Ofwat proposes £35.8 million fine on Severn Trent Water
Ofwat has 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.
Commenting on the proposed fine, Tony Wray, Chief Executive of Severn Trent Plc, said: "When my new management team and I uncovered misreporting and poor service in our customer relations department we promptly alerted Ofwat and took steps to implement proper controls and an ethical working culture with the highest standards to ensure there can be no repetition of this unacceptable behaviour.
"Without waiting for Ofwat's conclusions we are lowering bills for customers by £10.6 million, around £2.40 per household, to ensure we have not profited in any way.
"We fully acknowledge and accept that the Company is responsible for its failures. Now that we have received the notices from Ofwat setting out the proposed level of penalties and the reasons for them, we will carefully consider them and will respond appropriately.
"There is no doubt that the previous regime and culture in place during the era from 2000 to 2004 was overly bureaucratic and lacked sufficient controls and procedures. Those who were responsible for the customer relations mistakes are no longer with Severn Trent and we apologise to our customers for their failings.
"Severn Trent's new Board and management team has taken, and will continue to take, all actions appropriate to ensure the maintenance of both high ethical and professional standards and resilient and effective controls throughout our organisation.
"A comprehensive root and branch reorganisation of Severn Trent Water has been completed since I became Managing Director in March 2005 and, now, as Chief Executive of Severn Trent, I and my new management team are determined to continue to drive improvements in all our activities for the benefit of all our customers and other stakeholders."
The Consumer Council for Water agrees that Severn Trent Water should be penalised for deliberately misreporting customer service information to Ofwat and failing to meet Guaranteed Standards of Service, but would have preferred for Ofwat to penalise the company to the benefit of its consumers.
Ofwat is proposing to fine Severn Trent £35.8 million, which would simply hand the money over to the Treasury, but there are other options available to Ofwat which would have penalised the company, while benefiting customers.
James Perowne, Chair of the Consumer Council for Water Central and Eastern, said: “The penalty should send a message to the rest of the industry that this behaviour is unacceptable, and while these incidents took place four years ago, they have had a serious negative impact on consumer confidence in the company, and the industry as a whole. Severn Trent will need to work hard to restore this.
“The company’s management has changed but the new regime will need to demonstrate improved service and good value for money, and we will press to make sure that the business focuses on its consumers.
“We are disappointed that Ofwat’s penalty is not to consumers’ benefit. Penalties should demonstrate fairness for consumers, and make it very clear to companies that breaking the rules will not be tolerated, but fines should not be just another source of income for the Treasury. There is another way to punish the company which would have benefited consumers.
“A precedent for this was set in 2006 when Thames Water missed its leakage targets. Instead of imposing a fine, Ofwat agreed that Thames should invest an extra £150 million of shareholders’ money in order to replace ageing pipes.
“We would have preferred it if a similar arrangement was made in this situation. In fact we called for Ofwat to reduce customer bills as a penalty, rather than giving the money to the Treasury.
“We have and will continue to press Ofwat to change the way they penalise water companies.”
