Select Committee on Public Accounts Twenty-Fourth Report

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]


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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