Southern Water Services Limited To Be Penalized £126 Million for Unauthorized Wastewater Spills and Deliberate Misreporting of Environmental Compliance Data

On June 25, the United Kingdom Water Services Regulation Authority (Ofwat), a government department that serves as the economic regulator of the water sector in England and Wales, published a notice of its proposal to impose a penalty on Southern Water Services Limited (Southern Water) totaling £126 million. The penalty consists of payments to Southern Water customers totaling about £123 million over the next five years, and a £3 million financial penalty on Southern Water “for significant breaches of its licence conditions and its statutory duties.”

Ofwat stated that Southern Water –which The Times reported “supplies water and treats sewage in Kent, Sussex, Hampshire and the Isle of Wight, serving 4.7 million people in two million properties” —  had “deliberately misreported data to us about the performance of its wastewater treatment works,” and

has failed: to have adequate systems of planning, governance and internal controls in place to be able to manage its wastewater treatment works; to accurately report information about the performance of these works; and to properly carry out its general statutory duties as a sewerage undertaker, to make provision for effectually dealing with and treating wastewater.

Among other findings in its investigation, Ofwat concluded

that a material number of Southern Water’s wastewater treatment works have faced a wide range of problems, including some over a long period of time. This includes critical assets – including those used to monitor performance at treatment works and those which form a key part of the treatment process (such as screening equipment) – failing to perform effectively, either through lack of timely investment by the company or inadequate maintenance of those assets. These problems have contributed to the widespread use and adoption of improper practices within Southern Water, including at senior management levels, to present a false picture of compliance.

Ofwat further determined that this situation

has been compounded by failings of corporate culture and governance within the company. Southern Water’s Board did not take the steps that we would expect a diligent and reasonable company to take; firstly to put in place and check that there were adequate systems and processes to ensure that wastewater treatment works were being operated in a compliant manner, and secondly steps to ensure it had sight of and could identify problems at an early stage in order to take action to prevent these.

Among Southern Water’s failures in corporate culture and governance, Ofwat’s notice cited the following:

  • Southern Water itself stated “that whilst there is limited direct evidence of front line staff incentives or rewards linked to the implementation of ANFs, there was a potential that incentive schemes for senior management led to inappropriate behaviours to avoid [Ofwat Outcome Delivery Incentive] penalties.”
  • “Senior management within the Wastewater Operations division colluded to conceal the actual performance of [wastewater treatment works]. A culture of data manipulation was the norm and was accepted by staff across the division.”
  • Southern Water acknowledged
    • “that there were deficiencies in its organisational culture which prevented employees from being comfortable with speaking out about inappropriate or non-compliant behaviours. This included having in place ineffective whistleblowing processes which resulted in no staff coming forward to report their concerns despite certain staff being obviously uncomfortable about the implementation of ANFs and feeling pressured to act in an improper manner . . . .”
  • The whistleblower policy that Southern Water had in place at the time
    • “included on its first page and highlighted in bold the following text: ‘Should any investigation conclude that the disclosure was designed to discredit another individual or group, prove to be malicious or misleading then that worker concerned would become the subject of the Disciplinary Procedure or even action from the aggrieved individual’.”
    • Southern Water since confirmed that
      • “this policy has since been replaced with a new policy which makes clear that its whistleblower policy is completely anonymous and that Southern Water is committed to protecting the career of anyone who reports wrongdoing, and would not tolerate any form of retaliation or threat should the person choose not to remain anonymous.”
    • Ofwat also observed “that a company’s board should have oversight over the values and culture of the company to satisfy itself that behaviours throughout the business are aligned with the company’s purpose,” but that “this oversight was absent for the duration of the failures that are described in this notice.”

In summarizing its investigation and findings, Ofwat noted that its findings regarding Southern Water

are purely about regulatory obligations in respect of which Ofwat has jurisdiction. We are not seeking to make findings about environmental permit failures or whether the acts of Southern Water or its employees, were criminal in nature. These matters are currently being dealt with by the Environment Agency, as the environmental regulator.

Note: This action by Ofwat demonstrates that utility companies (including water and sewage) are no less responsible than any other sector for maintaining effective corporate-compliance programs, including with regarding to environmental compliance.  Compliance teams in multiple sectors should review the notice, particularly the section addressing the company’s culture and compliance failures, and compare it against their companies’ compliance programs to identify shortcomings or opportunities for improvement.

Since Ofwat issued the notice, Matthew Wright, who headed Southern Water from February 2011 to the end of 2016, reportedly stated that he had been “genuinely shocked” by Ofwat’s findings of wrongdoing, and that “there was ‘no suggestion’ that he or [the company’s] board were aware of the practices set out in the Ofwat report.”  If both of those statements are taken at face value, they provide further evidence of how substantial the company’s culture and compliance failures were.

Southern Water has already taken steps to address the reported compliance failures.  These include a draft confidential Action Plan that it presented to Ofwat, “listing various measures the company had already taken, was taking or planned to take with the aim of addressing the areas of concern” that Ofwat had previously identified.  Moreover, Ian McAulay, who took over as Southern Water’s chief executive in 2017, stated that the company was “profoundly sorry for these failures,” “that a former member of its executive management, who had since left the company in a restructuring, was among those aware of the cover-up,” and that an unspecified “number of people were dismissed.”

These measures, while necessary, will not suffice to resolve all aspects of Southern Water’s situation.  As Ofwat noted, Southern Water remains under criminal investigation, and the Environment Agency informed The Times “that it expected to start court proceedings ‘soon’.”  In addition, the revelations about Southern Water’s lengthy record of compliance failures have encouraged Labour Party calls for renationalization of Britain’s utilities.  The fact that Ofwat had previously fined Southern Water Ofwat £20.3 million for similar conduct – i.e., “’systematically manipulating information to conceal its true performance over an extended period of time’ — in that case to conceal woeful customer service” – can only increase the challenges for the company to demonstrate that it is truly committed to a culture of compliance.

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