Why UK water regulator’s decision on bills is set to stoke turmoil

Customers are facing water bills that will be on average 36 per cent higher by 2030 after the UK water regulator agreed the amount by which utilities in England and Wales can hike prices.

Thursday’s decision, made every five years by Ofwat, comes amid heightened public anger and political scrutiny of the sector over pollution and service failures. Thames Water, the UK’s biggest water company, is meanwhile teetering on the brink of insolvency and is trying to stave off temporary renationalisation.

For its own part, Ofwat has drawn criticism from water companies for allegedly damaging the attractiveness of the sector to investors, and from campaigners for failing to take the utilities to task on their failings.

The Labour government has indicated that the regulator could be overhauled or even replaced under a far-reaching review of oversight of the industry.

And while the bill hikes — which are on top of the effects of inflation — are likely to anger customers, they also fall far short of what some troubled utilities like Thames Water requested.  

How will the water companies be affected?

Debt-stricken Thames Water — which had lobbied for increases in what consumers pay of 53 per cent by 2030 — was restricted to a 35 per cent rise by the regulator, taking customers’ annual average bills from £436 to £588 by 2030.

The utility, which serves 16mn customers in and around London, will also be fined £18mn by Ofwat for improperly paying a dividend to its holding company — the first time the regulator has fined a utility for paying a dividend not linked to performance.

Thames Water is meanwhile attempting to get signed off an emergency £3bn loan from its senior creditors, while trying to raise fresh equity from new investors. The company has previously acknowledged that both processes may be affected by Ofwat’s decision on bills but said it would take time to digest Thursday’s news fully.

Water companies unhappy with the proposals are able to appeal against Ofwat’s decisions by requesting a referral to the Competition and Markets Authority by 18 February 2025. 

Chris Walters, Ofwat’s senior director for its price review, said it was “very tricky” to anticipate how many might appeal, but noted that there were “three or four companies” with large gaps between their requests and final allowances.

The company to have the highest increase approved was Southern Water, whose stretched finances have also come under scrutiny. It proposed an 83 per cent rise but received permission to hike bills by 53 per cent. Lawrence Gosden, CEO, said he was aware that “a rise in bills isn’t easy for our customers”.

He spoke after 58,000 households served by Southern Water were left without water because of a technical fault.

The utility, controlled by Australian infrastructure investor Macquarie, will be the first company hauled in front of a cross-party select committee in January as parliamentarians examine reforming the sector.

Other water companies provided mixed reactions to Ofwat’s announcement. Anglian Water, South West Water and Severn Trent welcomed the proposals, as did Water UK, the trade association for the water industry. 

“After a decade of cuts, Ofwat has finally listened to public anger and agreed a much-needed quadrupling of investment in our ageing infrastructure,” a Water UK spokesperson said. 

What is the political fallout?

The Labour government has found itself in the awkward position of being in power as Ofwat approves these huge rises in water bills for a general public already furious about the state of Britain’s waterways.

Steve Reed, environment secretary, issued a statement saying people were “right to be angry” about the performance of the water industry and tried to blame the previous Conservative government.

“They irresponsibly let water companies divert customers’ money to line the pockets of their bosses and shareholders,” he said. “This Labour government will ringfence money earmarked for investment so it can never be diverted for bonuses and shareholder payouts.”

Reed has already launched an independent commission into the water sector and its regulation by Sir Jon Cunliffe, former deputy governor of the Bank of England. The government has not ruled out an overhaul or even scrapping of Ofwat. 

One government official tried to play down the scale of the bill rises, saying they were equivalent to about £3 on average per month per household and would pay to fix crumbling infrastructure, cutting sewage spills and leading to cleaner rivers, lakes and seas. 

Labour has ignored calls from opposition parties to take the industry back into state ownership. 

On Thursday Adrian Ramsay, co-leader of the Green party, called on the government to “end this model of failure” and renationalise water companies, which were privatised in 1989 under Margaret Thatcher.

What has prompted the public outcry?

Widespread anger at polluted waterways and the £80bn in dividends water companies have paid out to shareholders since they were privatised has led to the formation of a patchwork of dedicated campaigning groups across Britain.

“It’s utterly disgraceful that after 35 years of bonus scandals, sewage spills, and huge dividends, water firms are set to be rewarded by Ofwat with huge inflation-busting bill hikes,” said Matthew Topham, lead campaigner at We Own It, a group campaigning for public ownership of public services.

Feargal Sharkey, a former rock musician who is now one of the UK’s most prominent water campaigners, hit out at Ofwat after the Office for Environmental Protection earlier this week found “failures to comply with environmental law” on multiple fronts by the water regulator and other government bodies.

“For 35 years they knowingly, blatantly did not enforce the law,” he said.

Sharkey added that Ofwat had presided “over what is now quite clearly a shambles and nothing more than an organised rip-off of bill payers and the environment” and he called for its abolition.

In response, Ofwat referred to a statement from its chief executive David Black published on Thursday that said the regulator “will monitor and hold companies to account on their investment programmes and improvements”.

How did markets and investors react?

As investors and analysts continue to sift through the data points and update their models, it is clear that the final determination will have radically different impacts on different companies.

For the UK’s three publicly listed water utilities, Severn Trent, United Utilities and Pennon Group — which are some of the sector’s top performers — the reaction from investors has been initially positive and their shares rose marginally on Thursday in London trading.

Dominic Nash, head of European utilities research at Barclays, said Ofwat had given “a lot of clarity” to questions that arose from their July draft determination “and investors like clarity”.

“I think it gives the better performers a good amount of upside,” he said.

Ofwat said on Thursday that equity investors could receive a return on investment of 5.1 per cent, compared with the 4.8 per cent it indicated in July.

“It’s clearly a material improvement versus where we were at the draft determination and that’s the way the market’s seeing it today,” said Alex Wheeler, a utilities analyst at RBC Capital.

But for Thames Water, the sector’s most distressed company, Ofwat’s decision does little to remedy its financial position as the company edges towards emergency financing and seeks to raise new equity. Its bond prices were little changed on Thursday.

One high-yield bond investor said the outlook for Thames looked just as “bleak” as it did before.

Additional reporting by Patrick Mathurin in London