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Water regulator Ofwat is drawing up plans for a special “recovery regime” for Thames Water and other financially stressed UK water companies in a bid to avoid nationalisation.
Companies with “regeneration regime” status could receive fewer or no regulatory penalties to encourage them to invest in infrastructure improvements, people close to Ofwat and water companies have said.
Utilities would also be given “more realistic” goals to reduce leaks and water and wastewater outages in exchange for greater regulatory oversight for up to five years, according to one person close to the debate.
While the regulator recognizes “the moral hazard of letting low-quality people off the hook, it is also interested in putting these companies on an upward trajectory,” another of the people said.
Such moves could be seen as a major concession to shareholders in Britain’s water companies, which have been widely criticized for large dividend payouts and sewage leaks while seeking a more lenient approach from regulators.
The plans could be announced within weeks to avoid Thames Water being taken into the government’s special administration regime – a form of nationalization that could take months or years.
Much of the public views Britain’s water privatization of the 1980s as a failure. But both the Conservative government and the Labor opposition, which leads in the polls ahead of the July 4 election, want to avoid renationalisation, which could affect investor sentiment.
Thames Water has already lobbied the government and regulator to allow it to increase customer bills and dividend payments, as well as face lower fines.
“This is exactly what we have been asking for, but it is too late for this group of investors,” a person close to Thames Water shareholders said of the proposals.
Other debt-ridden water companies, including Southern Water, South East Water and Yorkshire Water, may also be eligible for the recovery scheme.
One of the people close to the discussions said the aim was to help the water companies “get back on their feet”.
The person characterized the eligible utilities as “persistently poor performers who need more investment to improve, but who are still being penalized and therefore getting less and less money to go into business”.
In return for the changes, water companies would have to provide quarterly rather than annual updates on performance improvements, as well as agree to cap dividends. Ofwa declined to comment.
“The right answer is to stick with the rules-based regime, give Thames Water special management and solve the problem once and for all,” said Dieter Helm, professor of economic policy at Oxford University.
He called the idea of ​​a recovery regime “a halfway house that is likely to solve very little.”
Thames Water, which has 16 million customers and debt in excess of £18 billion, says it has enough cash to survive until May next year.
It has asked the regulator to allow it to increase bills by 59 per cent between 2025 and 2030. Ofwat is due to make a draft decision on July 11, after which the company will seek equity from new and existing shareholders.
Ofwat has slapped Thames Water with £175m in fines over the past three years after it failed to meet targets to reduce sewage and water leaks.
“Raising equity would be a lot easier if investors knew it wasn’t going to be destroyed by fines,” said one investor.
One person close to the discussions added: “You can bash companies all you want, but if a company is one huge money drain through fines, you’re never going to get anywhere.
However, plans for a recovery regime could be hindered by a proposed cap on shareholder dividends.
Some payouts are used to pay off intra-corporate debt within complex financial structures created by multiple companies. Investors are unlikely to come forward if all dividends are banned, one of the people said. “It’s just unreal.
The regulator is already investigating a £37.5m dividend paid by Thames Water to its parent company Kemble.