Customers or taxpayer to be on hook for Thames woes

Government will have to choose between lumbering Thames Water customers with major bill hikes or taking the company into special administration and burdening taxpayers, a former regulator has posited.

Sarah Bentley’s sudden departure sent shock through the utility sector, which was quickly followed by speculation about the future of Thames Water and the prospect of the company being placed in a special administrative regime (SAR).

Renegotiations against the company’s significant debts are due in the coming 18 months with £1.4 billion of debt due to mature next year. Exceptionally high interest rates will impact the repayments and the company’s cashflow dramatically as the cost of debt is substantially increased.

The financial viability of Thames Water at current water prices is therefore threatened, former regulator Chris Goodall suggested.

In his previous role at the Competition and Market Authority’s predecessor the Competition Commission, Goodall was a very vocal critic of Southern Water’s aborted takeover 20 years. He explicitly warned that private equity firms having active roles in a utility would be problematic, but his dissenting views were overlooked at the time.

“To make Thames viable by current high interest rates, Ofwat will have to allow it to increase its prices,” Goodall said. That could be to the tune of 20-50% bill hikes to invest in necessary areas.

“Thames Water is recognising it will have to invest a spectacular amount of money in the next decade, which it does not have the cash to do,” Goodall speculated. “So it becomes a political issue.”

The question would be, he said, does government allow Thames to push up prices by 50% and burden its 15 million customers, or apply special measures that all taxpayers would ultimately absorb?

His assessment was it would fall to the tax payer, rather than shareholders, as he summed up the asymmetry of such ownership structures that meant risk was transferred from the shareholders to the tax payer.

He said: “This is the consequence of setting in place an ownership structure that allows private shareholders to take a lot of money out when things are going well, but when things are going badly the tax payer has to pay.”

Commentators have speculated that shareholders, who have injected vast sums into the business in the past year would be unlikely to stick their hands in their pocket for huge amounts again.

Is special administration likely?

The precarious situation that Thames finds itself in was discussed via an urgent question raised in the House of Commons on Wednesday (28 June). Rebecca Pow, water minister, defended regulation by Ofwat and the levels of investment in the water industry.

However shadow environment minister Jim McMahon called out the “goldrush for shareholders” for which tackling leakage and sewage were sacrificed.

“All that was warned of is coming to pass – leaks are leading to water shortages, sewage pollutes our rivers, lakes and seas. The only thing on the up is debt at £60 billion.”

Meanwhile Labour MP Khalid Mahmood, suggested that David Black was going to put his hat in the ring to lead Thames rather than the regulator. “Ofwat has not been doing what it is supposed to have been doing, the current chief executive, I believe, of Ofwat is going to be applying for the job at Thames Water and that shows how Ofwat works and how closely it works. Rather than scrutinising, they are looking for the next job.”

Pow had noted that Thames paid no dividends to shareholders for the past six years, however John Cryer MP corrected her by saying: “It has not paid them in the usual way but it did pay dividends to the parent company last year, so it has paid dividends.”

Government and the regulator have been in talks with the company following the announcement of Bentley stepping down yesterday

Defra said it was a matter for Thames and its shareholders. “We prepare for a range of scenarios across our regulated industries – including water – as any responsible government would,” a spokesperson said. “The sector as a whole is financially resilient. Ofwat continues to monitor the financial position of all the key water and wastewater companies.”

The water regulator added it has ongoing discussions with Thames.

An Ofwat spokesperson said: “We monitor the financial position of all the key water and wastewater companies. We have been in ongoing discussions with Thames Water on the need for a robust and credible plan to turn the business around and transform its performance for customers and the environment. We will continue to focus on protecting customers’ interests.”

What could an SAR look like?

Martin Young, analyst at Investec warned that an SAR has never been used on a company of this size of Thames but said parallels can be drawn with the collapse of Bulb Energy in 2021. The company was publicly held until an acquisition by Octopus Energy was completed in January this year.

He suggested any measures would likely be the same type of process Bulb went through, so in theory customers should not notice a difference. “If special administration comes to pass, it will be interesting to see what can be offered as protection for a buyer,” Young said. This is the first time a company of this size is in this situation, so Young said getting it out of government’s responsibility, the company may need to be made attractive to any potential buyer.

He told Utility Week that “some risk was taken off the table” with the deal, which angered some incumbent energy firms.

He added: “There might be a price that works for someone to be rescued, which could address the initial financial part of the equation but the complexity comes with what are they actually taking on?”

Investment needs at the next asset management period and beyond are expected to be several times more than what companies have spent over 2020-25 to meet environmental, regulatory and societal expectations.