Thames Water faces break-up threat under new Ofwat measures

Thames Water may be forced to break up, publicly list or reduce its debt mountain under special measures imposed by the regulator Ofwat aimed at avoiding renationalisation of the ailing utility.

On Thursday, the regulator said it was putting Thames, the UK’s biggest water supplier, into a “special turnaround oversight regime” that would involve tougher scrutiny, including installing an independent monitor at the utility.

Ofwat added that, in the medium term, Thames may also be required to limit the amount of debt it takes on, break the business into two or more water companies, or seek a public listing to secure additional equity.

Thames has spent the past year in an escalating financial crisis as it struggles under an £18bn debt burden that has been hit by higher interest rates.

In its latest five-year business plan, the company requested that Ofwat allow it to raise customer bills by as much as 40 per cent in real terms over 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 average household water bills across England and Wales over the next five years. The figure fell far short of the average 33 per cent demanded by UK water companies.

Ofwat criticised Thames’s latest business plan as late, “incomplete” and “lacking ambition”. It added that some parts did not have “the assurance of [Thames’s] own board”.

The crisis at Thames is one of the first major challenges facing the new Labour government, which has said it is keen to avoid taking the company back into public ownership even as it teeters on the edge of collapse.

In March, Thames shareholders — which include the pension funds Omers and USS as well as the Chinese and Abu Dhabi sovereign wealth funds — backtracked from a plan to inject £500mn and branded the utility “uninvestable”.

Ofwat’s chief executive, David Black, said on Thursday that it was “up to Thames to convince its investors it can turn around the business”.

The company says it has enough cash to last until May but will need to raise £750mn of new equity by April and £2.5bn by 2030.

Anthony Legg, water expert at PA Consulting, said the draft price settlements had “increased the likelihood of temporary renationalisation of Thames Water”.

“It is difficult to see how these measures restore investor confidence, enabling Thames to access necessary new equity. At the same time, the new turnaround oversight regime proposed by Ofwat could impinge on the space needed by the management team to deliver on its turnaround plan.”

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Thames has held tentative discussions with shareholders with a view to raising equity by the new year.

Key to Thames’s ability to attract investors is the cost of capital. Ofwat said it would allow water companies to pay investors a 4.8 per cent return on equity needed for infrastructure investments, well below the 5.7 per cent Thames said it needs to find new sources of cash.

Ofwat’s decisions come just hours before bosses of 16 water companies are due to meet the government amid rising public anger and political scrutiny over the state of the UK’s water industry, which has also caused outcry over sewage pollution.

Industry lobby group Water UK, accused Ofwat of repeating the mistakes of the past by sanctioning lower bills, which it said represented the “biggest ever cut in investment by Ofwat”.

Under the draft plan, households will see their bills rise by an average of £94 between 2025 and 2030, though the cost increases vary by region.

Bills for Thames Water customers would increase by 23 per cent to about £535 a year before inflation, while those of Southern Water would receive a 44 per cent increase to £603 per household.

Shares in Pennon, the owner of South West Water, rose 10 per cent to 679.5p in London trading on Thursday, while shares in the other two publicly listed companies, Severn Trent and United Utilities, both increased by around 4 per cent.

The Consumer Council for Water said that around 2mn households were already struggling to pay their water bills. 

“Millions of people will feel upset and anxious at the prospect of these water bill rises and question the fairness of them given some water companies’ record of failure and poor service,” said Mike Keil, interim chief executive of the CCW.

Separately, the government will draw up legislation that would put the entire water industry into special measures, with a ban on bonuses for executives of heavily polluting companies, criminal charges for the worst lawbreakers, and closer monitoring of sewage outflows.

Steve Reed, environment secretary — who is meeting water executives on Thursday afternoon — has also set out other immediate reforms.

Reed wrote to Ofwat saying that funding for infrastructure work must be ringfenced rather than being diverted for bonuses or dividends or salary increases. 

Ofwat’s Black said: “Our draft decisions on company plans approve a tripling of investment to make sustained improvement to customer service and the environment at a fair price to customers.”

Water companies will spend the next few months negotiating with Ofwat, which will ask for more details on rejected projects such as reservoirs and sewage treatment plants.

A final decision is due by December 19, after which water companies will be able to appeal to the Competition and Markets Authority. 

Additional reporting by Ella Hollowood in London