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Severn Trent Water ordered to cut bills by 42m after overcharging

Mark Milner, industrial editor
March 8, 2006

Industry regulator Ofwat has ordered Severn Trent Water to cut bills by 42m over the next four years after concluding the company had provided regulatory information that was "either deliberately miscalculated or poorly supported".

Ofwat's director general Philip Fletcher said he was so concerned about the "poor practices" that led to customers being overcharged that he would impose further penalties. This will mean further reductions in bills. The company will have to wait to find out the extent of the further penalties until a separate investigation by the Serious Fraud Office into the reliability of Severn Trent Water's data on leakage has been concluded.

Yesterday the company's parent, Severn Trent, accepted Ofwat's conclusions and apologised to its 8 million customers for its water subsidiary's shortcomings. It said a number of employees had been disciplined and pledged to meet Ofwat's demands to return the 42m to customers.

Colin Matthews, Severn Trent group's chief executive, said: "We apologise unreservedly to customers and Ofwat for weaknesses in Severn Trent Water's internal processes and systems of control during 2000 to 2004." Ofwat said there was no evidence the parent company was party to the failings of its subsidiary.

The Consumer Council for Water Midlands welcomed the decision to return money to customers. However its chairman, Sir James Perowne, said: "We are still seeking reassurance on behalf of consumers about the reliability of water company data supplied to the regulator."

The amount water companies can charge each year is determined by Ofwat every five years, on the basis of information they provide to the regulator. The watchdog began its inquiry in January last year after completion of the latest five-year review. Its decision followed accusations by a Severn Trent Water employee, David Donnelly, alleging the submission of false data. The allegations were made to the company which carried out its own investigation and drew them to the attention of Ofwat.

In its interim report published yesterday, Ofwat said Mr Donnelly had alleged that, on the instruction of senior management, he made "inappropriate adjustments that had resulted in the deliberate miscalculation" of bad debt charges and provisions. Yesterday Ofwat said its interim conclusion was that Severn Trent Water's approach to the collection and submission of regulatory information raised "serious concerns". It said poor processes and controls resulted in "incorrect" income data which led to customers being overcharged. It also concluded bad debt charges had been deliberately miscalculated by Mr Donnelly between 2000 and 2004 and that these had been accepted and used by the company.

Severn Trent said it has brought in stronger financial controls, clear responsibilities and change in culture which included a focus on good business ethics.