Regulator plans to cut fines to help stressed UK water companies

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 “recovery regime” status could receive fewer or no regulatory penalties to encourage them to invest in infrastructure improvements instead, people close to Ofwat and the water companies said.

The utilities would also be given more “realistic” targets for reducing sewage and water leaks and outages, in exchange for more regulatory oversight for a period of up to five years, according to one person close to the discussions. 

Although the regulator is aware of the “moral hazard involved in letting poor performers off the hook, it is also keen to put 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 criticised for large dividend payouts and sewage spills while seeking a softer touch 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 nationalisation that could last for months or years.

Much of the public views Britain’s 1980s water privatisations as a failure. But both the Conservative government and the Labour opposition, which is leading in the polls ahead of the July 4 election, are keen to avoid renationalisation, which could affect investor sentiment.

Thames Water has already lobbied the government and the regulator to allow it to increase customer bills and dividend payouts, as well as face lower fines.

“This is exactly what we were asking for, but it’s too late for this set of investors,” a person close to Thames Water shareholders said of the proposals.

Other debt-laden water companies, including Southern Water, South East Water and Yorkshire Water, may also be eligible for the recovery regime.

One of the people close to the discussions said the aim was to help water companies “get back on their feet”.

The person characterised the eligible utilities as “persistent poor performers, which need to invest more to improve but which keep being hit by penalties and are therefore getting less and less cash into the business”.

In return for the changes, the water companies would have to provide quarterly rather than yearly updates on performance improvements, as well as agreeing to dividend restrictions. Ofwat declined to comment.

“The right answer is to stick by the rules-based regime, put Thames Water into special administration and resolve the problem for once and for all,” said Dieter Helm, professor of economic policy at Oxford university.

He called the recovery regime idea a “halfway house that will probably resolve very little”.

Thames Water, which has 16mn customers and more than £18bn debt, 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 to raise equity from new and existing shareholders. 

Ofwat has charged Thames Water £175mn in fines over the past three years after it failed to meet targets on reducing sewage spills and water leaks.

“Raising equity would be a lot easier if investors knew it wouldn’t be wiped out in fines,” said one investor.

One of the people close to the discussions added: “You can beat up the companies all you like but if the company is one giant cash drain as a result of the fines you never get anywhere.”

However, the recovery regime plans could be hindered by the proposed restriction on shareholder dividends.

Some payouts are used to pay off intra-company debt under complex financial structures created by several of the utilities. Investors are unlikely to sign up if all dividends are banned, said one of the people. “It’s just unrealistic.”

The regulator is already investigating a £37.5mn dividend paid by Thames Water to its parent company Kemble.