Regulator Ofwat has warned the water industry it will not hesitate to level even heftier fines than the record penalty for Southern Water – if it finds further evidence of misreporting or breaches of trust.
Yesterday’s culmination of a two-year investigation into Southern Water’s failures in the operation of its sewage treatment sites and deliberate misreporting of performance saw Ofwat issue the company with a penalty of £37.3 million. This is equivalent to 6.7 per cent of Southern Water’s wholesale wastewater turnover – the largest proportional penalty ever awarded by Ofwat.
The regulator has the power to fine companies up to 10 per cent of turnover and Emma Kelso, senior director of markets and enforcement, told Utility Week the Southern Water penalty would have been higher if it wasn’t for the settlement package presented. This included a £123 million rebate to customers.
The fine was reduced to £3 million in light of Southern Water’s undertakings but Kelso said it was significant that it was not downgraded to a purely nominal sum.
She said: “We considered that figure very carefully. It was important that it was the customers who were compensated for this breach of trust. In the past, when that has been satisfied, we have often chosen a nominal figure of £1. But, the fact that this was so egregious, so serious and happened over such a long period of time meant that we wanted to send a strong message.
“We want the industry to take notice. The package at stake here is huge compared to other enforcement packages we have agreed or that we have imposed in the past. But, it could have been higher and if we see further evidence of companies misreporting and breaching both our trust and their customers, then we can and will go further.”
Kelso said Ofwat was pleased with the steps being taken by Southern Water in terms of strengthening its processes and culture but insisted continued progress would need to be visible to avoid further enforcement.
She said: “There are 900 individual investigation operations that Southern Water has agreed to undertake – two thirds of which they have completed. We will keep holding their feet to the fire. They will have to report regularly to us and if they don’t meet those targets that is again a legal breach. We have plenty of power here to make sure they do the things they have said they will do.”
Asked how Ofwat can measure how a company is changing its culture, Kelso said it would be looking at Southern Water’s approach to whistle-blowing, how its board makes decisions and the processes in place.
On lessons for the wider water industry in the Southern Water case, Kelso said: “One of the key aspects in this case was that investment in assets had drifted and once that happens its very hard to get back on track.
“There are clear lessons in several areas in terms of ensuring that you have the right form of governance and culture running through the business and that it goes right from the board to the individual waste treatment works.”
She added: “We do note that one of the reasons we arrived at the level of 6.7 per cent is because Southern came forward with the reparation package. If they hadn’t done that that figure would have been even higher.
“This kind of behaviour won’t be tolerated and if we do find it in the rest of the industry then they can expect similar treatment.”