7th Mar 2006 07:10
The Board of Severn Trent Plc accepts the conclusions of Ofwat's interim reportpublished today concerning allegations of false reporting made against itssubsidiary Severn Trent Water in 2004.The Company's internal investigation and Ofwat's investigation have beenthorough and lengthy, requiring complex judgements. Severn Trent's judgementshave not been identical to Ofwat's in every aspect, but in the interests ofmaking amends as soon as possible, the Board believes it is sensible now toproceed by agreement.Ofwat has concluded that Severn Trent Water: * Had poor internal processes and controls which led to incorrect income data being submitted to Ofwat in 2004 and price limits being ‚£8m a year too high for five years to 2010 * Provided data to Ofwat in 2002 which was deliberately miscalculated and which meant customers were overcharged by ‚£2m in 2004 * Approached the collection and submission of data in a manner which causes Ofwat serious concerns Having considered Ofwat's findings, the Board of Severn Trent Plc has agreedthat customer accounts should be credited as soon as possible. This year, onaverage, this credit will be around ‚£4 per customer in addition to the ‚£2 to ‚£3already rebated. In the following three years the rebate will be ‚£2 to ‚£3 percustomer.The interim report will be available on www.ofwat.gov.ukOn behalf of the Board of Severn Trent Plc, Group Chief Executive, ColinMatthews, said:"We apologise unreservedly to customers and Ofwat for weaknesses in SevernTrent Water's internal processes and systems of control during 2000 to 2004."Price limits were set in 2004 which unintentionally could have resulted incustomers paying ‚£8m a year too much over the five year period had the newmanagement team not acted."In September 2005 we identified unexplained extra income in excess of ouragreed 2004 business plan and we immediately alerted Ofwat."We reduced price increases for this year, 2006, by ‚£7m and anticipated thiscontinuing in subsequent years. In the light of Ofwat's findings we shallaccept their ‚£8m a year figure and make additional amends accordingly."We deeply regret weaknesses in internal processes, controls, ethics andculture. Ofwat has concluded that deliberate miscalculation of data by anemployee, David Donnelly, went unchallenged and as a result customers wereovercharged by ‚£2m in 2004."Our investigations also discovered adjustments in our favour which would havemore than offset Ofwat's finding of an overcharge in bad debts. However, it isOfwat's judgement not to allow them."As the Ofwat report acknowledges, the Board of Severn Trent Plc and the newsenior management team have since 2004 already made major changes toorganisation structure, to people and to processes and controls. The intensedrive to improve Severn Trent Water will continue to be a top priority for thenew Managing Director, Tony Wray, and his management team as well as the Boardof Severn Trent Plc."We will co-operate fully with Ofwat to restore confidence in Severn TrentWater going forward."The Board of Severn Trent Plc also acknowledges that Ofwat may expect furtheramends to be made to customers. Ofwat has stated that this penalty will bediscussed with Severn Trent Water on completion of the SFO investigation intoleakage.The Ofwat report found no evidence of a company-wide attempt to mislead onissues of bad debt or metered customers bills. However, it did find evidence ofa limited number of staff who became aware of wrong behaviour but did not raiseany concerns.Mr Matthews said:"A number of our employees were disciplined as a result of our own thoroughinternal disciplinary investigation."As we regard disciplinary hearings as confidential between employer andemployee no further details will be released."Severn Trent concurs with the Regulator that the provision of false, inaccurateor incomplete data undermines stakeholder confidence in regulation."The Board and senior management team are fully committed to creating a workingenvironment in which good business ethics are supported and promoted bymanagers at all levels and unethical behaviour is recognised for what it is,and rejected as completely unacceptable" said Mr Matthews.Substantial action has already been taken to improve processes and behaviour toensure that Severn Trent Water has: * A stronger financial framework and system of controls * Clear responsibilities and accountabilities * A culture based on openness and evaluation of all aspects of performance, bad as well as good, where every member of staff practises proper business ethics Actions already taken by Severn Trent WaterStronger financial controls achieved by: * Implementing new processes to provide a detailed documentary control base, and clear audit trails, following an in-depth review by auditors * Broadening of skills and knowledge to remove single point of risk/failure * Separating of Finance and Regulatory functions to ensure independence/ constructive challenge * Restructuring Finance to focus separately and more robustly on capital, revenue and operating expenses Clear responsibilities achieved by: * Simplifying the organisation with clear roles and accountabilities * Putting directors in closer contact with the detail of the business by having less layers of management * Reorganising and refreshing senior team with a mix of new external and internal appointments * Focusing intensely on core performance delivery and value for money for water and sewerage customers Cultural change achieved by: * A stronger focus on good business ethics, promoted by managers at all levels, being implemented through a revised and strengthened code of conduct * Removal of unnecessary hierarchy and barriers to communication - more face to face, peer to peer, team work * Fresh approach to Performance Management based on full disclosure and risk and issue management * Explicit training with improved control framework in Regulatory Compliance, Competition Act, whistleblowing procedure and financial approval levels Mr Matthews concluded:"Acting with openness, honesty and integrity is an essential part of corporateresponsibility, particularly so for a regulated utility. We intend to continueto build a company that customers, Ofwat and employees are all proud of."FOR FURTHER INFORMATION CONTACT:Peter GavanDirector of Corporate AffairsSevern Trent Plc0121 722 4310ENDSEVERN TRENT PLCRelated Shares:
Severn Trent