Over the past few eventful months in the water industry, advisers for businesses looking into ways to save bills through switching water suppliers have waited in anticipation for enforcement action involving all of the major water companies in light of astonishing derelictions of duty.
The first signs of this action have been seen with three of the biggest offenders, who are set to receive a combined £168m worth of fines, including the largest fine for a water company since privatisation.
These fines, which affect Northumbrian Water, Yorkshire Water and Thames Water, are based on what Ofwat’s chief executive David Black described as a “catalogue of failure”.
However, many people are already aware of the breaches that led to historic financial penalties, but what is of greater concern is how this will affect customers, both residential and business alike, in terms of water quality, stability of supply and in terms of bills.
The Largest Fine Ever
Ofwat has the ability to fine companies as much as ten per cent of their annual revenue, and the Thames Water case was the closest Ofwat has come to reaching that mark with a nine per cent fine.
This penalty translates to £104m, a gargantuan sum for a company that has already faced major existential concerns due to its extreme level of debt, which currently stands at £14.7bn.
The other two fines, £17m for Northumbrian Water and £47m for Yorkshire Water, are still substantial, and all three reflect both the severity and repeated nature of the offences, caused by a failure to maintain their networks, invest in vital upgrades and a callous disregard for the environment and natural resources they profit from.
The main cause of the fines is the abuse of “combined sewer overflows” (CSOs), which are a means by which excess untreated wastewater is discharged into waterways.
The system, a relic of the Victorian water system, is designed to minimise damage when used appropriately, in other words through a heavy storm or a long period of rain.
The rainwater will ideally dilute the sewage and stop it from polluting Britain’s waters as quickly, and this use of the system is legal.
However, the three water companies fined (and every other water company is under investigation for similar offences) are accused of abusing the CSO system and simply allowing untreated sewage to enter rivers and seas, including areas of outstanding natural beauty such as Lake Windermere.
This means that there is a strong chance that the three fines the industry has seen in August 2024 will be far from the last, but it does not appear as if they will be allowed to pass the price of their failure directly to the consumer.
No Increase To The Increase
Water bills are set to increase from 2025 until 2030 as part of an Ofwat proposal, and whilst this is far from an ideal situation, the side effect of these significant fines is that it makes an increase to the increase unlikely.
This is not what the major water companies would like to hear, as they were hoping for water bills to be increased further to pay for the infrastructure improvements that would be needed.
Whilst passing bills, fines and invoices onto the customer is a regrettably common trait of the industry in recent years, it appears that the dereliction of duty will lead to a double impact effect on the finances of major water companies.
Thames Water was hoping for a bill increase twice the size of the one that is currently set to be determined by the end of 2024 to take effect in April 2025, and the aim was to convince Ofwat to allow for a larger increase to help them in their hour of need.
Whilst an increase of £99 on average is substantial, it is not enough for Thames Water to manage their exceptional levels of debt, this new fine, the risk of their debts being downgraded to “junk status” and a warning that they will run out of money by May 2025 all put the UK’s biggest water company in a dangerous situation.
Could It Be Counterproductive?
The counter-argument regularly made by Water UK and the companies involved is that “excessive” fines are counterproductive because money supposedly earmarked for infrastructure improvements is instead being used to pay fines, and discourage outside investment because their money is immediately used to pay them.
The response to this argument has been that many of these companies are in such high levels of debt due to asset stripping, the money has historically not gone to infrastructure improvements and remedies but instead towards bonuses, and the fines are more likely to be earmarked towards improvements.
