Ex-regulator warns Thames’ renationalisation is inevitable

A former regulator has said that renationalisation of Thames Water is the is now the only feasible option for the debt-laden company.

Chris Goodall, who previously worked at the Competition and Market Authority’s predecessor the Competition Commission, told Utility Week the level of debt compared to the business’ revenue makes Thames unsustainable and will force a change in the coming months.

He said the relatively low cash reserves would be insufficient to keep the company afloat and believes that renationalisation is inevitable before the end of the year.

Goodall – a vocal dissenter to private equity companies buying utilities during his time at the Competition Commission – said that Thames will “run out of money […] and will not generate enough cash to cover the debt maturity, so at some stage it will not be able to pay its debts.”

He added that this would force a special administration with a form of public ownership to follow.

He described the debt to revenue ratio as “extraordinary” and said it would make investment commitments “almost impossible” in AMP8.

“It’s an investment larger than the company’s revenue for the period, which would be unprecedently financial situation for almost any industry,” Goodall said.

However, others have warned that Thames Water situation will get “kicked down the road” until after this year’s general election, widely expected to be held during the Autumn.

Professor of economics at the University of Sheffield Adam Leaver told Utility Week that the future of Thames – whose parent company Kemble Water has publicly state it cannot service debts due this month – is likely to remain unresolved this side of an election.

Much of the speculation over the past nine months about the future of the country’s largest water supplier has suggested a special administration regime (SAR) could happen. However, Leaver argued that this would be a burden to the regulator and government.

“Instinctively I think what will happen is a very unsatisfactory fudge, with nothing resolved and the can kicked down the road to be extended until it becomes a problem for the next administration,” Leaver said.

He added that the politicisation of the situation cannot be overlooked in discussions.

Teneo, the administrators who handled the Bulb administration process are understood to have been on-site at Thames HQ in recent months, despite senior management insisting it was business as usual.

Parent company Kemble Water has external debts of £1.35 billion maturing between April 2024 and 2028, with £190 million due this month.

Shareholders confirmed last week that they would not put more money into the company without favourable terms being provided by regulator Ofwat including significant bill rises from 2025.

Chief executive, Chris Weston, and financial officer, Alastair Cochran, stated that the company has several options before administration is a consideration, but without reassurances from the regulator it seems unclear where new equity could come from.

“At the moment there is a game of chicken going on, but the problem is no one really wants the asset. So it’s not impossible that it could all end in a crash,” Leaver said. That could trigger a “special administration by accident” if no resolution is reached.

Part of the reluctance to intervene, Leaver suggested, would be not to spook other water company investors. “Government would want new investors to sort it out, potential future shareholders to sort out the UK water investment problem, But if you wipe out the shareholders here (at Thames), that sends a rather strong signal to potential investors.”

Therefore he believes a “really unsatisfactory” situation will continue until the next government administration.

The company was loaded with debt by previous owners when it was cheap to do so, which was not uncommon among utilities. Current management and shareholders have been left with the legacy of that.

“There is a lesson for the regulators here about the skills they need,” Leaver warned. “They are stuffed full of economists who are great at price setting and working out regulatory capital, but you need some forensic accountants and people with legal expertise as well to understand what these companies are actually doing, and what the risks are.”

Ofwat has stepped in to block intercompany loans and add a financial resilience condition to company licences, but this was after Thames and others were already highly geared.

Goodall urged the sector and its regulators to look at and learn from ownership models in Europe.

He believes dividing Thames not only into smaller regions but also to separate operational functions should be done within the process of taking the company into a form of public ownership. This model was also suggested by economist Dieter Helm last month.