Ofwat imposes stiff penalties on Southern Water

Southern Water has been fined £3 million in penalties and £123 million in payments to customers, following an investigation by the regulator Ofwat. It is the biggest penalty Ofwat has imposed.

The watchdog found that the company had deliberately misreported its performance and discovered serious failures in the operation of its sewage treatment sites. “What we found in this case is shocking,” Ofwat chief executive, Rachel Fletcher, said: “It was not just the poor operational performance, but the co-ordinated efforts to hide and deceive customers of the fact that are so troubling. In all, it shows the company was being run with scant regard for its responsibilities to society and the environment.”

She said that the previous management team had failed to stamp out the behaviour that had led to these breaches of the company’s responsibilities and had failed to manage its plants properly. “In doing so, Southern Water let down its customers and operated in a way completely counter to the public service ethos we expect. That is why the company deserves such a significant sanction,” Fletcher said.

The regulator found that Southern Water failed to operate a number of wastewater treatments works properly, including by not making the necessary investment which led to equipment failures and spills of wastewater into the environment. Ofwat also found that Southern Water manipulated its wastewater sampling process which resulted in it misreporting information about the performance of a number of sewage treatment sites. This meant the company avoided penalties under Ofwat’s incentive regime.

Ofwat has not investigated the environmental impact as a result of Southern Water’s actions. The Environment Agency is currently running its own investigation into Southern Water.

Changes

Ian McAulay, Southern Water’s Chief Executive, said; “We are deeply sorry for what has happened. There are no excuses for the failings that occurred between 2010 and 2017 outlined in Ofwat’s report. We have clearly fallen far short of the expectations and trust placed in us by our wastewater customers and the wider communities we serve.”

He said that Southern Water was “substantially different today” than it was when he was brought in to run the company in 2017. McAulay said that as well as restructuring the executive team and board, the company had appointed a new director of risk and compliance to challenge front-line teams. In addition, it has adopted a three lines of defence model of governance aimed at improving its regulatory reporting and risk management. Other measures include stronger whistle-blowing procedures, enhanced wastewater treatment compliance processes and code of ethics training. The company has also invested £26 million into its wastewater plants.

Ofwat recently consulted on updating its 2014 governance principles to include compulsory new objectives for water companies on board leadership, transparency and governance, including the need to establish a purpose, strategy and a set of values.
“Company boards must also be satisfied that these, and its culture, reflect the needs of all those it serves,” it said. If approved, the new, mandatory objectives will be incorporated into water companies’ operating licenses.

The four objectives

  • The board of the appointee establishes the company’s purpose, strategy and values, and is satisfied that these and its culture reflect the needs of all those it serves.
  • The appointee has an effective board with full responsibility for all aspects of the appointee’s business for the long term.
  • The board of the appointee’s leadership and approach to transparency and governance engenders trust in the appointee and ensures accountability for their actions.
  • The board of the appointee and its committees are competent, well run, and have sufficient independent membership, ensuring they can make high quality decisions that address diverse customer and stakeholder needs.
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