Utility Week

UTILITY WEEK | 5TH - 11TH JULY 2019 | 13 Policy & Regulation the right noises, but those same noises were made back in 2006. It's about the culture within the business, not just the misreport- ing. 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 unac- ceptable 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 gen- erated negative headlines. Last year's £120 million penalty for Thames Water's leakage performance means that Ofwat has identified serious breaches across water and wastewa- ter 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 "reck- less" 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. While all of these are positive steps, they are likely to be seen as fundamental prin- ciples of any business which should have been in place from the start. As one indus- try 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 Third, under the "accounting for past delivery head", Southern was criticised for its poor performance on major incidents. Four prosecutions from the Environment Agency and the Drinking Water Inspectorate were highlighted by Ofwat. To be fair, Southern will have responded to these – and other – Ofwat concerns in its resubmitted business plan, as chief execu- tive Ian McAulay has already shown Furthermore, much of the criticism related to historic events; to that extent, today's scenario may be somewhat different. Having been placed in the "significant scrutiny" category, notwithstanding the varying mishaps it has faced in recent years, Southern can hardly expect a particularly positive final determination. But although Southern's predicament may look grim, it is arguably better placed than Thames, with its £11-plus billion net debt and a much-criticised water leakage record. Indeed, with Thames' chief executive suddenly exiting, a major responsibility falls on chairman Ian Marchant – with his decades of utility regulation experience – to right a rocky ship. While its leakage levels are far less of an issue compared with Thames, Southern has faced major intervention from the Pensions Regulator (TPR). Last December, TPR confirmed that Southern will pay an additional £50 million into its pension fund: its March 2016 deficit was £252 million. TPR's executive director of frontline regu- lation, Nicola Parish, pulled no punches, saying the risk to member benefits had been "unacceptably high". This ruling may have important repercussions beyond the water sector. Clearly, Southern's management does not lack challenges, not least the crucial final determination of PR19. Undoubtedly, this will be the highest priority for chief execu- tive Ian McAulay, appointed in 2017. There has now been a full apology for the wastewater spills and agreement with Ofwat on the £126 million penalty package. Fur- thermore, bad though the wastewater leaks were, they do not begin to compare with the infamous Camelford pollution incident in Cornwall in 1988, whose repercussions persist to this day. Meanwhile, Southern must hope this ends any Watergate-type "follow-the-money" penalties levied by critical regulators. Nigel Hawkins is the utilities analyst at Hardman Research and a Utility Week correspondent Thames results, p19 Northumbrian fine, p10 "What happened at Southern is on a com- pletely different scale to what Thames was fined for so it is likely to be a very important case." For Southern and Thames, the chal- lenges are unlikely to let up, with Ofwat due to release its dra¡ 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 investi- gations into past misreportings. The challenge for both Ofwat and any water companies who are le¡ revising their budgets later this month, is to get the mes- sage 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 dif- ficult 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 occur- ring naturally but one of their number delib- erately misreporting is completely avoidable. "Ofwat has given the industry a warn- ing. 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." "It's about the culture within the business, not just the misreporting. This was happening on a very wide scale."

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