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Ofwat proposes £35.8 million fine on Severn Trent Water

WATER SERVICES REGULATION AUTHORITY News Release (PN 11/08) issued by The Government News Network on 8 April 2008

Ofwat today published its proposals to fine Severn Trent Water 3% of its turnover - a total of £35.8 million - for deliberately providing false information to the regulator and providing a poor service to its customers.

Ofwat's proposed fine on Severn Trent Water breaks down as follows:

* 2.9% of 2006-07 turnover (£34.7 million) for deliberately misreporting some key customer service information; and

* 0.1% of 2005-06 turnover (£1.1 million) for providing sub-standard services to customers in 2005-06 by failing to meet Guaranteed Standards of Service.

Severn Trent Water's Customer Relations Department deliberately misreported some of its customer service data to hide its true performance in 2005 and in earlier years. This damaged Ofwat's ability to regulate the water sector effectively and protect customers.

Severn Trent Water's shareholders will bear the entire cost of the proposed penalty. It cannot be passed on to its customers.

Ofwat Chief Executive Regina Finn said:

"Severn Trent Water's behaviour was unacceptable. The size of the proposed fine reflects how seriously Ofwat takes the deliberate misreporting of information.

"This sends a clear message to the company and to the rest of the water sector - Ofwat will protect consumers and companies must comply with their legal obligations or pay the price. Any further attempts to deliberately mislead Ofwat could lead to even bigger fines in the future."

In a monopoly industry where the majority of customers have no choice of supplier, the only protection customers have is from the regulator. Reliable, accurate and complete information is fundamentally important if Ofwat is to be able to protect consumers. By deliberately misrepresenting its performance, Severn Trent Water prevented Ofwat from identifying failures in the company's customer service and taking action to improve that service.

This deception combined with poor internal processes and controls within the company meant that its customers received a service that was far below what the company had reported it was delivering, and in many cases was below the statutory minimum standards.

The company's actions also resulted in customers paying higher bills than they should have done. Some customers also missed out on payments they were entitled to because performance fell below prescribed standards.

As part of its actions to put right these failings, Severn Trent Water is returning money to customers. It has already made a start by returning some of that money through a reduction in this year's (2008-09) bills. The remainder will be returned to customers in next year's bills.

The company is also implementing action plans to address the weaknesses identified in its internal processes and controls. Ofwat is working closely with the company's auditors and reporters to monitor Severn Trent Water's performance.

Ofwat notes that Severn Trent Water took action when it discovered the misreporting. It reported the situation to Ofwat, initiated an investigation and co-operated with Ofwat's investigation. These factors have been taken into account when setting the level of the proposed penalty.

Notes to Editors:

1. The Water Services Regulation Authority (Ofwat) is the economic regulator of water and sewerage companies in England and Wales. It exercises its powers in a way that it judges will protect the interests of consumers, promote value and safeguard future water and sewerage services by allowing efficient companies to carry out their functions properly, and finance them.

2. Severn Trent Water is one of the largest companies, in terms of its turnover, operating in the water industry in England and Wales. It represents nearly 15% of total industry turnover.

3. Copies of Ofwat's proposals to impose a penalty on Severn Trent Water are available on the Ofwat website, http://www.ofwat.gov.uk or from the Ofwat Library by phoning 0121 625 1373.

4. Representations about or objections to the proposals to impose penalties should be made by 5pm on Tuesday, 6 May 2008 to Ingrid Olsen, Head of Enforcement Policy, Ofwat, 7 Hill Street,
Birmingham B5 4UA, or by e-mail to Ingrid.olsen@ofwat.gsi.gov.uk

5. A financial penalty may not exceed 10% of the company's turnover as set out in Water Industry (Determination of Turnover for Penalties) Order 2005 (SI 2005/477). Severn Trent Water's regulated turnover for 2006-07 was nearly £1.2 billion.

6. Penalties are paid into the Consolidated Fund and are not returned to customers. The requirements of the Water Act 2003 mean Ofwat may only impose a penalty covering a 12-month period in this case. Additionally, it cannot impose a penalty in respect of any contravention or failure before its powers came into effect on 1 April 2005. The penalty proposed cannot therefore take account of the full scale and duration of the failures that have been seen in this investigation.

7. Ofwat carried out a previous investigation into Severn Trent Water following allegations made by a then employee about false reporting of information to the regulator. Ofwat published its interim report into these allegations on 7 March 2006 (see press notice PN 09/06, which is available on the Ofwat website, http://www.ofwat.gov.uk ). Ofwat's investigation in that case found that Severn Trent Water had provided bad debt data that was deliberately miscalculated and that incorrect income data had been submitted because of poor internal processes and controls. As part of that investigation Ofwat also alerted the Serious Fraud Office (SFO) to concerns about false leakage data being supplied to the regulator. The SFO has decided to bring three criminal charges against Severn Trent Water for providing false information to Ofwat between 2000 and 2002.

8. Ofwat confirmed earlier this year that it would be fining Southern Water 3.6% of turnover (equivalent to £20.3 million) for its deliberate misreporting of information and its failure to meet customer service standards (see press notice PN 02/08, 8 February 2008, which is available on the Ofwat website).

9. On 9 January 2008, Ofwat announced its proposals to fine Thames Water 0.9% of turnover (equivalent to £12.5 million) for failing to provide robust information and for poor customer service (see press notice PN 01/08, which is available on the Ofwat website).

10. Customers of all water and sewerage companies are entitled to minimum guaranteed standards of service, which are set out by the Government. The Guaranteed Standards Scheme (GSS) applies to all water and sewerage customers, including potential customers, business customers, tenants and those in debt. Companies must inform billed customers of their rights under the scheme every year. If a company fails to meet any of the guaranteed standards, it must make a payment to affected customers. Standards cover areas such as:

a. making and keeping appointments;
b. responding to account queries;
c. responding to complaints;
d. interruptions to the water supply; and
e. informing customers about interruptions to water supply.

Ofwat monitors companies' performance against the GSS Regulations. Companies report their performance under the GSS to the regulator in an annual return (the June return).

11. Further information about performance standards required under the GSS is available on the Ofwat website.

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