Thames Water has lobbied the government to intervene with the regulator to allow it to charge far higher bills, the Guardian can reveal.
Advisers and board members of the beleaguered water company are understood to have met Whitehall officials in recent weeks to say that allowing it to be temporarily renationalised would have a “chilling effect” on the entire UK’s appeal to international investors, sources familiar with the discussions told the Guardian.
Thames is one of the biggest challenges facing the new Labour administration, after the company was brought to its knees by sewage scandals, fines and huge debts. Its attempt to convince the government to put pressure on Ofwat is the latest tactic in an increasingly desperate scramble to repair its threadbare finances and avoid being pulled on to the state’s balance sheet. This week Thames demanded the watchdog allow it to increase bills by 59% – an average of £228 a year – for its 16 million customers across London and the Thames valley.
The call for government to intervene and potentially overrule Ofwat risks bringing into question the watchdog’s independence. The body was created in 1989, when Britain’s water and sewage services were privatised by Margaret Thatcher’s government, in order to set limits on the amounts regional monopolies could charge consumers.
In crisis talks with civil servants, advisers and members of Thames’s board of directors have predicted that if it runs out of money and is put into a so-called special administration regime – temporarily bringing it on to the government’s balance sheet – it could damage the entire water sector and the wider UK infrastructure market. They are understood to have argued that the contagion from temporary renationalisation would increase the cost of capital for all water companies hoping to raise funds.
However, some investors and people familiar with the discussions have talked down the risk of contagion, saying it would be unlikely as markets would view Thames as an extreme outlier, adding that stock market listed peers, including Severn Trent, have not struggled to raise fresh funds despite Thames’s very public struggles.
Thames Water declined to comment.
Such is the concern over the company unravelling and potential fallout that it was high on the list of priorities for the new government drawn up by Keir Starmer’s chief of staff, Sue Gray, in the run-up to July’s election. Cross-Whitehall discussions have included senior figures from No 10, the Cabinet Office, Treasury, the environment and business departments.
Thames is locked in an increasingly bitter struggle with Ofwat over its attempts to raise bills over the next five years. Its initial request for a 44% increase was rejected by the regulator in July, but this week Thames returned with an even higher ask of 59% by 2030. However, Ofwat has said 22% bill increases are more reasonable, equivalent to a £99 increase to £535 by 2030. It will give its final ruling in December. Thames says that would leave its activities “neither financeable nor investible”.
Sir Adrian Montague, the chair of Thames, this week called for forgiveness of past failures and a fresh start, in an opinion piece for the Times.
“Our regulator now has a choice: maintain a status quo that condemns the industry to struggle to meet public expectations; or draw a line under the past and enable the investment to kickstart a new cycle of improvements,” he wrote.
Views within the government on how to handle the crisis vary. One minister said special administration should be avoided at all costs as it would be regarded by political opponents as a bailout and “nationalisation, pure and simple”. Other senior government figures said they now believe a deep overhaul with a state-appointed administrator would be the best-value way of reforming Thames for the long term and distinguished between the special administration regime and full-blown nationalisation.
Thames’s financial troubles have placed a spotlight on the stewardship of the company by Macquarie, the Australian bank that previously co-owned the water supplier. It has been heavily criticised for building huge debts at Thames while paying dividends to shareholders.
The company has said it has sufficient funds to maintain its operations until June next year, but is labouring under more than £15bn of debt and its existing shareholders have refused to put in fresh cash.
Officials are exploring how much pain Thames’s lenders ought to bear should the company be temporarily renationalised, sources said. An alternative to a special administration could be a heavy writedown of its debts while remaining in private hands, allowing it to attract fresh shareholder funds.
Water UK, the industry body, has suggested that unless Ofwat offers all water companies in England and Wales more room to increase bills it could make it harder for them to attract investment. This would put “urgent improvements at risk”, amid growing public outrage at the environmental harm caused by water companies’ activities.
David Henderson, Water UK’s chief executive, said on Wednesday: “Water companies want to invest £105bn to support economic growth, build more homes, secure our water supplies and end sewage entering our rivers. Ofwat wants to cut that investment by £17bn – a record amount.
“Ofwat has a difficult job, but investors are telling us that they need Ofwat to change its approach. Unless the right conditions to invest are put in place, our environment and our economy will pay the price.”
Ofwat declined to comment on Thames’s discussions with government. A spokesperson referred the Guardian to its previous statement on proposals for future water bills: “We have received responses to our consultation from many organisations, including water companies, customers, environmental and consumer organisations, and investors.
“Inevitably these reflect a diverse range of views on the proposals we have made. We will consider all of these responses carefully over the next three months and set out our final decisions on 19 December,” it added.
A spokesperson for the Department for Environment, Food and Rural Affairs said: “The government is closely monitoring the situation and the company remains stable.”
They added that the government was elected on a mandate to clear up Britain’s waterways and seas. “The water (special measures) bill will deliver on our commitments, giving regulators new powers to ban the payment of bonuses for polluting water bosses and bring criminal charges against persistent law breakers,” the spokesperson said.