Plans to cap water bills could create a “material risk” that suppliers may fail to raise enough cash to invest in stopping sewage leaks, the water industry has warned.
Industry trade association Water UK said regulator Ofwat’s draft plans to limit the rise in household water bills to £19 a year on average will hold back firms’ ability to improve their services.
In a letter to Ofwat chief executive David Black on Wednesday, the group also warned that the bill cap will drive away investors needed for a multimillion-pound spending plan to bring Britain’s water infrastructure up to scratch.
Water UK boss David Henderson wrote: “Ofwat’s approach would make it impossible for the water sector to attract the level of investment that it needs and will reduce the UK’s attractiveness to international investment.”
The stark warning comes on the deadline day for firms and other stakeholders to respond to Ofwat’s initial proposals, which determines the sector’s bill increases, spending plans and returns for investors over the five years to 2030.
Ofwat proposed in its draft determination in July that water firms should be allowed to increase bills by a third less than they had requested on average.
Water firms had put forward plans for increases averaging £144 over five years, although there were significant variations in price changes between suppliers.
Ofwat said its proposals to cap the average bill increase at 21% – around £19 per year – follows firms’ proposals to increase their total spending by £29 billion, split between a £5 billion increase in the core costs for running their business and a £24 billion rise in spending to meet requirements set by governments and for other environmental improvements.
Ofwat said at the time that its scrutiny of companies’ cost proposals, to ensure they deliver efficiently, had led to a £16 billion reduction.
But there has been mounting public and political fury around firms’ polluting of waterways with sewage spills as they continue to hand dividends to shareholders, and bonuses to executives – something which Labour has pledged to clamp down on.
Sewage spills into England’s rivers and seas more than doubled in 2023.
Ofwat’s draft determinations would likely result in significant investability issues for the sector as a whole
Oxera report
However, a Water UK-commissioned report by consultancy Oxera, which is being published on Wednesday, warns over the impact on the sector of the Ofwat plans.
It said: “Ofwat’s draft determinations would likely result in significant investability issues for the sector as a whole.
“In particular, there is a material risk that the sector is unable to raise the new equity investment required to finance the proposed investment programme.”
The report added: “This would hamper the sector’s ability to deliver the environmental and service improvements expected of the sector by its consumers and other stakeholders, and would not be in the public interest.”
In a further shot across the bow, a group representing water investors such as pension funds also cautioned over Ofwat’s draft plans.
For too long, the regulator has prioritised low bills at the expense of investing in the resilience of the sector
Jon Phillips, Global Infrastructure Investor Association
Jon Phillips, chief executive of the Global Infrastructure Investor Association, said: “For too long, the regulator has prioritised low bills at the expense of investing in the resilience of the sector.
“The solution to this vicious circle sits with Ofwat – the regulator can’t continue to penalise water companies for not meeting expectations without equipping them with means to provide the solution.”
The warnings come just weeks after Ofwat revealed £168 million of proposed fines for three of England’s biggest water companies for failing to manage sewage spills, including a £104 million penalty for troubled Thames Water.
The fine for Thames came alongside a planned £47 million penalty for Yorkshire Water and £17 million for Northumbrian Water after a “catalogue of failure” by the firms, according to Ofwat in the first batch of results from its biggest ever investigation into the industry.
Ofwat said it will consider all responses “carefully” ahead of its final decision on water firms’ spending plans by December 19.
A spokesman said: “We expect to receive responses from many organisations, including water companies, customers, environmental and consumer organisations and investors.
“These are likely to reflect a diverse range of views on the proposals we have made.”