Southern under investigation

Ofwat’s investigation into wastewater treatment compliance at Southern Water may be justified, but its retrospective exposure of the intervention looks politically motivated, says Katey Pigden.

No water company was expecting a quiet 2018. But some may have cherished hopes that in the run-up to the submission of PR19 business plans this September they might avoid further inflaming the zeal which certain political figures seem to have developed for attacking the sector.

No such luck for Southern Water, which in the midst of renewed questions over water company legitimacy, found itself in media headlines earlier this month, thanks to a surprise announcement from Ofwat that it is investigating the water company for failures in reporting and transparency.

The investigation itself was not news to Southern. It was launched last June following Ofwat concerns about the performance of wastewater treatment sites under Southern’s jurisdiction and the reporting of relevant compliance information. Since then, the water company has been “fully ­co-operating and assisting Ofwat with its enquiries”, according to a spokesperson.

It must have caused some consternation then at Southern’s offices when, on 2 February, Ofwat “revealed” its exploration of reporting misdemeanours at Southern – a process that could impose penalties of up to 10 per cent of annual turnover for each breach of Southern’s statutory obligations uncovered.

A spokesperson for Ofwat had little explanation for the timing of its announcement. They said it had “no bearing on the status of the investigation”. Instead, the regulator says it felt compelled for “reasons of transparency” to make the public aware that it is investigating Southern.

It can be no coincidence that this urge to come clean with the public followed hard on the heels of a fresh furore over water company revenues, the transparency of their financial arrangements and their legitimacy with customers.

Mid-way through January, environment secretary Michael Gove threatened to legislate against water companies over their use of offshore tax arrangements unless they start to behave in a “responsible fashion”, according to an interview with The Sunday Times. Then, in a letter to Ofwat chairman Jonson Cox at the end of January, he further signalled a crackdown on executive pay and offshore financial arrangements to address the “concerning” behaviour of water companies, encouraging the regulator to keep on “pressing companies hard” to change their ways.

Ofwat’s retrospective revelation of its Southern probe came just two days later.

There’s no doubt Ofwat’s investigation is legitimate. Southern is widely acknowledged as a poor performer in the water sector. Indeed, in a recent premium analysis for Utility Week, experts tipped it as one of the few companies with any real risk of falling into the regulator’s “significant scrutiny” category after review of PR19 business plans.

It ranks as the fourth worst water company in terms of delivery against PR14 service commitments, according to Ofwat’s recent Service Delivery Report, with notable weaknesses in customer satisfaction and sewer flooding.

Until the investigation into wastewater treatment sites is complete, however, there’s little that either the regulator or Southern can say about what has been uncovered here, or how it might impact the level of scrutiny Southern should receive in the future.

Responding to questions from Utility Week, Ofwat could only say: “We will conclude the investigation as quickly as we can to establish whether or not there has been any contravention and whether we need to take any enforcement action.”

Meanwhile, Southern is similarly restric­ted in its ability to comment, only observing: “As a regulated company, we work closely with our regulators, who are entitled to make inquiries into how we operate our ­wastewater treatment sites, and who do so regularly.”

There’s no doubt Ofwat is under pressure to show it is taking its obligations seriously and holding companies to account in every way possible. And it is well within its rights to make public its investigations into companies for suspected licence breaches.

However, companies should also be able to expect their regulator not to act in a way that perpetuates and exacerbates politically motivated attacks on the water sector.

It’s hard to see how making announcements about ongoing company investigations at a time when no detail can be revealed about transgressions, related customer detri­ment or remedial action, really supports informed debate around the ­legitimacy of water companies, or the trust consumers can place in them.

The investigation process

Sections 18-22E of the Water Industry Act 1991 (WIA91) enable Ofwat to take enforcement action against a company if it is found it has contravened, is contravening or is likely to contravene a condition of its appointment or a statutory requirement.

The regulator’s enforcement action might entail issuing an enforcement order requiring the company to take particular action(s) and/or imposing a financial penalty.

Ofwat can impose a financial penalty of up to 10 per cent of the regulated company’s annual turnover for each breach. The regulator is also able to consider not issuing an enforcement order or a financial penalty where a company provides an undertaking under section 19 of WIA91, legally committing it to take appropriate steps to ensure compliance with its obligations and provide appropriate redress to its customers.

Ofwat said it may consider not opening a formal enforcement case if the company satisfies the regulator that the breach is not ongoing, and it has taken steps to provide appropriate redress to its customers.

Another type of “settlement” arrangement includes Ofwat starting formal proceedings against a company but agreeing to a reduced penalty if the company puts measures in place to provide customers with appropriate redress.