Thames Water faces the threat of break-up under new Ofwat measures

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Thames Water could be forced to split up, list or reduce its debt mountains under special measures introduced by regulator Ofwat to avoid renationalising the ailing company.

On Thursday, the regulator said it was placing Thames, the UK’s biggest water supplier, into a “special turnaround monitoring regime” that will require stricter scrutiny, including the installation of an independent monitor at the plant.

Ofwat added that in the medium term Thames may also be required to limit the amount of debt it takes on, split the business into two or more water companies or seek a public listing to secure additional capital.

Thames has spent the past year in an escalating financial crisis as it grapples with an £18 billion debt load that has been hit by higher interest rates.

In its latest five-year business plan, the company asked Ofwat to allow it to increase customer bills by up to 40 per cent in real terms over the five years to 2030 in a bid to shore up its finances.

But on Thursday the regulator said it would allow average household water bills in England and Wales to rise by just 21 per cent over the next five years. This figure falls well short of the average 33 per cent required by UK water companies.

Ofwat criticized the latest Thames Business Plan as late, “incomplete” and “lacking ambition”. It added that some parts lacked “assurance [Thames’s] custom board”.

The Thames crisis is one of the first major challenges facing the new Labor government, which has said it wants to prevent the company from being taken back into public ownership even as it teeters on the brink of collapse.

In March, Thames’ shareholders – which include pension funds Omers and USS, as well as China and Abu Dhabi sovereign wealth funds – backed out of plans to invest £500m, calling the vehicle “uninvestable”.

Ofwat’s chief executive, David Black, said on Thursday that “it is up to the Thames to convince its investors that it can turn the business around”.

The company says it has enough cash to last until May, but will need to raise £750m of new equity by April and £2.5bn by 2030.

Thames has held preliminary talks with shareholders to raise capital in the new year.

Key to Thames’ ability to attract investors is the cost of capital. Ofwat said it would allow water companies to pay investors the 4.8% return on equity needed to invest in infrastructure, well below the 5.7% Thames said it needed to find new sources of cash.

Ofwat’s decisions come just hours before the bosses of 16 water companies are due to meet Labor amid growing public anger and political scrutiny of the state of Britain’s water sector, which has also sparked outrage over sewage pollution.

Industry lobby group Water UK accused Ofwat of repeating the mistakes of the past by sanctioning lower bills which it said represented “Ofwat’s biggest disinvestment”.

Under the draft plan, their bills will rise by an average of £94 between 2025 and 2030, although the cost increase varies from region to region.

Bills for Thames Water customers would rise by 23 per cent before inflation to around £535 a year, while bills for Southern Water customers would rise by 44 per cent to £603 per household.

The Consumers’ Water Council said around 2 million households are already struggling to pay their water bills.

“Millions of people will feel upset and concerned at the prospect of these increases in their water bills, and will question their fairness given the failures and poor service of some water companies,” said Mike Keil, CCW’s Interim CEO.

Separately, the government will prepare legislation that will put the entire water industry into special measures, with a ban on bonuses for executives at heavy polluting companies, criminal charges for the worst offenders and closer monitoring of sewage discharges.

Steve Reed, the environment secretary, who is meeting with water officials on Thursday afternoon, also laid out other immediate reforms.

Reed wrote to Ofwat that funding for infrastructure work must be earmarked rather than being diverted to bonuses or dividends or pay rises.

Ofwat’s Black said: “Our proposed decisions on the company’s plans approve a tripling of investment to ensure continued improvements in customer service and the environment at a fair cost to customers.”

Water companies will spend the next few months negotiating with Ofwat, which will ask for more details on rejected projects such as reservoirs and sewage treatment plants.

A final decision is due by December 19, after which the water companies will be able to appeal to the Competition and Markets Authority.

More news from Ella Hollowood in London