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Severn Trent fined record £36m after misreporting water leakages

Severn Trent, the Midlands water company, is to pay a record £36m fine and pledged to cut customer bills after it pleaded guilty yesterday to orchestrating one of the largest customer overcharging scandals ever perpetrated in the UK.

The company's extraordinary mea culpa, issued yesterday to the City of London magistrates' court, was the culmination of a long-running investigation by the Serious Fraud Office into a years-long pattern of falsifying information that enabled it to charge customers more than it would have otherwise been allowed under the regulatory regime. To settle the case, Severn Trent pleaded guilty to two charges of falsifying leakage data in 2001 and 2002.

The company also resolved a separate inquiry from Ofwat, the water regulator, under which it admitted to systematically lying about hitting key performance criteria between 2000 and 2004 that allowed it to overcharge customers during that period. It will pay £35.8m in fines and said it will cut customer bills by £2.40 per household.

Regina Finn, head of Ofwat, called the company's behaviour "unacceptable". She added: "The size of the proposed fine reflects how seriously Ofwat takes the deliberate misreporting of information. This sends a clear message to the company and the rest of the water sector ... Any further attempts to deliberately mislead Ofwat could lead to even bigger fines in the future."

This was not an isolated case. Southern Water was fined £20.3m in November last year for lying about its performance. Thames Water was forced to set aside £150m to invest in its network after massive leakage problems were revealed in 2006. Two years ago, Severn Trent was forced to cut bills by £42m after being caught engaging in similarly underhand tactics. And the energy supplier npower suspended 17 employees over a scandal involving alleged mis-selling by its door-to-door salesforce.

Just as Severn Trent was fessing up, Ofgem announced an inquiry into Scottish Power and Scottish & Southern after the energy regulator received a complaint of alleged "abuse of a dominant position in the electricity generation sector" in Scotland. Allan Asher of EnergyWatch said the Scottish energy market is "as bad as the worst markets in Europe" in terms of market concentration and transparency.

The water industry is most prone to abuse. Unlike electricity and gas, where customers can switch if they are displeased, water companies have a captive audience. Since the industry was privatised in 1989, water prices have increased by an average of 42 per cent in real terms, well above inflation, said Tony Smith, chief executive of the Consumer Council for Water. He applauded Ofwat's move but added that the fine should go to customers, either through improvements or bill cuts, rather than to the Treasury.

Tony Wray, the chief executive of Severn Trent, dismissed the episode as an ugly vestige of a previous regime. "Those who were responsible for the customer relations mistakes are no longer with Severn Trent and we apologise to our customers for their failings."

The company got off lightly. Ofwat has the power to levy fines equal to 10 per cent of group turnover.