Southern Water to pay £126m to customers after Ofwat ruling

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A LANDMARK Ofwat ruling sees Southern Water pay £126m to its existing and former wastewater customers following a two-year investigation.

This is the biggest penalties and rebates package the governing body has ever imposed and is said to reflect the ‘serious failures in the operation of Southern Water’s sewage treatment sites and the deliberate misreporting of performance information’.

“The findings in this case are shocking. We have listened to all representations and think it is right to confirm the biggest package of penalties and rebates we’ve ever imposed”,

Rachel Fletcher, Ofwat Chief Executive said.

“Southern Water is serious about responding to the challenges it faces and is committed to putting things right. In doing so it is now bound by formal undertakings.

“We will continue to monitor its performance against those undertakings, and should Southern Water fail to comply with them, we will take further action.”

Proportionate to the size of the business, this package of penalties and rebates is the biggest Ofwat has ever imposed.

The total value of the package of penalties and rebates is equivalent to 6.7% of Southern Water’s wholesale wastewater turnover.

This is by far the largest proportion of turnover Ofwat has ever set out, as the previous highest was 3.5%.

The final sum follows a consultation on the package of rebates and undertakings proposed by Southern Water to make reparation to its customers and comply with its legal obligations.

According to Ofwat, Southern’s fine was reduced from £37.7 million to £3 million in recognition of the steps taken by the company ‘to put things right’, including its proposal to make significant rebates to customers.

Having considered representations during the consultation, Ofwat has also secured additional commitments from Southern Water.

This includes proposals from the company to make payments to former wastewater customers who have moved away from the Southern Water area and to provide greater transparency on its environmental performance.

Southern Water’s wastewater treatment compliance has been under investigation by Ofwat since June 2017 due to breaches of licence conditions and statutory obligations during the period from 2010 to 2017.

Southern Water began investigating issues at its wastewater treatment sites in July 2016 before alerting Ofwat to deeper issues in March 2017.

In the course of the large-scale investigation, Ofwat found that Southern Water failed to operate a number of wastewater treatments works properly, including by not making the necessary investment in a timely manner.

Southern Water’s failures led to equipment breakdowns and unpermitted spills of wastewater into the environment.

The Environment Agency is currently investigating whether any environmental impact may have been caused by the company’s failures.

A key finding from Ofwat is that between 2010 and 2017 some of Southern Water’s waste water treatment sites were manipulated by staff to pass sampling tests they otherwise might have failed.

This meant the company avoided penalties under Ofwat’s incentive regime.

The £126 million package will see Southern Water return £123 million to former and existing customers.

This is made up of:

  • £91.2 million for underperformance penalties – money it should have paid as part of Ofwat’s price review incentive regime, and;
  • £31.7 million (in lieu of a greater fine). This is additional compensation to customers for failing in its legal obligations.
  • Pay a fine of £3 million on top – in recognition of the serious and significant breaches of its licence conditions and statutory duties

Existing customers could receive an average of about £60 (depending on consumption), as a bill rebate over the next five years.

Former wastewater customers will be able to apply directly to Southern Water for payment from April 2020.

Southern Water has also now committed to greater transparency about its environmental performance, including establishing a new web page to be developed with key stakeholders and customers.

It has also included a commitment to strengthen its assurance around paying bonuses, so they are only paid when appropriate.

“I’m pleased that we have an opportunity to not only make appropriate amends to our customers past and present for the unacceptable failings of the past but to also commit to increased transparency on environmental performance”, Ian McAulay, Southern Water CEO, commented following the Ofwat ruling.

“Since 2017 we have invested more than £100 million in improving our networks, systems and training our people. We are recognised as having made significant strides in improving our business. There is a lot more work to do but we are working hard to fully make amends to our customers and regain their trust.”

Southern Water is also subject to ongoing criminal investigations by the Environment Agency.

Ofwat states that its findings are purely about regulatory obligations in respect of which Ofwat has jurisdiction.

Ofwat has not made findings about environmental harm, site specific permit failures or whether the acts of Southern Water were criminal in nature as such matters are for the Environment Agency.