3 Enforcement and Consumer Protection
23. If a water company fails to deliver its promised
level of service to customers Ofwat can apply a range of sanctions,
including revoking a company's licence.[31]
Ofwat has these powers to protect the interests of the consumer
in the absence of effective competition in the water industry.[32]
Leakage
24. In 1995, Ofwat identified high levels of water
leakage which contributed to serious difficulties in maintaining
supplies during the drought of that year. To tackle the problem
it introduced leakage targets and a range of sanctions in the
event of a company's failure to meet its target (Figure 3).
In 2005, Ofwat gained the power to impose financial penalties
on companies who contravene their licence conditions. As a result,
it can now fine companies up to ten 10% of turnover if they miss
their leakage target.
| Figure 3: Regulatory Sanctions
Naming and shaming—applies to every company failing to achieve its leakage target. The failure is detailed in Ofwat's annual report Security of supply, leakage and water efficiency and may also be highlighted in a separate press release.
Extra reporting—companies usually report their performance on leakage annually. However, Ofwat can require more regular reporting outside the annual system. It has taken this step against a number of water companies including Anglian, South East Water, Thames and United Utilities.
Investigations—involves detailed examination of a company's performance and data quality. For example, Severn Trent, Southern and Thames have been subject to investigations relating to customer service data.
Enforcement order—under the 1991 Water Industry Act Ofwat can apply an enforcement order against a company where it is not complying with the terms of its licence. This major sanction has never been used.
Fines (power introduced 1 April 2005)—this has not yet been used although Ofwat has now published its intent to apply fines following recent investigations, and has proposed to fine one company.
|
Source: Ofwat
25. Ofwat's leakage targets have resulted in reduced
levels of leakage across the industry. Since 2000-01, however,
Thames Water has persistently failed to meet its targets.[33]
In 2001-02 and 2002-03 its targets were suspended due to unreliable
data. Despite an agreement in 2000-01 that Thames Water would
put in place an action plan to meet its leakage target within
3 years, it still missed this target in 2003-04 by more than 10%
and has missed it ever since.[34]
26. Ofwat could have taken action, including enforcement
orders under the 1991 Water Industry Act to force Thames to improve
its performance. However, it only required more regular reports
from the company, and investigated the company's customer service
data.[35] Ofwat considered
taking legal action but decided against this or imposing an enforcement
order on the company.[36]
27. Finally, in 2005-06, after Thames had missed
its targets for six consecutive years, Ofwat decided to accept
a legally binding undertaking instead of imposing a fine on the
company. The undertaking requires Thames Water to replace about
370 kilometres of water mains, costing some £150 million
and to improve its security of supply position. These measures
are to be met entirely at the expense of Thames Water's shareholders
with no cost falling on their customers.[37]
If Ofwat had fined the company, the maximum fine would have been
£66.4 million. Ofwat considered that the alternative solution
of an undertaking ensured that Thames Water addressed the crucial
issues such as its low security of supply, as well as tackling
its leakage problems.[38]
By not imposing a fine, however, Ofwat risks sending a message
to the industry that it will not readily use sanctions where appropriate.
More recently, however, in April 2007, Ofwat has proposed fining
United Utilities 0.7% of its annual turnover for repeated and
serious breaches of its licence conditions between November 2005
and March 2007.
Sanctions to protect the consumer
28. Ofwat considers that the scope for economies
of scale in the water sector is small.[39]
Furthermore, many of the smaller companies provide very good levels
of service to consumers.[40]
29. Thames Water is one of the largest water companies
and should be able to benefit from economies of scale, to the
extent that they exist in the water industry. However, Thames
has a range of problems in areas such as the serviceability of
its infrastructure and its security of supply. Ofwat considers
that the size of the company may be responsible for its inefficiencies
and the current poor quality of service.[41]
30. Ofwat can refer a water company merger to the
Competition Commission if it believes the merger is not in the
interest of the consumer. But it is not clear whether Ofwat can
promote a de-merger if a large company is performing poorly and
not benefiting from economies of scale. Despite the ongoing problems
at Thames Water, Ofwat has never imposed an enforcement order
or fined the company. Nor has it used any sanctions or action
that may encourage the company to change its corporate structure
to become more efficient.[42]
Consumer compensation
31. If a company's performance is well below expected
standards of service, Ofwat has the power to fine the company
a maximum of 10% of its turnover. But any fines imposed would
go to the Treasury and not benefit the consumer.[43]
This means that consumers are not compensated for poor company
performance. Furthermore, during a hosepipe ban, consumers do
not receive compensation for the lower level of service they have
endured.
31 C&AG's Report, para 4.1 Back
32
Q 48 Back
33
Q 29 Back
34
C&AG's Report, Appendix 5 Back
35
Q 11 Back
36
Qq 10, 15-18 Back
37
Q 29 Back
38
C&AG's Report, para 4.9 Back
39
Q 111 Back
40
Q 110 Back
41
Q 112 Back
42
Qq 113-115 Back
43
Qq 147, 152 Back
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