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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 on Thursday in its “final determination” on the complex set of measures and metrics governing Britain’s privatised water companies for the next five years.
The increases mean bills will rise by an average of £31 a year before inflation between now and 2030, with the average annual cost to customers rising to £597 at the end of the period. Ofwat is also allowing water companies to apply the majority of these increases in the first year of the next five-year period.
“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 across the sector 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.
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. The company, which is the UK’s largest water utility, serving 16mn customers, is drowning under nearly £19bn of debt and is trying to raise new funding to avoid crashing into the government’s special administration regime.
Black said Thames Water’s financial difficulties had not influenced its approach to setting its allowances, which was done “on the same basis as other companies”.
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”.
The industry has pushed for hefty bill 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 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.
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 water utitlities from 3.72 per cent to 4.03 per cent, which it said reflected “recent market movements”.
It can take water companies and their armies of lawyers and advisers days to fully work through the ramifications of the complicated series of rules and allowances.
Investors and analysts initially viewed the settlement as beneficial for the sector, however, with equity analysts at Barclays describing it as positive at “first glance” and shares in the publicly listed water companies rising slightly.
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 for which Thames Water is in the process of obtaining court approval 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.
Chris Walters, Ofwat’s senior director for its price review, said it was “very tricky” to anticipate how many companies might appeal to the CMA, but noted that there were “three or four companies” with large gaps between their requests and final allowances.