Southern Water fined £126m by regulator for ‘serious failures’

Southern Water has been fined a record £126 million ($158.9 million; €139.9 million) after the UK regulator found it had shown “serious failures in the operation of its sewage treatment sites and for deliberately misreporting its performance”.

The fine is the largest ever imposed by Ofwat and concludes an investigation that began in June 2017. The regulator said it found the company had failed to operate a number of wastewater works properly, including by not making enough investment to prevent wastewater from spilling into the environment.

Southern Water was also found to have manipulated its wastewater sampling process. This resulted in the misreporting of performance on a number of its sewage treatment sites and the company avoiding £91 million in penalties under the regulator’s incentive regime.

Ofwat said that £123 million of the fine would be given back to customers through rebates and that the settlement was equivalent to 6.7 percent of the company’s wastewater turnover. However, a spokeswoman told Infrastructure Investor that the distribution of the settlement proceeds “was proposed action and we are inviting responses to this consultation”.

In addition, when asked about the impact of Southern Water’s previous offences on the fine, the spokeswoman said: “We note that in 2008 cultural issues around compliance, including the manipulation and concealment of the true position of performance data, were also identified and we would therefore have expected Southern Water to have been particularly alert to the risk of misreporting and the need for a robust and actively monitored compliance culture in the organisation.”

The watchdog acknowledged Southern Water had made “substantial changes” to its management team since appointing a new chief executive in January 2017. Ofwat noted that the company had introduced new governance arrangements to support accurate monitoring and reporting. The regulator also acknowledged a commitment by Southern Water to change its corporate culture, which Ofwat said had “enabled these failings and behaviours”. It added that the company had also made investments to improve the failing sites.

The Environment Agency, a UK government body, has been running a separate criminal investigation since 2016 in relation to suspected permit breaches at wastewater sites. It said in a statement yesterday that it expected “to begin court proceedings soon”.

In a statement, Ofwat chief executive Rachel Fletcher said: “What we found in this case is shocking. In all, it shows the company was being run with scant regard for its responsibilities to society and the environment. 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.

“The previous management failed to stamp out this behaviour and 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.”

Southern Water’s two largest shareholders are JPMorgan Asset Management and UBS Asset Management, whose combined stakes amount to more than 61 percent. JPMorgan declined to comment. UBS did not respond to a request for comment.

In a separate statement, Southern Water’s chief executive Ian McAulay said: “We have fully supported these investigations and completed our own internal review, which has highlighted failures of people, processes and systems during that time. We are profoundly sorry for these failures and have been working very hard to understand past failings and implement the changes required to ensure we better deliver for our customers and meet the standards they deserve.”

‘Five star’ rating

A presentation from UBS dated June 2018 shows that GRESB Infrastructure in 2017 gave Southern Water a five-star accreditation for environmental, sustainability and governance issues. The benchmarking company also praised Southern Water in February 2018 for its “speak up campaign”. The campaign was designed to encourage greater interaction between staff after Southern Water recognised it had received no reports through its whistleblowing line.

“With your help we’ll foster a culture where we look after the safety and wellbeing of each other and our customers,” the campaign stated, according to GRESB. The body had not responded to a request for comment at the time of publication.