The Water Services Regulation Authority, or Ofwat, the body responsible for economic regulation of the privatised water and sewerage industry in England and Wales, has issued a record fine (£122.7 million) against Thames Water. The fine was for breaches of wastewater rules and dividend payment rules.
Why was Thames Water fined nearly £123 million?
Ofwat’s investigation into Thames Water covered two breaches:
- Wastewater overflows.
- Payment of dividends.
Wastewater (sewage) overflows
Thames Water serves London and the Southeast. Ofwat stated the fine imposed on the company resulted from a “complex” investigation into wastewater contraventions of the Urban Wastewater Treatment (England and Wales) Regulations 1994, section 94 of the Water Industry Act 1991, and Condition P of its Licence.
The investigation focused on Thames Water’s failings concerning the “management, operation, maintenance, and performance of its wastewater treatment works (WWTW) and the collecting systems (that is, its sewer networks – the network) that are used to supply them.”
After examining the evidence, Ofwat concluded that:
“…Thames Water did not have appropriate and robust processes and controls in place to ensure that it was able to properly deliver its wastewater business in line with its legal obligations. It lacked adequate processes to enable it to properly monitor and assess compliance with its legal and regulatory obligations and, even when it was aware of potential compliance risks across its WWTW estate and on its network, it failed to take action to address those risks effectively and with sufficient urgency. In addition, Thames Water’s senior management and Board had inadequate oversight in relation to the compliance of its assets.”
Crucially, the Regulator ruled that Thames Water had not shown that the sewage spills related to exceptional circumstances or that it would have been excessively expensive to deal with the spills. These two factors would have provided a defence to the breaches had they been proven.
Payment of dividends
In October 2023, the Thames Water Utilities Limited (TWUL) board made interim dividend payments of £37.5 million to its holding company, Thames Water Utilities Holdings Limited (TWUHL). Ofwat ruled that this contravened Condition P30 of its Licence, which stated:
“The Appointee shall declare or pay dividends only in accordance with a dividend policy which has been approved by the Board of the Appointee and which complies with the following principles:
- that dividends declared or paid will not impair the ability of the Appointee to finance the Appointed Business, taking account of current and future investment needs and financial resilience over the longer term;
- that dividends declared or paid take account of service delivery for customers and the environment over time, including performance levels, and other obligations; and
- that dividends declared or paid reward efficiency and the effective management of risks to the Appointed Business.
For the purpose of this licence condition, dividends refers to any distributions declared or paid in respect of any ordinary shares or preference shares.”
TWUL set out five tests that the Board must consider when deciding on its dividend policy:
- Payment of a proposed dividend should not impair short term liquidity or compliance with the Company’s covenants
- Payment of a proposed dividend should not impair the longer-term ability to finance the Company’s business, including access to both debt and equity capital.
- An assessment is made to determine if the payment of a dividend reflects the Company’s performance against the final determination for AMP7 and its commitments to customers and other stakeholders.
- An assessment is made of the impact that payment of the dividend may have on its commitments and obligations to customers and other stakeholders as a supplier of essential services, which includes customer commitments, environmental commitments, community commitments, employees and pension members.
- An assessment of the long term financial resilience of the Company.
The Ofwat investigation found that the Board did not give nearly enough to the five tests, and when assessing the company’s performance, the range investigated was “extremely narrow”. In addition, no genuine consideration was given to the principles set out in Condition P30.
Will Thames Water customers have to pay the £122.7 million fine?
No, Ofwat made clear that the fine could not be paid through raising prices for consumers. The company is unable to make further dividend payments without Ofwat’s consent.
What does the Thames Water fine mean for companies in breach of environmental regulations?
This is the first time Ofwat has fined a company for paying dividend amounts that did not reflect the organisation’s performance regarding its customers or its duty to protect the environment. The total fine for the breach of wastewater rules was £104.5m – 9% of Thames Water‘s turnover. This was just below the maximum 10% of turnover that Ofwat could have applied. The remaining £18.2 million penalty was for the breach of dividend payment rules.
It is also important to note that Thames Water cannot simply increase its prices to cover the fines. Ultimately, it is shareholders and investors who must bear the financial burden.
With public sympathy for water companies at an all-time low, Ofwat must be seen to come down hard on those that breach environmental regulations and then pay generous dividends to shareholders. Therefore, it is essential to get expert legal advice as soon as you become aware that a regulatory investigation may be imminent. Early legal advice can, in some cases, result in the investigation not occurring or being shut down as quickly as possible with little reputational damage.
Getting legal help with regulatory investigations
If your organisation is facing a regulatory investigation or civil claim, it is crucial to get legal advice immediately. Waiting too long can result in being prosecuted by the Regulator or the case going to court, jeopardising your commercial reputation and financial solvency.
Tanveer Qureshi has a robust track record of successfully advising and representing companies subject to regulatory investigations and prosecutions. If you require legal representation, please get in touch with Tanveer directly at tqureshi@libertaschambers.com or via his Chambers, Libertas Chambers on 020 7036 02000.
Author bio
Tanveer Qureshi specialises in general crime, white-collar crime, and regulatory investigations and prosecutions. He has over 20 years’ experience and is passionate about ensuring his clients get results and achieve justice. When not pouring over case briefs, Tanveer gets up at 4.30am to get his gym workout done and is a committed motorsports fan.