Thames Water placed in special measures due to ‘significant issues’
The water industry regulator has put Thames Water into unprecedented special measures, allowing extra scrutiny of the struggling water supplier as it faces the prospect of a painful restructuring or temporary nationalisation.
Ofwat said on Thursday that Thames would be placed in a “turnaround oversight regime” and subject to “heightened regulatory” measures, meaning the company must regularly report on the progress of its investment plan. It is the first time a water company has faced such measures.
The regulator made the announcement as it published its draft review on English and Welsh water companies’ business plans and said the proposal submitted by Thames was “unsatisfactory”.
Ofwat said customers of Thames Water, which is Britain’s biggest water company, would face a 22% increase in their bills over the next five years.
The regulator said Thames would be allowed to increase bills by £99 to £535, £92 less than the company had proposed. Thames, which serves 16 million customers across London and the south-east, had asked the regulator to raise bills by 44% over the next five years.
The average water bill for customers of all companies in England and Wales may rise by 21%, or £94, over the next five years, also to £535.
Ofwat’s chief executive, David Black, said that in the Thames plan “costs were poorly justified, service levels were unsatisfactory and so that makes our job more challenging”. He said Ofwat’s response to Thames was “fair” and it was “up to Thames to convince investors” of its turnaround as it attempts to raise fresh funds.
Thames’ business plan was “late” and “incomplete”, said the regulator Chris Walters. “Overall, it lacked ambition. Parts of it certainly did not have the assurance of Thames’ own board and it’s difficult for us to stand behind a plan that a board won’t stand behind.”
The price review is seen as crucial for the future of Thames Water, which is creaking under £15.2bn of debt. The company said this week that after the review it would approach potential investors this autumn, before Ofwat’s final verdict in December.
Over the next five years, Thames has been tasked with reducing sewage spills by 64%, cutting leaks by 19% and reducing supply interruptions by two-thirds.
As a result of being put into the regime, Thames will have to provide a “delivery action plan” and regularly report on the progress of its spending programme. It will also have to provide a “financial resilience plan” and could be scrutinised by an independent monitor, who would be given full access to company information.
In order to exit the regime, it will need to show an improvement in its operating performance, delivery of investments and the state of its balance sheet.
The company could be limited in the amount of debt it can take on. Ofwat said it had suggested that in a longer-term scenario Thames could separate into two or more companies or list on the stock exchange to secure extra equity.
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Thames revised an original £18.7bn spending plan submitted in October 2023 up to £19.8bn. Ofwat said on Thursday that it would be allowed to spend £16.9bn. Within that, more than £3.3bn is contingent on Thames proving it is “ready and able” to make the investments.
A spokesperson for Thames Water said: “Ofwat has asked us to look again at our turnaround plan, and is seeking enhanced oversight of our delivery against it. We are in any case taking stock of our turnaround plan under our new leadership and reflecting on our progress to date.
“We will consider all of Ofwat’s proposals as we go through this process. This is one stage in a longer process.”
A source close to Thames’ troubled parent company, Kemble Water Holdings, said Ofwat’s review had “done nothing to reduce the risk of a special administration”, in which it would be temporarily nationalised.
Ofwat said it was asking “further questions” about a dividend payment of more than £150m, first revealed by the Guardian. Thames has said the dividend did not reach external shareholders. Black said: “We will want to get further confidence that that is the nature of those payments and whether customers interests have been protected.”
Black said the regulator would also look at a £195,000 bonus paid to Thames’ chief executive, Chris Weston, and payouts to other bosses in the sector.