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Thames Water could be forced to split up, go public or reduce its huge debt under special measures imposed by regulator Ofwat to avoid renationalisation of the troubled utility.
On Thursday, the regulator said it would put Thames, the UK’s largest water supplier, on a “special transitional monitoring regime” that involves closer monitoring, including the installation of an independent monitoring device at the water company.
Ofwat added that, in the medium term, Thames could also be required to limit the amount of debt it owes, split the business into two or more water companies or go public to secure additional equity.
Thames has spent the past year in an escalating financial crisis as it struggles with an £18bn debt burden due to rising interest rates.
In its latest five-year business plan, the company asked Ofwat to allow it to increase customer bills by up to 40 per cent in real terms over the five years to 2030 in a bid to shore up its finances.
But on Thursday, the regulator said it would allow an increase of just 21 per cent in the average household water bill across England and Wales over the next five years. This is far below the 33 per cent average demanded by UK water companies.
Ofwat criticised Thames’ latest business plan as being late, “incomplete” and “lacking ambition”. Ofwat added that some departments lacked “assurances about [Thames’s] “private board”
The crisis at Thames was one of the first major challenges facing the new Labour government, which said it wanted to avoid returning the company to state ownership even as it teetered on the brink of collapse.
In March, Thames shareholders — including pension funds Omers and USS as well as the sovereign wealth funds of China and Abu Dhabi — scrapped plans to inject £500m and deemed the utility “uninvestable”.
Ofwat chief executive David Black said on Thursday that “Thames must convince investors it can turn the business around”.
The company said it had enough cash to last until May but would need to raise £750m of new equity by April and £2.5bn by 2030.
Thames has held preliminary discussions with shareholders with a view to raising equity in the new year.
Key to Thames’ ability to attract investors is its cost of capital. Ofwat said it would allow water companies to pay investors a return on equity of 4.8 per cent for infrastructure investment, well below the 5.7 per cent Thames said it needed to find new cash.
Ofwat’s decision comes just hours before the directors of 16 water companies are due to meet the government amid growing public anger and political scrutiny over the state of the UK’s water industry, which has also sparked protests over wastewater pollution.
Industry lobby group Water UK accused Ofwat of repeating past mistakes by approving lower bills, which it said was “Ofwat’s biggest ever investment cut”.
Under the draft plans, households’ energy bills would rise by an average of £94 between 2025 and 2030, although the cost increase will vary by region.
Bills for Thames Water customers will rise by 23 per cent to around £535 a year before inflation, while Southern Water bills will rise by 44 per cent to £603 per household.
The Consumer Council for Water says around 2 million households are currently struggling to pay their water bills.
“Millions of people will be upset and worried by the prospect of rising water bills and will question the fairness of these price increases given the poor track record of some water companies and poor service,” said Mike Keil, interim chief executive of CCW.
Separately, the government will draft legislation that would put the entire water industry under special measures, with a ban on bonuses for executives of major polluters, criminal prosecution of the most serious lawbreakers and tighter monitoring of wastewater flows.
Steve Reed, the environment secretary – who will meet water industry chiefs on Thursday afternoon – has also set out other immediate reforms.
Reed has written to Ofwat saying funding for infrastructure work should be earmarked rather than diverted to bonuses, dividends or pay rises.
“Our draft decisions on the company’s plans approve tripling investment to sustainably improve customer service and the environment at a fair price for customers,” said Ofwat’s Black.
Water companies will spend the next few months negotiating with Ofwat, which will ask for more details about rejected projects such as reservoirs and wastewater treatment plants.
A final decision will be made on December 19, after which water companies will be able to appeal to the Competition and Markets Authority.
Additional reporting by Ella Hollowood in London
