The £168m fines levied on three water companies by Ofwat are part of a slow – many argue far too slow – reckoning for the industry for the routine release of sewage via storm overflows.
For Thames Water, predictably hit with the largest fine of £104m, close to the maximum penalty available to the regulator, it is also another blow to its credibility and bottom line in an increasingly desperate search for investors to secure its future.
The sewage problem first. Storm overflows are the emergency release valve for our largely Victorian water infrastructure, in which rain water and wastewater ultimately share the same pipes.
As the name suggests, their primary purpose is to divert water from the system during inundations, when the alternative would be for drain water to back up into people’s homes.
The grim reality of their operation, largely revealed thanks to a campaign of increased monitoring by concerned citizens, is that the use of storm outflows have become routine, with more than 460,000 incidents in 2023 – a 54% increase year-on-year.
Ofwat found that all three companies – Thames Water, Yorkshire Water and Northumbrian Water – had failed not only to prevent routine spills, but often did not understand the scale of the problem.
David Black, chief executive of Ofwat, told Sky News Thames Water did not even know about 300 of the 500 overflows in its network.
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Water firms ‘need to change’
For Britain’s largest water company, with 16 million customers in London and the Thames Valley, this is another blow to its reputation and bottom line.
Drowning in debt after a decade of mismanagement, Thames was already struggling to secure the fresh investment it needs to shore up the business and deliver infrastructure improvements.
Earlier this year, chief executive Chris Weston described the company as “uninvestable” after existing shareholders pulled a £3.25bn equity injection, and last month said it only has enough cash to survive until next May without fresh funding.
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Thames has even argued that it should face lower fines to help protect its financial position in negotiations with the regulator.
This captures the tension at the heart of the privatised water model and the regulator’s role.
It only works if water companies are attractive to investors, but customers demand that they be held to account with severe financial penalties that can undermine the proposition.
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From July: Water bills to rise
As a £20bn company with £2bn of revenue and a monopoly on a fundamental utility, Thames Water remains attractive to investors, but the current ones will likely have to take a substantial hit first.
Ofwat insists that the companies cannot recover these fines from customers, but bills will increase as part of an industry-wide settlement that will be agreed by the end of the year.
The regulator approved average increases of 23% last month in exchange for £88bn of spending over the next five years, the bulk of it on daily operations, a figure the industry says is too low to deliver change.