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UK regulator Ofwat has warned about the financial health of four water suppliers in England: Thames Water, Southern Water, South East Water and SES Water.
Two companies — Yorkshire Water and Portsmouth Water — will still be closely monitored but have been taken off the regulator’s higher priority list this year, Ofwat said in its annual report on financial resilience published on Thursday.
Ofwat’s concerns come despite equity injections across the industry totalling £4.6bn since 2020, from investors that include a clutch of pension, private equity and sovereign wealth funds. This included £500mn for Thames Water and £375mn for Southern Water so far, according to Ofwat. SES Water, which received £7mn, is up for sale by its Japanese owners.
The regulator said on Thursday that more debt and equity would be needed given lower credit ratings, the potential for fines and the scale of investment required. It also criticised the complexity of water companies’ financial structures, and their lack of transparency on reporting.
Water suppliers in England and Wales are under increasing political and financial pressure.
Rising inflation has increased financing, labour and energy costs, while the government is on standby for a temporary renationalisation, with particular concerns about Thames Water, which serves London and surrounding areas.
At the same time a public outcry over sewage pollution has prompted calls for renationalisation and a shake-up of the water regulators, which include Ofwat, the Environment Agency and the Drinking Water Inspectorate.
To fund investment, water companies have asked Ofwat to agree customer bill increases of around 60 per cent over the next regulatory period from 2025 until 2030.
The plans would increase the average household bill by around £156 a year by the end of the decade before inflation, according to industry lobby group Water UK.
Because the water companies are local monopolies, Ofwat decides on bill increases and will need to approve or amend the requests by the end of next year. As part of the process, it also signs off on water company plans for upgrading and maintaining infrastructure over the five-year period.
However, Ofwat also said on Thursday that 12 of the 17 companies had underspent the amount allocated to improvements such as new infrastructure in the current regulatory period — from 2020 to the end of 2024 — while nine had underspent on sewage systems.
Water companies cited high inflation and labour shortages as obstacles to delivery, according to Ofwat, but there are concerns that under the complex regulatory system any underspending could allow the companies to divert some of the excess to shareholders.
The 17 private water companies in England and Wales paid out £1.4bn in dividends in the year to March 2023, while debt rose from £60bn to £68bn, around half of which was tied to inflation, the regulator said.
Water companies have been asking for further equity injections from their investors. However, companies such as Thames Water have warned that it would need limits to penalties for poor performance such as pollution and an increase in permitted returns to help persuade shareholders.
The sector also failed to deliver improvements on key measures such as sewage discharges and pollution in the past year, Ofwat said. None of the 17 companies achieved the regulator’s highest “leading” category, it said.
Leakages and burst water mains pipes all increased in the past year, as did the likelihood of companies missing targets for clean drinking water, the regulator added. Customer service also deteriorated, the regulator said, though the number of incidents of sewage flooding in properties decreased.