Thames Water hits back at regulator with call for further bill rise

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Thames Water, the London utility fighting for its financial survival, has called for another increase in customer bills as it warned that proposed cuts to its business plan by the industry regulator would jeopardise the company’s recovery.

The UK’s biggest water supplier, which serves 16mn people in south-east England, said on Wednesday that it wanted to raise customer bills by £18.99 a month — or 52 per cent — by 2030 to fund investment in wastewater treatment and other improvements to its services.

That could become a 59 per cent rise if given extra spending allowances by the regulator. Thames blamed the latest proposed increase on new projections for its customer numbers.

The utility had originally asked to increase bills by 40 per cent and invest £22bn by the end of the decade to fix leaks and develop new water supplies.

Ofwat, however, rejected that plan last month and said it could only increase bills by 23 per cent over the five years covered by the business plan.

Chris Weston, chief executive, said Ofwat’s response would make its business plan “neither financeable nor investible and therefore not deliverable”, thereby preventing “the turnaround and recovery of the company”.

Weston insisted that the extra money that customers were being asked to pay would be invested in “new infrastructure and improving our services for the benefit of households and the environment”.

“Over the last three regulatory periods we are forecast to spend over £2.7bn more than our allowances. Structural underfunding has led to significant asset health challenges alongside a substantial increase in the group’s leverage,” said Weston.

Customers, he added, were “not being asked to pay twice, but to make up for years of focus on keeping bills low”.

Ofwat said on Wednesday that it would consider responses from the water companies before setting out final decisions in December. 

Thames Water also said it needs to raise around “£3.3bn of new external equity, as well as substantial new debt”. The utility is working with advisers at Rothschild to try to attract new equity investors, after its existing shareholders backed away from injecting further funds and described it as “uninvestable” in March.

Thames also proposed an increase to the “weighted average cost of capital” (WACC) — a measure of the blended cost of its overall financing, agreed with the regulator — arguing that “investors perceive the risk of investing in Thames Water as greater than the industry average”.

It is now proposing that it will need to allow for financing to cost 4.6 per cent, which “better reflects real-world financing costs”, higher than the 4.25 per cent it forecast in an earlier business plan and the 3.72 per cent allowed return on capital proposed by Ofwat.

The group is struggling under the weight of an £18bn debt pile, including borrowing at its parent company that has been in default since April.

Last month, Thames Water lost its investment-grade credit ratings, putting it in breach of its licence conditions and pushing the group closer to renationalisation. The company’s bonds are now trading at deep discounts to face value and some major lenders have already taken losses when cutting their exposure.

Water UK also on Wednesday warned that Ofwat’s recent draft proposals would likely make it impossible for the sector to attract the investment needed and reduce the UK’s attractiveness to international investors.

The industry had set out plans to invest £105bn over the next five years but Ofwat had proposed cutting this by £17bn.

David Henderson, chief executive of Water UK, wrote in a letter to Ofwat that it “must stop repeatedly cutting investment plans to the point they are no longer viable while, at the same time, holding companies to increasingly unachievable targets that set the sector (and Ofwat) up to fail”.