Thames heads to the CMA as Ofwat opens a WINEP enforcement case

Thames Water has asked Ofwat to refer its PR24 final determination (FD) to the Competition and Markets Authority (CMA).

In a statement, Thames said that its board had unanimously decided that the FD “does not support the investment and improvement that is required”. The settlement left a totex gap of 16% compared to Thames Water’s business plan. The board wants three issues to be reconsidered: more allowances to be made for particular challenges in its operating area; “realistic” (meaning softer) targets for areas where it is struggling; and a higher return as Thames will receive a 30 basis points deduction from the sector base allowed return because of its ‘inadequate’ business plan, as designated by Ofwat.

The appeal has attracted criticism from some quarters. Mike Keil, chief executive of the Consumer Council for Water (CCW), said: “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. This is a company which has a poor track record on service delivery and customer complaints, so people will rightly question why it should be trusted with even more of bill-payers’ money.

“People want investment to improve services but they also expect value for money and to be treated fairly. CCW will do everything in its power to ensure the views and concerns of customers are heard loudly and clearly during this appeal.”

Separately last week, Ofwat announced it had opened an enforcement case against Thames under Section 18 of the Water Industry Act 1991, after the company reported that it would not deliver over 100 of its 812 Water Industry National Environment Programme schemes on time in AMP7. Ofwat said it would look at whether this amounts to a failure by Thames Water to comply with its statutory obligation, and whether enforcement action is required.  

Comment:

Thames needs to attract new equity. Given that the allowed cost of equity of 5.1% compares unfavourably with Ofgem’s Sector Specific Methodology Decision range of 4.75%-6.35% (assuming 60% debt/RCV), it is worth getting a redetermination.

The problem with comparative regulation is that Ofwat has to be fair. Thames has ended up with a determination that Ofwat admits will not allow it to earn even the base allowed return for the sector. However, Thames cannot argue that it deserves a determination without challenge – not least because of its recent declaration that it will fail to complete 100 wastewater schemes out of 812, that have been funded by customer bills.

Meanwhile Thames’ attempts to extend its immediate liquidity continue. The scheme of financial reorganisation proposed by the Class A creditors does take into account the timing of a referral. Equity bidders are likely to have made significant caveats to their offers to include a better outcome from the CMA.