Southern Water could be slapped with a £54 million penalty after its plans for future improvements were branded “inadequate” by a water regulator.

Ofwat said the water company’s business plan for 2025 to 2030 did not meet “minimum expectations” and it will impose the hefty fine if proposals are not improved by the end of the year.

Ofwat, which is responsible for economic regulation of the privatised water and sewerage industry, said in its draft determination, published nine months after Southern Water submitted its plans, that the company’s performance “lags behind” others in the sector.

Key expectations set out by Ofwat to be achieved between 2025 and 2030 include Southern Water delivering a 35 per cent reduction in storm overflow spills, supported by a £622 million programme of investment, delivering a 13 per cent reduction in leakage and helping customers reduce their water use by two per cent.

Ofwat also expects the company to invest £76 million in metering, including rolling out smart meters.

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It proposed Southern Water reduce interruptions to customers' water supply by 86 per cent based on its current 2020-23 performance.

And the company is also expected to reduce incidences of internal sewer flooding by 13 per cent as well as invest £89 million to improve drinking water quality.

“In 2022-23, Southern Water performed better or at the required level of performance for unplanned outage at water treatment works but performed worse on all other measures including leakage and water supply interruptions,” the report said.

“We have had to make significant interventions to Southern Water's business plan as we assess that the plan did not meet our minimum standards that we set for all companies. Under our draft decisions, we require Southern Water to deliver a significantly improved level of service for customers and the environment.”

To deliver its performance commitments and legal obligations, Ofwat’s draft decision allows Southern Water to have a total expenditure allowance of £6.9 billion over the 2025- 30 period, some £2.9 billion more than the company was provided within the current price review period (2020-25).

It was 12 per cent less than Southern Water requested.

The costs of the investment that Southern Water makes is recovered from customer bills over the long term.

Some £5.8 million of the expenditure can be recovered through customer’s bills, Ofwat said.

This will see an increase to average household bills of £183 from 2024-25 to 2029-30 before inflation.

As well as the penalty, Ofwat said it could also apply different cost sharing rates if the plan is not improved enough.

“This means the company bears a higher proportion of any overspends of its cost allowances and has to give a higher proportion of any underspends back to customers,” it said.

Stuart Ledger, Southern Water’s chief financial officer, said: “Since submitting our business plan in October, we have continued to engage with stakeholders and customers, to feed into Ofwat’s process.  

“We are now reviewing Ofwat’s draft determination, and we will publish our response on August 28, 2024, ahead of Ofwat’s final determination in December 2024.”