Reflections on a dark week for the water sector

Ofwat’s record penalties for Southern Water act as a stark warning to water companies that they must act fast to shore up the public reputation of the sector.

Ofwat’s damning investigation into Southern Water’s failings and misreporting over a seven-year period now seems certain to cast the net of scrutiny over the wider industry.

A letter from Ofwat chief executive Rachel Fletcher to water company bosses, revealed exclusively in Utility Week, starkly declared the fallout of the Southern controversy as a “dark week for the water industry”.

She said that while she did not believe the scale of deliberate deception uncovered at Southern was representative of the industry, “none of us can afford to be complacent”.

Fletcher’s approach, and the very public nature of it, seems to indicate two things. First, that Ofwat is determined to show it is a regulator with teeth, and second that the water industry has a reputation problem that urgently needs to be addressed. These challenges come at a time when the spectre of renationalisation is looming over the industry.

The public reaction to the past behaviour at Southern is strengthening the hand of that policy’s proponents. For a Labour party keen to promote issues that can unite a fractured electorate, this could be a strong call.

Ofwat has been clear about what it is demanding of Southern Water and the company will quite rightly be expected to be at the forefront of painting a more positive and progressive picture. Chief executive Ian McAulay told Utility Week that the company needs to “improve relentlessly”.

He admitted that many of Ofwat’s findings were “unpalatable” but insisted progress had been made over the past two years. The company has introduced “three lines of defence”: ensuring people who carry out tasks do things properly; embedding checks and balances; and seeking third-party assurance on its audits.

McAulay has also worked to bolster the company’s values and instigate enhanced compliance procedures across all wastewater treatment works, as well as strengthening whistle-blowing policies.

While all of these are positive steps, they are likely to be seen as fundamental principles of any business which should have been in place from the start. As one industry source pointed out to Utility Week, the company must also overcome the fact that this is not the first time it has been fined for misreporting.

The source said: “They are making all the right noises, but those same noises were made back in 2006. It’s about the culture within the business, not just the misreporting. This was happening on a very wide scale and to change that culture throughout the business is a huge and complex task.

“It depends what is valued within the company. You’re either in an environment where telling bad news to people is unacceptable or you’re under pressure to deliver results no matter what. Neither of which is a healthy place to be in.”

Keeping bad company

While the Southern case has brought the industry into the spotlight for all the wrong reasons, it is far from alone in having generated negative headlines. Last year’s £120 million penalty for Thames Water’s leakage performance means that Ofwat has identified serious breaches across water and wastewater at two of the sector’s biggest companies in the past year.

Next is the unedifying prospect that the Environment Agency will prosecute Southern for its mismanagement of sewage treatment. This follows the £2 million fine it levied on Thames at the end of last year for its “reckless” pollution of the river which provided its name.

Among industry sources there seems ­little doubt that the Environment Agency will go to court.

One said: “You shouldn’t read anything into the fact that the agency’s investigation is taking longer, simply because Ofwat was essentially working to a civil standard while the Environment Agency is working to a criminal standard.

“What happened at Southern is on a completely different scale to what Thames was fined for so it is likely to be a very important case.”

For Southern and Thames, the challenges are unlikely to let up, with Ofwat due to release its draft determinations on the revised PR19 business plans on 18 July.

Both are already in “significant scrutiny”, and in Southern’s case it will inevitably have had to restate data as part of its own investigations into past misreportings.

The challenge for both Ofwat and any water companies who are left revising their budgets later this month, is to get the message across to the public that the necessary investment is going into infrastructure and improvements to the network while limiting firms’ earning powers.

On the message to industry from the Southern case, one source said: “This is a difficult time for the industry and it is under a lot of pressure. It needs this like a hole in the head. There will always be challenges occurring naturally but one of their number deliberately misreporting is completely avoidable.

“Ofwat has given the industry a warning. The culture of factoring in a penalty for missed targets as a cost of business has to end. Now it’s time for companies to respond.”