Thames Water boss: We are fundamentally not investible

Thames Water is “fundamentally not investible”.

That is according to the company’s strategy and external affairs director Cathryn Ross who warned that other water companies are likely to run into similar financial problems.

Ross – who acted as interim chief executive at Thames for six months last year following Sarah Bentley’s departure – said that regulatory controls are actively preventing investment in the sector.

She said this is ultimately why Thames’ investors pulled £500 million of previously-committed investment in March.

“The fundamental problem is Thames is not investible – and I’m quoting our current shareholders on the basis of what they know today about how we are going to be regulated through to 2030,” Ross told the All Party Parliamentary Group for Water.

“A big part of that is the fact that we are spending more than we are allowed to recover from Ofwat.

“Part of that is because we need to be more efficient, but I would also argue that we have been underfunded,” she said.

“Those two things add up to a massive funding gap and our shareholders aren’t prepared to bear that.”

Ross added that Thames is expected to have paid out around £500 million in fines related to poor service by the end of PR19.

She said this is seen as an increased risk by investors, adding: “Why would they put their money in if they know they can’t get a return until the other side of 2030?”

Ross – who headed up Ofwat between 2013 and 2017 – said that Thames “is not unique” in this regard, adding that she “can imagine a similar story playing out over time” with other companies who are persistent poor performers.

However, she admitted that Thames is “definitely the worst, definitely the biggest and definitely the first”.

Questioned on whether renationalising water companies would solve the issue, Ross said it is a “legitimate choice” that could be taken.

“You could nationalise water companies, you could use the public balance sheet, that is fine, it is a legitimate choice,” Ross said.

“But we have the model we’ve got, and we need to make the investment now and given that we need to find a way to attract equity now. We have to be investible.”

To make the sector more attractive to investors, Ross called on Ofwat to change the way that it sets expenditure limits.

She said that the regulator’s current funding models don’t work as they are unable to distinguish between companies who have been efficient and those who have simply underspent.

“I worry a lot about the way Ofwat compares companies,” Ross said. “Most of the expenditure limits that Ofwat allows are reached by virtue of regression models. They take data in from companies and take the lowest quartile and set that as the benchmark for efficiency and say everybody should do that.

“The problem is those models do not distinguish between efficiency and underspend […] therefore the industry benchmark is often not being set by companies who are being efficient but by companies who are not spending as much as they should. And therefore you have a problem.”

Ross added that to achieve this Ofwat will have to shift its mindset from its “in built bias” to keep customer bills down, which leads to Ofwat seeing “its role as being to challenge every item of spend”.

In response to Ross’ comments an Ofwat spokesperson said: “Our cost assessment model has provided Thames Water with more money than it initially requested over the last two price reviews.

“We have consulted on these models across the water sector, including with Thames Water. We have also offered water companies the opportunity to submit business cases in their PR24 business plans should they believe that the model did not provide a sufficient base expenditure allowance.”

Last month, Thames Water updated its business plan for PR24, adding up to £3 billion more to its totex, which brings its total planned expenditure to £21.7 billion for the five years to 2030.

It also took the industry’s total spending ask for PR24 to just over £100 billion, with all other companies also announcing updates to their business plans.

Ross said that “it is not right” that water companies have had to update their plans between original submissions in October and Ofwat’s draft determinations expected on 12 June, adding that it shows the disjointed nature of the industry’s relationship with its regulators.

“I would love to see more joined up work with regulators,” she said.

“Every water company has updated their business plan because of additional conversations we’ve been having with Defra, the Environment Agency and DWI after the business plans were submitted. That’s not right.

“I’m glad we had those conversations as we all know more now than we did before and we have a better plan now, but in an ideal world those conversations should have happened before and everyone should have agreed what we needed to do 18 months ago.

“When you are changing your plan after the plan has been submitted, that is not a great process.”

Ofwat’s director of the price control told Utility Week that plans would be subject to more changes between the draft determinations in June and the final determinations in December. This, Chris Walters said, was due to ongoing discussions between the industry and environmental regulators and policy makers.