Response to Ofwat Interim Report

The Board of Severn Trent Plc accepts the conclusions of Ofwat's interim report
published today concerning allegations of false reporting made against its
subsidiary Severn Trent Water in 2004.

The Company's internal investigation and Ofwat's investigation have been
thorough and lengthy, requiring complex judgements. Severn Trent's judgements
have not been identical to Ofwat's in every aspect, but in the interests of
making amends as soon as possible, the Board believes it is sensible now to
proceed by agreement.

Ofwat has concluded that Severn Trent Water:

  * Had poor internal processes and controls which led to incorrect income data
    being submitted to Ofwat in 2004 and price limits being £8m a year too high
    for five years to 2010
   
  * Provided data to Ofwat in 2002 which was deliberately miscalculated and
    which meant customers were overcharged by £2m in 2004
   
  * Approached the collection and submission of data in a manner which causes
    Ofwat serious concerns
   
Having considered Ofwat's findings, the Board of Severn Trent Plc has agreed
that customer accounts should be credited as soon as possible. This year, on
average, this credit will be around £4 per customer in addition to the £2 to £3
already rebated. In the following three years the rebate will be £2 to £3 per
customer.

The interim report will be available on www.ofwat.gov.uk

On behalf of the Board of Severn Trent Plc, Group Chief Executive, Colin
Matthews, said:

'We apologise unreservedly to customers and Ofwat for weaknesses in Severn
Trent Water's internal processes and systems of control during 2000 to 2004.

'Price limits were set in 2004 which unintentionally could have resulted in
customers paying £8m a year too much over the five year period had the new
management team not acted.

'In September 2005 we identified unexplained extra income in excess of our
agreed 2004 business plan and we immediately alerted Ofwat.

'We reduced price increases for this year, 2006, by £7m and anticipated this
continuing in subsequent years. In the light of Ofwat's findings we shall
accept their £8m a year figure and make additional amends accordingly.

'We deeply regret weaknesses in internal processes, controls, ethics and
culture. Ofwat has concluded that deliberate miscalculation of data by an
employee, David Donnelly, went unchallenged and as a result customers were
overcharged by £2m in 2004.

'Our investigations also discovered adjustments in our favour which would have
more than offset Ofwat's finding of an overcharge in bad debts. However, it is
Ofwat's judgement not to allow them.

'As the Ofwat report acknowledges, the Board of Severn Trent Plc and the new
senior management team have since 2004 already made major changes to
organisation structure, to people and to processes and controls. The intense
drive to improve Severn Trent Water will continue to be a top priority for the
new Managing Director, Tony Wray, and his management team as well as the Board
of Severn Trent Plc.

'We will co-operate fully with Ofwat to restore confidence in Severn Trent
Water going forward.'

The Board of Severn Trent Plc also acknowledges that Ofwat may expect further
amends to be made to customers. Ofwat has stated that this penalty will be
discussed with Severn Trent Water on completion of the SFO investigation into
leakage.

The Ofwat report found no evidence of a company-wide attempt to mislead on
issues of bad debt or metered customers bills. However, it did find evidence of
a limited number of staff who became aware of wrong behaviour but did not raise
any concerns.

Mr Matthews said:

'A number of our employees were disciplined as a result of our own thorough
internal disciplinary investigation.

'As we regard disciplinary hearings as confidential between employer and
employee no further details will be released.'

Severn Trent concurs with the Regulator that the provision of false, inaccurate
or incomplete data undermines stakeholder confidence in regulation.

'The Board and senior management team are fully committed to creating a working
environment in which good business ethics are supported and promoted by
managers at all levels and unethical behaviour is recognised for what it is,
and rejected as completely unacceptable' said Mr Matthews.

Substantial action has already been taken to improve processes and behaviour to
ensure that Severn Trent Water has:

  * A stronger financial framework and system of controls
   
  * Clear responsibilities and accountabilities
   
  * A culture based on openness and evaluation of all aspects of performance,
    bad as well as good, where every member of staff practises proper business
    ethics
   
Actions already taken by Severn Trent Water

Stronger financial controls achieved by:

  * Implementing new processes to provide a detailed documentary control base,
    and clear audit trails, following an in-depth review by auditors
   
  * Broadening of skills and knowledge to remove single point of risk/failure
   
  * Separating of Finance and Regulatory functions to ensure independence/
    constructive challenge
   
  * Restructuring Finance to focus separately and more robustly on capital,
    revenue and operating expenses
   
Clear responsibilities achieved by:

  * Simplifying the organisation with clear roles and accountabilities
   
  * Putting directors in closer contact with the detail of the business by
    having less layers of management
   
  * Reorganising and refreshing senior team with a mix of new external and
    internal appointments
   
  * Focusing intensely on core performance delivery and value for money for
    water and sewerage customers
   
Cultural change achieved by:

  * A stronger focus on good business ethics, promoted by managers at all
    levels, being implemented through a revised and strengthened code of
    conduct
   
  * Removal of unnecessary hierarchy and barriers to communication - more face
    to face, peer to peer, team work
   
  * Fresh approach to Performance Management based on full disclosure and risk
    and issue management
   
  * Explicit training with improved control framework in Regulatory Compliance,
    Competition Act, whistleblowing procedure and financial approval levels
   
Mr Matthews concluded:

'Acting with openness, honesty and integrity is an essential part of corporate
responsibility, particularly so for a regulated utility. We intend to continue
to build a company that customers, Ofwat and employees are all proud of.'

FOR FURTHER INFORMATION CONTACT:

Peter Gavan

Director of Corporate Affairs

Severn Trent Plc

0121 722 4310