Water bills to rise by 36% after Ofwat review

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UK water regulator Ofwat will allow utilities in England and Wales to raise customer bills by an average of 36 per cent by 2030, a larger increase than it had previously indicated, but still short of the rises requested by troubled companies such as Thames Water.

Ofwat announced the bill increases in its “final determination” on the complex set of measures and metrics governing Britain’s privatised water companies for the next five years.

“Water companies now need to rise to this challenge, customers will rightly expect them to show they can deliver significant improvement over time to justify the increase in bills,” said David Black, Ofwat’s chief executive.

The regulator also fined Thames Water £18mn after finding that the company’s dividend payments last year breached its licence conditions.

The bill rises are higher than the 21 per cent average increase Ofwat indicated it would allow earlier this year. Water utilities had on average requested a 44 per cent hike.

The increases mean bills will rise by an average of £31 a year before inflation between now and 2030.

Thames Water will be allowed to raise bills by 35 per cent, far lower than the 53 per cent rise requested by the near-insolvent utility.

However, bills could rise further than the headline figures in future at both Thames Water and Southern Water, whose stretched finances have also come under scrutiny. Ofwat said annual bills could rise a further £11 and £20 respectively at the two utilities, pending “greater clarity on the timing and profile of these companies’ plans”.

Water companies have been locked in negotiations with Ofwat over how high they can raise bills between 2025 and 2030. The industry has pushed for hefty increases, saying they are needed to fund investment in ailing infrastructure.

It is the first time in 15 years that Ofwat has ruled in favour of allowing water companies to raise bill prices in real terms, having cut costs to customers before inflation in the last two five-year price reviews.

Since the industry’s privatisation in 1989, water companies have been required to reach settlements with the regulator every five years covering bill increases, the amount they can invest and the returns their investors can make.

The prolonged crisis at Thames Water has threatened to drive investors away from the industry, raising the stakes for Ofwat. Thames Water, the UK’s largest water company, has warned that an adverse ruling would jeopardise its efforts to raise new equity from investors.

Problems at UK water companies and pollution of rivers and seaside areas have also triggered public anger.

Steve Reed, environment secretary, said the public was “right to be angry” about the performance of the water industry and blamed the previous Conservative government.

“They irresponsibly let water companies divert customers’ money to line the pockets of their bosses and shareholders,” he said.

The Labour government would “ringfence money earmarked for investment so it can never be diverted for bonuses and shareholder payouts”, Reed added.

Compared to its draft determinations published in July, Ofwat has significantly raised the returns allowed for shareholders from 3.72 per cent to 4.03 per cent, which it said reflected “recent market movements”.

While Ofwat published the full details of its final determination on Thursday, it can take the water companies and their armies of lawyers and advisers days to fully work through the ramifications of the complicated series of rules and allowances.

“The devil is in the detail,” said one Thames Water bondholder.

Water companies can also challenge Ofwat’s final determinations with the Competition and Markets Authority. They have two months to take their case to the CMA, with any challenges expected to take at least six months to settle.

An up to £3bn emergency loan that Thames Water is in the process of obtaining court approval for could give it the funding for a CMA challenge, with half of the financing released only if it takes its case to the competition regulator.

Four companies — Bristol Water, Northumbrian Water, Anglian Water and Yorkshire Water — appealed to the CMA over Ofwat’s 2019 price determination and won their case. Their appeal to the competition regulator was the biggest since privatisation more than three decades ago.