as its wholesale pricing was in line with the price controls.

The General Court disagreed, stating that “it is only where anticompetitive conduct is required of companies by national legislation, or if Member States create a legal framework which itself eliminates any possibility of competitive activity on the part of companies, that the EU competition rules do not apply”. It is to be seen that, at least in EU law, the pricing behaviour of a regulated entity is still possible to constitute a breach of competition law where the regulation allows sufficient discretion to “decide” its conduct. This is relevant because, as set out above, many of the private actions brought against utilities in the UK will likely allege some sort of inappropriate pricing.

Collective actions in the UK

An important factor in the uptick of private claims against regulated utilities is the expansion of “collective” actions, i.e. where a class of individuals are represented as a group in a single action.

Given the nature of the activities carried out by regulated utilities, it is likely that a course of action will impact a large number of people, but the harm caused individually may be of low economic value. Traditionally, these cases have been economically unviable to bring against a well-resourced utility which is willing to defend the action.

Opt-out vs Opt-in

Different mechanisms have existed in England, Wales, and Scotland for some time which allowed parties to combine similar cases on an “opt-in” basis, e.g. joint claims and representative actions in England and Wales and the use of case management powers in Scotland.

However, in 2015 the scope for collective actions was significantly widened in respect of competition claims as “opt-out” actions were introduced. This means an action can be brought on behalf of unnamed and unidentified claimants who will be treated as part of the action unless they have specifically requested otherwise.

Opt-out actions can be brought before the Competition Appeal Tribunal in respect of an infringement of competition law in England, Wales, or Scotland. For example, the claim against Severn Trent Water above has been brought as an opt-out action where the proposed class is in the region of 8.1 million members.

Separately, Scotland now has a formal “opt-in” collective action procedure which was introduced in 2020 and applies to all forms of actions, not just competition claims. The Scottish Civil Justice Council has also stated that it is considering introducing an opt-out regime.

Collective actions have the potential to fundamentally alter the economics behind a claim and increase the risk to regulated utilities of a private action. This is because claims that were traditionally prohibitively expensive for individuals can now be started as a collective action and receive funding from a litigation funder, something that we are already seeing examples of.

How we can help

Our RRC team has acted on some of the largest and most innovative projects across the UK, Europe, and Asia, representing utilities, regulators, and other interested parties.

We welcome feedback on these themes and would be happy to have a dialogue with interested parties.  Please feel free to get in touch with a member of our RRC team or via your usual Shepherd and Wedderburn contact.