Summary of case
On 14 June 2017, Thames Water published its Annual Report and Accounts 2016-17, which showed that the company had failed to meet its commitment to reduce leakage in 2016-2017. This was one of a series of performance commitments Thames Water committed to deliver for its customers during the 2015-20 period.
As a consequence of missing its performance commitment on leakage, Thames Water will be automatically penalised £8.55m. This is the maximum automatic penalty under the performance commitment regime for missing this specific target. The penalty is borne by the company alone and cannot be passed on to customers.
In addition, we opened an investigation to consider whether Thames Water had contravened and/or was contravening any of its statutory obligations, and therefore whether enforcement action was needed over and above this automatic penalty.
Summary of Ofwat’s final decision
Our investigation found that Thames Water had breached two of its legal obligations in relation to its management of leakage reduction:
- Section 37 of the Water Industry Act 1991, which is a water company’s general duty to develop and maintain an efficient and economical system of water supply within its area and to ensure that all such arrangements have been made, a) for providing supplies of water to premises in its area of appointment and making them available on demand, and b) for maintaining, improving and extending its water mains and other pipes as are necessary to meet its obligations under Part III of the Water Industry Act 1991.
- Condition F paragraph 6A.1 of its instrument of appointment, which requires companies to ensure they have adequate financial and management resources and systems of planning and control in place to enable it to fulfil its statutory obligations.
These breaches were largely due to how Thames Water designed and implemented its contractual arrangements for reducing leakage. We found that as a result of these, Thames Water’s Board had insufficient oversight and control of the company’s leakage performance and that the company underestimated the significance of its underperformance on leakage when assuring Ofwat that it was meeting its statutory obligations, one of which is to deliver an effective service. Full details of our findings are set out in our final notice document.
On 7 June 2018 we published a notice of our intention to impose a £1 financial penalty on Thames Water. This was in light of Thames Water proposing a package of financial and non-financial commitments worth £120m to customers. We are required to provide an opportunity for interested parties to make representations on our intention to impose a penalty. Having considered the three responses we received, on 8 August 2018 we published a notice confirming that we had imposed a £1 penalty on Thames Water . We also published the undertaking Thames Water has provided to us under section 19 of the Water Industry Act 1991. This formalises the package of commitments it has provided.
The undertaking includes commitments that Thames Water will:
- Return a further £65m to customers, in addition to the £55m in automatic penalties Thames Water has incurred for missing its leakage and Security of Supply (SOSI) performance commitments.
- Restore its leakage performance back to the level it had promised its customers (606Ml/d) by 2019-20.
- Prepare its PR19 business plan on the basis of a commitment to reduce leakage by a further 15% by 2025 and by 50% in future price control periods.
- Publish monthly audited reports on the progress of its leakage recovery plan.
- Do more to engage meaningfully with customers on leakage issues, including at its Board.
- Ensure no executive or senior management incentive bonus which is dependent on the company’s leakage performance in 2018-19 and 2019-20 is paid unless the company meets or exceeds its performance commitments.
- Provide more detailed and externally audited evidence when it provides Ofwat with certificates under Condition F of its licence assuring that it has adequate resources, systems and controls in place to meet its statutory obligations.
- Review the governance arrangements of the boards of Thames Water Utilities Limited and Kemble Water Holdings Limited.
- Maintain sufficient management control over the delivery of its operational functions (whether delivered by its own employees or outsourced) to ensure it is able to meet its leakage and SOSI performance commitments.
- Provide written monitoring reports to Ofwat demonstrating its compliance with its section 19 undertaking.
Thames Water section 19 undertaking (8 August 2018)
PN34/18: Ofwat confirms package of payments and penalties for Thames Water following leakage failures (8 August 2018)
PN22/18: Thames water’s failure to tackle leakage results in £65m package for customers (7 June 2018)
Ofwat Statement on Thames Water Leakage Commitments (14 June 2017)
Update to the Undertakings 2021-2025
Third Party Assurance Requirements in the Undertakings
Since we accepted the Undertakings from Thames Water in August 2018, Ofwat issued, in February 2020, new guidance regarding the requirements and expectations for water companies’ annual ring-fencing certificates, which includes requirements for third party assurance. To avoid unnecessary duplication we have confirmed that Thames Water can appropriately scope and use one set of third party assurance to satisfy the two different regulatory requirements; relating to its Condition P certificate and the Undertakings.
This retains Undertaking 10’s requirement for suitable third party assurance but would have the effect of amending the current wording in Undertaking 10 as follows: “this review will form part of its third party assurance of its annual Condition P certificate as required in accordance with Ofwat’s February 2020 information notice, and any subsequent such guidance, and be explicitly and individually identified and assured in the third party assurance report”. This will maintain the level of assurance required by both the standard annual certificate obligations and the Undertakings.
Section 18 – 22 of the Water Industry Act 1991
14 June 2017
8 August 2018
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Media Relations Ofwat: 07458 030 677 / 0121 644 7728
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Date Last Updated
8 March 2021