Professor Dieter Helm has published a highly critical and detailed analysis of Thames Water, describing the deeply indebted utility as “a disaster of its own and the regulators’ making” and “badly managed and financially engineered.”

According to the leading expert on energy, utilities and the environment and previous Independent Chair of the Natural Capital Committee from 2012 to 2020, if the water company does not merit being put into special administration, then “it is a good bet to assume that no major utility ever will.”

Commenting on the current financial situation at Thames, Helm says:

“There are three possible candidates that could be forced to pick up the tab: the customers; the taxpayers; and the environment. Bills could go up, the government could add in more subsidies, or the environmental targets could be watered down. Customer bill and taxpayer increases would have to be more than those applicable to an efficiently run and financially robust company; they would have to underpin the costs of failures so far. The failures on capital maintenance will not go away and someone has to make good the shortfalls. More sewage in the rivers than is necessary would be one of the environmental costs.

“Crisis management might hold the line, and the company could limp on through this year and into next. It would continue on its life support of customers’ bills and lower environmental requirements. That is why it demanded a price increase of 40% and a cap on fines….

“So again, why won’t the government and the regulator pull the plug? The fears are twofold: that it might lead to wider systemic failures in the water industry; and that it might scare off foreign investors. Both are very real possibilities.”

A report in the Financial Times newspaper last week suggested that Thames Water is lobbying both the government and regulators for higher bills, (with an increase in bills of 40% by 2030), the ability to continue with dividend payouts to shareholders and lower fines for regulatory breaches.

According to Helm:

“Ofwat is right to stand its ground, and it will be a terrible day for the industry and its customers if the government and the regulator cave in to Thames’s demands. Arm- twisting and independent regulation do not and should never mix.”

The analysis suggests two possible futures for Thames Water – sticking with the existing model or appointing the special administrator.

In Helm’s view, the 1990 privatisation model is “no longer fit for purpose” – he comments:

“The industry has been badly regulated, allowing structures like Thames and its financial engineering to emerge, and neglecting the primary purpose of privatisation, which was to create a private sector balance sheet, without debt, to serve a once-in-a-generation programme of major capital upgrades of the water and sewerage assets.”

Instead, a special administrator should be appointed to:

• carry out an immediate audit of the capital maintenance required to address the failings
• take the opportunity to consider splitting the business up between London and the rest of the catchment, and also splitting water from sewerage

“Do this now, and the environment and the customers can look forward to a much brighter and cleaner future,” Helm concludes.

Click here to download Kicking the Thames can down the river – the cost to the environment, to the economy and to the rest of the industry published on 5^th April 2024

Click here to listen to Dieter Helm's podcast via the Waterbriefing Watch Channel What is to be done about the UK’s failing utilities? Listen to Professor Dieter Helm explore the options to tackle the UK’s failing utilities – Thames Water, the Royal Mail and Network Rail in particular.