Thames Water will have to pay an £18.2m penalty after the water industry regulator confirmed the troubled utilities company had breached dividend rules.
The Guardian revealed on Wednesday that Thames would be penalised over two dividend payments, made in 2023 and 2024, and that it would allow the water company to increase bills by just over a third. The industry watchdog Ofwat confirmed the penalty and bills rise on Thursday.
It marks the first time Ofwat has used its new powers to take action against companies that pay dividends regardless of their performance since they came into force in May 2023.
The rules were brought in to stop companies making dividend payments that could not be justified by Ofwat’s performance measures. Thames “failed to comply with these”, the regulator said.
Separately, Ofwat said water bills for millions of customers in London and south-east England would increase by £152 on average over the next five years.
It said on Thursday that Thames would be allowed to increase bills by 35% by 2030 in the regulator’s much-anticipated “final determination” on the business plans of water companies in England and Wales.
Thames will receive an £18m penalty for payments including a £37.5m dividend it paid last year and a £158.3m this year, as first revealed by the Guardian.
Ofwat said it would also “claw back value” by adjusting its price controls to recover £131m of the dividend payments, defined as a surrendered tax loss by Thames.
David Black, the chief executive of Ofwat, said: “Ofwat’s £18m penalty and clawing back the value of £131m in unjustified dividend payments is a clear warning to the whole sector: we will take action against companies who take money out of these businesses, where performance does not merit it.”
The decision is seen as crucial in determining the future of the debt-laden company, which is trying to secure £3bn emergency in funding and a further £3.25bn equity investment to prevent its collapse.
In a preliminary decision on Thames’s business plan in July, Ofwat refused a request from the company to increase bills by 44% over the next five years, saying it would only allow 22%, equivalent to a £99 increase to £535 on average by 2030.
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Thames later said that if it was not allowed to raise bills by 59% – an average of £228 by 2030 – it “would also prevent the turnaround and recovery of the company” as relations between the company and Ofwat appeared increasingly strained.
In March, investors pulled the plug on £500m of funding, arguing the regulator had made Thames “uninvestible” for shareholders.
Thames, which has 16 million customers, won court approval to secure the “critical” £3bn cash lifeline this week, but risks falling into a temporary, government-handled administration if the company collapses. It will need further court approval to finalise emergency funding.
Across the industry, bills will increase by £31 a year on average to £597 over the next five years, Ofwat said on Thursday.