Simon Jack
Business editor, BBC News
Thames Water’s survival as a private company depends on the industry regulator Ofwat being lenient over fines and penalties, its boss Chris Weston has said.
Speaking to MPs, Mr Weston said the firm would not get new investment if money leaked out of the business, leading to some form of nationalisation.
Thames Water would struggle and fail to hit performance targets on pollution while it tried to turn the company around, he added.
The troubled company is currently in talks with Ofwat in an effort to persuade it to give some leeway on fines, but the regulator has told the BBC there is a “high bar” for flexibility within its regulations.
Thames has faced heavy criticism over its performance in recent years following a series of sewage discharges and leaks.
Since the dire state of the company’s finances first emerged about 18 months ago, the government has been on standby to put Thames into special administration.
The firm is in discussions with Ofwat to put in place a “turnaround regime” designed to let it escape a loop where fines lead to further fines because it has not got the money to improve.
Thames has estimated it could be fined up to £900m over the next five years for leaks and sewage spills which would hinder efforts to attract new investment.
Regardless of what happens to the company in the future, water supplies and waste services to households will continue as normal.
An Ofwat spokesperson said it would be looking at how proposals of potential bidders would make the company stronger and turn it around.
The regulator already has some flexibility in applying the rules if it is in customers’ interests, “but there is a high bar for this”, they added.
In addition to talks with Ofwat, Thames Water is in discussions with private investment group KKR about a cash injection of up to £5bn.
That deal being completed is also dependent on lenders to the company accepting a discount on the nearly £20bn they are owed. Some junior lenders could see their entire loan being written off.
On Tuesday, heated exchanges broke out between MPs on the Environment Select Committee and Thames Water chairman Sir Adrian Montague, Mr Weston, and chief financial officer Steve Buck.
Questions were asked about why the water company had whittled down potential bidders from five to just one, and why Thames had pressed ahead with an additional, high-interest loan earlier this year of £3bn when cheaper options seemed available.
Sir Adrian insisted that in both cases, those were the most credible options when the company faced completely running out of cash and being forced into a government-sponsored administration.
Thames originally appealed a decision by Ofwat to limit bill rises to 35% above inflation over the next five years, insisting it needed 53% to deliver the investments needed to improve services.
However, it paused its appeal to the Competition and Markets Authority partly because the process could take several months and also because it hoped to reach an agreement with Ofwat to water down fines, which would make further bill increases unnecessary.
Some have bristled at the idea of Thames being given special treatment after getting into financial distress of its own making.
“Customers will have little sympathy for a company with such a poor track record on service delivery and complaints,” said Mike Keil, chief executive of the Consumer Council for Water (CCW).
But even sources close to the matter admitted that the current regime does not always result in the right outcomes for customers and the environment.
A source told the BBC: “This is special treatment but this is a special case. There is no point pretending that Thames is not in serious financial distress and deserves a chance to turn things around.”
Thames Water is not alone. Heavily indebted Southern Water is also in gritty conversations with its lenders to accept a discount on what they are owed in order to attract an injection of new equity (money that doesn’t need to be paid back).
Meanwhile, a major review of the entire structure of the water industry is being conducted by former deputy Bank of England governor Sir Jon Cunliffe.
He is expected to recommend a major overhaul of the way the sector is run and regulated in a report understood to be released at the end of May.
