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Whoever wins the general election, a potential headache for the new administration will be Thames Water.
The current government has already drawn up contingency plans, known as Project Timber, for the possible collapse of a company currently saddled with £15.4 billion in debt.
The scenario also features strongly in a dossier of potential crises compiled by Sue Gray, Sir Keir Starmer’s chief of staff, that a new Labor government would face.
Talk of a potential collapse has moved up the agenda because Thames Water’s owners, which include Canadian pensions giant Omers, the Universities Superannuation Scheme, a unit of the Abu Dhabi Investment Authority, and the China Investment Corporation, have refused to inject more capital in the business. They had previously offered to inject a further £3.25bn on top of last year’s £500m if Ofwat, the regulator, supported the company’s plans.
But Ofwat refuses to allow Thames to increase its investment levels and customer bills to the point that company is proposing.
Thames asked Ofwat to approve an £18.7 billion investment that would have entailed an average 44% increase in customer bills over the next regulatory period, which will run from 2025 to 2030. It adjusted this presentation in April to increase the investment to £19.8 billion over the period, with no extra increase in bills.
Ofwat was due to publish its “final determination” on investment plans and customer accounts for the entire water sector, including Thames, on June 12, but postponed it until July 11 due to the general election.
The guardian reported earlier this week, Ofwat is expected to refuse requests from most water companies, including Thames, with some operators being allowed to increase bills by up to half of what they asked for.
This approach is consistent with Ofwat’s historic approach of keeping water bills low as its top priority, rather than, for example, allowing greater investment to tackle sewage spills.
However, there are signs that Ofwat may be prepared to compromise, at least to some extent.
The Financial Times reports today that the regulator is drawing up plans for a special “recovery regime” for Thames and other UK water companies in financial difficulty, in a bid to avoid nationalisation.
It suggests that companies with “recovery regime” status could receive fewer or no regulatory sanctions to encourage them to invest in infrastructure improvements, as well as receive more “realistic” targets to reduce sewer and water leaks and interruptions.
The regulator finds itself in a dilemma. Ofwat does not want Thames to collapse, not least because such an event would intensify criticism that the regulator allowed Thames’ previous owners – most notably Australian investment bank Macquarie – to saddle the company with debt while extracting huge dividends (the current investors have not received any dividends since 2017).
Ofwat’s ministerial overlords – from both parties – will also be aware that a Thames administration would deter the same international investors that the UK desperately needs to attract to pay for infrastructure improvements.
On the other hand, however, Ofwat does not want to face accusations that it is being unduly lenient with a company that has behaved badly in the past.
Now, it’s fair to say that Ofwat is offering an olive branch here. Just two weeks ago he said he was “considering” punishing Thames for breaching license conditions over a £37.5m dividend paid to shareholders in October last year (Thames points out the payment was made to Kemble Water, its controlling holding company, and was necessary to maintain the latter’s solvency). This could result in another fine worth tens of millions of pounds.
The big question is whether this commitment will be enough to strengthen Thames’ financial situation. Ofwat has fined Thames £175 million over the last three years, which, although a large sum, is a relatively insignificant amount compared to Thames’ debts.
So it probably wouldn’t be enough on its own to persuade the Thames owner to inject more capital into the business. Omers, Thames’ largest individual shareholder, has already reduced the entire value of its 31.7% stake in the company to zero. USS, which has more than half a million scheme members at British universities and which owns almost 20% of Thames, has reduced the value of its shareholding from £956m at the end of 2022 to just £364.4m at the end of last year. year.
What today’s news reveals is that there is a compromise to be reached here. The extra month before Ofwat was due to publish its draft deliberation gave both sides a little more time.
But it appears that, with Ofwat unwilling to back down with Thames on its proposal to increase investment and customer bills, the latter’s shareholders have lost patience.
A “special management” of the Thames – something neither Rishi Sunak nor Sir Keir Starmer would like to see – still appears to be the way to go.