Thames responds to PR24 draft cuts with a bigger spending plan and higher prices

“This gap needs to be closed,” Thames Water told Ofwat as it responded last week to its PR24 Draft Determination (DD). It was referring to the 25% cut in expenditure to £16.8bn the regulator made to the business plan it submitted in April; Thames said this was not tenable and rendered its plan uninvestible. “This would leave us with a multi-billion pound gap between what we are allowed to charge our customers and what is needed to deliver against the ambitions that customers and stakeholders have set for us,” a company document explained.

However, Thames proposed a way forward, having listened to Ofwat feedback, that it said would enable it to meet customer expectations and ensure it is a viable and investible business. This featured:

• A £20.7bn core plan with an additional £3bn through gated mechanisms, £0.9bn up on the April proposal, or £2bn up if the gated allowances can be accessed. £1.3bn of the gated funding related to clean water; specifically compliance with the Security and Emergency Measures Directive, installing additional UV treatment, and some strategic resource expenditure. The remaining £1.7bn would come through the new Delivery Mechanism and relates to wastewater; specifically phosphorus removal, compliance with the Industrial Emissions Directive, and additional storm overflow work. Under Thames’ proposals, Ofwat would allow an initial 6% for development work and then assess the full allowance based on the information provided. 

• Price rises of 52% (rising to 59% if gated allowances go though), up from 44% in April, which Thames said resulted from a combination of the totex increase and fewer customers than previously forecast. The average bill by 2030 would be £667 for the core plan and £696 for the whole package, up from the £627 proposed in April. This will be accompanied by an improved social tariff offering, which will see bills reducing for one in ten households (647,000), typically with discounts of 50%.

• Performance commitments (PCs) – Thames accepted most of Ofwat’s water PCs, but said it was exposed to disproportionate penalties and excessive downside risk on the wastewater side. 

• An industry weighted average cost of capital of 4.6% (real), and gearing below 75%.  

Chief executive Chris Weston said: “On the basis of the DD given to us by Ofwat, both our own and independent analysis shows that our plan would be neither financeable nor investible and therefore not deliverable. It would also prevent the turnaround and recovery of the company.

“We have listened carefully to Ofwat’s feedback and have responded constructively to address the issues raised, updating our plan to reflect stretching goals, while offering changes that would give us the opportunity to secure the necessary investment so that our ambitious plan can be delivered for our customers and the environment.”

He added: “Over the last three regulatory periods we are forecast to spend over £2.7bn more than our allowances. Structural underfunding has led to significant asset health challenges alongside a substantial increase in the group’s leverage.

“The money we’re asking for from customers will be invested in new infrastructure and improving our services for the benefit of households and the environment. They are not being asked to pay twice, but to make up for years of focus on keeping bills low.”