(Bloomberg) — The UK water regulator is for the first time considering boosting returns for investors, after the crisis at Thames Water pushed up the cost of borrowing across the industry.
Under current plans proposed by Ofwat, equity investors will get a return of 4.8% for the next five-year price control period that starts in April. But the rising cost of debt means the regulator may need to relent on allowed returns, according to a person familiar with the matter.
Thames says it needs a return of at least 5.7% to attract new equity into its business. The heavily indebted utility is desperately seeking new investors to provide as much as £3.3 billion to fix chronic leaks and sewage spills before it runs out of money next year.
Until now, Ofwat officials have privately maintained that its proposed return for investors is generous enough, and is at the upper end of recommendations by analysts. But in making its final ruling, currently due Dec. 19, Ofwat must consider market conditions as well as the arguments put forward by stakeholders.
Since its draft determination in July, the cost of debt has soared. In recent months, Yorkshire Water, Anglian Water and Welsh Water have all borrowed at rates higher than Ofwat has currently factored in, a sign that contagion risks after the default of Thames’ parent company have already started to materialize.
That means Ofwat may need to raise the allowed return in its final determination, said the person familiar, who asked not to be named discussing commercially sensitive matters. In line with previous price reviews, Ofwat is also expected to raise the amount that companies can charge customers and invest, compared to its draft determination in July, the person said.
The regulator is expecting to make its final ruling on the price review, known as PR24, at its board meeting at the end of November, according to the person. That will include a decision on whether to delay the ruling by a month until January. While officials are keen to stick to the current timetable, the process was delayed by UK elections earlier this year.
Water companies have also pointed out that the energy regulator Ofgem has proposed a higher rate of return for investors — a range of 4.57%-6.35% — and are concerned potential investors would choose energy over water for that reason.
While the exact changes remain undecided, the news is likely to be welcomed by water companies that have said they will be unable to deliver the step-change needed in tackling leaks, pollution and climate change, based on Ofwat’s draft proposals.
In total, the industry wants to spend more than £100 billion by 2030, but Ofwat cut that to £88 billion, capping bill increases by £19 per year.
A lack of investment would be a problem for the new Labour government which has promised to get the highest sustained growth in the Group of Seven countries.
In a major speech to investors on Monday, Prime Minister Keir Starmer vowed to prioritize growth. “It’s time to upgrade the regulatory regime, make it fit for the modern age, harness every opportunity available to Britain,” he said. “We will rip out the bureaucracy that blocks investment.”
–With assistance from Ronan Martin.
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