83NL Severn T.6e%

RNS Number:3909Z
Office of Water Services
07 March 2006



PN 09/06                                                  7 March 2006



           OFWAT PUBLISHES INTERIM REPORT INTO ALLEGATIONS

                      AGAINST SEVERN TRENT WATER

Ofwat today published its interim report into allegations about false reporting
of information by Severn Trent Water.

The report sets out the regulator's interim findings into certain allegations
made by an employee of Severn Trent Water, and the actions Ofwat will require
the company to take. Ofwat's concerns about the reliability of leakage data are
not covered in the report because this issue is currently being investigated by
the Serious Fraud Office (SFO).

Ofwat's investigation found that Severn Trent Water had provided regulatory data
that was either deliberately miscalculated or poorly supported. This led to
price limits being set for the water company that were higher than necessary,
which would have resulted in customers paying #42 million more by 2009-10. This
is equivalent to between #2 and #3 each year on an average household customer's
bill.

Severn Trent Water has agreed to reduce its price limits to return the #42
million to customers. The company is returning #7 million of this in bills
currently being sent to customers. The remainder will be returned to customers
over the next three years of the current price review period.

Ofwat regards the findings of its investigation as sufficiently serious to
warrant a further reduction in the company's price limits as a penalty. The
scale of this can only be determined once the SFO investigation is completed.

Ofwat's interim conclusions are that the evidence reviewed did not support the
allegations in full. But Severn Trent Water had:

   *Approached the collection and submission of regulatory information in a
    manner that raised serious concerns.
   *Poor internal processes and controls which led to incorrect income data
    being submitted to Ofwat in 2004 when it set price limits for 2005-10. This
    means that customers would have been disadvantaged by #40 million over that
    period; and
   *Deliberately miscalculated bad debt data which was included in the
    company's interim determination claim in 2002 that led to revised price
    limits. This resulted in customers being overcharged by #2 million in
    2004-05.

The investigation found no evidence that the holding company, Severn Trent plc,
was a party to these failures.

Philip Fletcher, Director General of Water Services, said:

"Customers have the right to expect companies to maintain the highest governance
standards, including effective processes and controls, at all times. Severn
Trent Water's approach fell significantly below these standards.

"I view very seriously the findings and the conclusions we have drawn from our
investigation. I have had to take the unprecedented step of alerting the Serious
Fraud Office to certain issues. The poor practices we identified at Severn Trent
Water cannot be remedied simply by the company returning the #42 million to its
customers. The findings are sufficiently serious that the company should also
pay a penalty to its customers, but I cannot assess the size of this now because
of the ongoing SFO investigation.

"Since our investigation began, Severn Trent Plc has kept us informed about
major changes it has made to organisational structure, to people and to
processes and controls at Severn Trent Water. While these changes represent
steps in the right direction, it is still early days and we have not yet seen
the full benefits of the changes.

"We will require Severn Trent Water to implement a number of measures to satisfy
us that we can in future rely on the regulatory information it reports to us. We
will work closely with the company's auditors and reporters to monitor its
performance against these actions."

Philip Fletcher has today written to all the appointed water companies in
England and Wales reminding them of his letter MD 209, published last November,
which emphasised that it is the companies' ultimate responsibility to provide
reliable, accurate and complete regulatory information.

Notes to Editors:

 1. *The Director General of Water Services is the economic regulator of the
    water and sewerage companies in England and Wales. He exercises his powers
    in a way that he judges will allow them to carry out their functions
    properly, and finance them. His duties include protecting the interests of
    consumers, wherever appropriate by promoting effective competition. He will
    be succeeded by the Water Services Regulation Authority on 1 April 2006.

 2. *The publication, 'Interim report on allegations made against Severn Trent
    Water', will be available on the Ofwat website, www.ofwat.gov.uk, and from
    the Ofwat Library on 0121- 625 1373.

 3. *The Water Industry Act 1991, as amended by the Water Act 2003, provides that
    in certain circumstances Ofwat may impose a financial penalty on providers
    of water and sewerage services. In this instance, the financial penalty
    regime does not apply because the allegations relate to actions before its
    powers to fine came into force in April 2005.

 4. *Ofwat has written to all managing directors of water companies in England
    and Wales, MD 213, providing them with a copy of the interim report and
    repeating the importance of MD 209. Both MD letters are available on the
    Ofwat website.

 5. *Ofwat issued PN 28/05, 'Serious Fraud Office investigates Ofwat's concerns
    about Severn Trent Water', on 31 October 2005. A copy is available on the
    Ofwat website.

 6. *Severn Trent Water serves more than eight million customers across the heart
    of the UK, stretching from the Bristol Channel to the Humber, and from
    mid-Wales to the East Midlands.

 7. *Media enquiries to Ofwat Press Office on 0121-625 1442/1416/1496. Out of
    hours enquiries to 07884 117760 or 07768 456646.






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