Thames Water Takes Business Plan Dispute to Markets Watchdog

(Bloomberg) -- Thames Water will appeal to the UK’s Competition and Markets Authority to examine a recent decision by the industry regulator on how much it’s allowed to charge customers and return to investors.

The so-called final determination governs what Britain’s largest water and sewage company will be able to spend on its crumbling infrastructure over the next five years. The heavily indebted utility said Friday the watchdog’s decision — allowing bill hikes of 35% — “does not appropriately support the investment and improvement” required.

The CMA process is lengthy, costly and could be perilous for Thames, with the company on a tight timeline before it runs out of money. The utility is holding an equity raise and awaiting a judge’s ruling on a £3 billion ($3.8 billion) loan, but that would still only be a Band-Aid ahead of a major restructuring.

Regulator Ofwat published its determination in December, setting out a return of 5.1% for equity investors and bill hikes that fell far short of the more than 50% increase sought by the utility.

“Customers of Thames Water are already facing steep bill rises and they will be incensed the company now has the temerity to pursue an even larger increase,” Mike Keil, chief executive officer of the Consumer Council for Water, said in a note. “People want investment to improve services but they also expect value for money and to be treated fairly.”

The CMA may take as long as four months to make a final ruling. That’s problematic since Thames — weighed down by more than £16 billion of debt — might see cash drain away by the end of March. Without new equity, it could plunge into special administration — a state-supervised process akin to insolvency designed for businesses that provide critical services such as water.

Water firms and the government say higher bills are necessary to fund vital infrastructure upgrades following a public outcry over chronic leaks and sewage spills.

The decision by Thames’ board to push Ofwat on a referral was made unanimously, according to a statement. It wants the additional cost of operating in London to be taken into account, as well as targets that are “challenging but achievable” and an “appropriate balance of risk and return” — referring to the return on equity allowed.

The regulator set rates of return for the entire industry, determining how utilities will fund their biggest investment plans since privatization. Other water companies are yet to go public on any move to appeal the decision, with the official deadline expiring Feb. 18.

The next regulatory period, when the new rates of return and bill hikes kick in, starts April 1, before the CMA investigation is likely to be concluded. Customer bills will go up regardless, Thames said. 

(Updates with comment from consumer council in fifth paragraph.)

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