15 April 2024 What is happening with Thames Water?

Full Disclosure:​

What is happening with Thames Water?​

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The Story:

Thames Water supplies water to about 25% of the UK population. It has what we call a ‘monopoly’, which means it’s the single supplier of water in a region (which, in this case, includes London). This makes sense in the water industry because of the inefficiency/high costs of multiple companies managing the water pipes.

Now there's a worry over monopolies; if there’s no competition, a company could raise its prices and consumers would have nowhere else to go. This is why the water industry in usually partly owned/managed by the government.

But England is one of the few countries with a fully privatised water industry. Private companies can get a licence to deliver water for a particular region from the UK water regulator Ofwat. The basic agreement is that you manage the water supply for a region under the terms of the licence and in return you get a monopoly to make money from customers (at a price Ofwat sets every five years).

Seems like a reasonable deal, right? So why is Thames Water on the brink of collapse?

Put simply, Thames Water needs more money, but no-one wants to give it more money. This is why the current owner of Thames Water defaulted on its debt this week.

Thames Water now owes £18bn in debt. A lot of blame has been put on Macquarie Group, which was the owner of Thames Water between 2006 and 2017. The Australian bank has been accused of doing the typical private equity thing of loading debt onto the company while extracting a lot of money through dividends. (Counterpoint: Macquarie Group would argue it borrowed money to invest into Thames Water.)

Another problem is that this debt was linked to a specific type of inflation measure (RPI), which has outpaced the inflation measure the water bills are linked to (CPIH). Simply put, this means higher costs.

Meanwhile, Thames Water's shareholders are in a fight with Ofwat; they won’t agree to put more money in, unless Ofwat allows Thames Water to raise prices by up to 56% by 2030 and pay less in regulatory fines. The owners argue they need to do this to reasonably turn Thames Water around.

But Ofwat isn't budging. The regulator wants less debt and more infrastructure investment. Thames Water already has a horrible track record for sewage dumping and leakage.

What does this mean for law firms?

This is a good example of the tension between regulators and the private sector. Ofwat wants less gearing (the ratio of debt to equity) and a greater investment in infrastructure. The private sector says it is impacted by higher inflation and wants to raise customer bills.

The law takes a unique role when an important utility could go bust. We wouldn't want a system where customers don’t have access to their water supply. This explains why the UK recently updated its insolvency regime for water companies. This ‘special administration regime’ could allow Thames Water’s current shareholders to keep control of the company, while allowing the company to restructure its debts. At the same time, there are difficult legal questions. What happens to Thames Water's creditors in an insolvency process that is focussed on the protection of consumers?

There is plenty of legal work when advising a water company, from M&A investment and the issuance of bonds to the role of restructuring lawyers when dealing with financial instability. Thames Water’s general counsel joined last year after heading up the infrastructure practice at Ashurst. Meanwhile Slaughter and May is reported to be advising the company on its financing options.

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Have any thoughts? I'd love to hear your perspective below!