Severn Trent, the country's biggest quoted water company, is facing a fine running into tens of millions of pounds after being found guilty of deliberately supplying false information to the industry regulator.
Ofwat ruled yesterday that the company had overcharged customers by £42m by incorrectly calculating levels of income and bad debt and ordered Severn Trent to repay the money.
But the regulator also warned that Severn Trent's failings over the 2000 to 2004 period were sufficiently serious to warrant a further penalty. The exact size of this will be decided once a separate criminal investigation by the Serious Fraud Office into the company's reporting of leakage rates is complete, but the fine is likely to be of a similar size to the compensation payment.
The scandal - which came to light in May 2004 when a whistleblower, David Donnelly, reported Severn Trent to Ofwat - raises question marks over two of Britain's most senior businessmen who were in charge of the water company at the time.
Sir David Arculus, who was chairman of Severn Trent and also chairman of the Government's Better Regulation Taskforce at the time the water regulator was deliberately being misled, is the president-elect of the Confederation of British Industry. Robert Walker, who was Severn Trent's chief executive during the period, is now chairman of the retailer WH Smith.
Ofwat's investigation concluded it could not support Mr Donnelly's allegations that directors of Severn Trent "directed the deliberate miscalculation and that knowledge of it was widespread". But it did conclude the company had provided regulatory data which was "either deliberately miscalculated or poorly supported", leading to bills being higher than was necessary.
The regulator was also critical of the lack of proper management controls and processes at Severn Trent. "We have serious concerns about the culture and systems of planning and control within Severn Trent during the period covered by the allegations," Ofwat's report says. "In our view it led to data being submitted that was not accurate or well supported and that was influenced by a desire to present a particular position or achieve a particular outcome. We consider that Severn Trent Water's approach fell significantly below the standard we expect."
The rebate, to be paid over the next four years, is equivalent to a reduction of between £2 and £3 a year in the average bill for Severn Trent's 3.9 million customers.
In November 2004, six months after the allegations first emerged, and again in October last year, Severn Trent maintained that a forensic investigation conducted by PricewaterhouseCoopers into the allegations found that customers had not been overcharged.
The company stood by that statement again yesterday but accepted that Ofwat had come to a different conclusion.
Sir David left Severn Trent in December 2004 to become chairman of O2, the mobile phone operator taken over last year by Telefónica of Spain. He resigned as chairman of the Better Regulation Taskforce in December. Mr Walker left Severn Trent in February 2005 and handed over as chief executive to Colin Matthews.
The two other senior executives in charge of Severn Trent at the time, its finance director Mark Wilson and managing director, Brian Duckworth, have also both subsequently left the company. Mr Duckworth remains a non-executive director of several quoted companies including the housebuilder Redrow and Avon Rubber.
A spokesman for the CBI refused to respond to Ofwat's findings, saying: "It is not an issue that it is appropriate for us to comment on on the grounds that this is a company matter."
Neither Sir David nor Mr Walker returned telephone calls. But a spokesman for WH Smith said: "This has no impact on Robert Walker's role as chairman." A spokeswoman for the Better Regulation Taskforce, said: "Sir David's work for us was in a completely independent and voluntary capacity. In that capacity he achieved a huge amount. The Government is doing more now on regulation than ever before and that is down to his leadership."
A spokesman for Redrow said: "Brian is doing an excellent job as non-executive director of Redrow. It wouldn't be appropriate for us to comment on these matters."
Mr Matthews, the new chief executive, said Severn Trent "apologises unreservedly" to customers and Ofwat, adding that a number of employees had been disciplined.
Water chiefs under pressure
CHAIRMAN Sir David Arculus, now president-elect of Confederation of British Industry
CHIEF EXECUTIVE Robert Walker - 'no impact' on new role at WH Smith
THE NEW CHIEF Colin Matthews - apologised 'unreservedly' to customers
MANAGING DIRECTOR Brian Duckworth - doing an 'excellent' job at RedrowReuse content