Inflation-busting increases blamed on need to invest in super-sewer as London grows
Britain’s biggest water company plans inflation-busting price rises over the next six years that could leave customers paying around £100 a year more by the end of the decade. Thames Water wants to review current price rules agreed with regulator Ofwat and to increase customers’ bills by at least £15 next year.
The company then plans an above-inflation increase for the following five years, which will leave the average customer with a bill of more than £450 a year by 2020.
The company will justify the price increase to the regulator by claiming there have been recent unforeseen costs and there is a need to invest in major infrastructure projects, including a new £4.1bn super-sewer to cope with London’s rising population.
However, the organisation that represents the water firms’ customers, the Consumer Council for Water (CCWater), said it was “concerned” by plans for above-inflation price rises in the current economic climate. Steve Hobbs, policy manager at CCWater, said: “Due to the wider context of the economy and the pressures householders are under due to their budgets, more than ever Thames, and all the other companies, have to listen to customers.
“Really if a company is looking at above-inflation rises it needs to justify it and show that it has listened to customers, explained the reasons for those increases, and crucially show customers have accepted it. We will be looking for evidence of that.
“The financial performance of the industry, especially in the last couple of years, has been pretty good. I think the time has come for that gain to benefit the customers as well as the shareholders. We would like to see a better balance.”
According to the latest available accounts, Thames paid total dividends to its shareholders of £1.18bn in the five years to March 2012. Last year the company enjoyed operating profits of £650m, although it did not pay any corporation tax in 2012 by offsetting the interest payments on its debts against its tax liability and delaying it by claiming allowances on capital project spending.
Thames is owned by an international consortium of investors led by the European arm of an Australian bank, Macquarie Group. Martin Baggs, the chief executive of Thames Water, was given a bonus of £420,000 on top of his £425,000 salary and is in line for a further windfall of £1m based on company performance through to 2015.
Martin Blaiklock, a former director of utilities at the European Bank for Reconstruction and Development, said that the company should have paid less to its shareholders and saved more for investment.
He said: “If Thames had not been so generous to its shareholders with dividends over the last 12 years, and strengthened, rather than weakened, their balance sheet, they would not be in the predicament they are today.”
Thames’s plans, laid out in a draft business plan for 2015-2020, will fuel concern over the policies of the UK’s water companies which since privatisation in 1989 have increased their average bills from £236 to £340, although the privatised companies maintain that prices increased at a greater rate when they were state-owned.
Critics say the takeover of the water industry by private equity firms, which have often burdened the UK companies with offshore intra-company debt, has seen a profitable, secure industry turned into a cash cow in which customers are the financial losers.
Severn Trent is the latest firm to catch the eye of private-equity buyers. The company recently rejected an approach by a consortium of Canada’s Borealis, the Kuwait Investment Office and the UK’s Universities Superannuation Scheme.
A spokesman for Thames Water said the company had the second-lowest average bills in the country and that rises were required for investment in infrastructure. He added that the full impact of the costs of the new super-sewer would hit customers in around 2020, and that alone would add around £70 to £80 to all customers’ bills, not including inflation.
He said: “We are proposing 1%-a-year above-inflation bill rises between 2015 and 2020 to help fund essential upgrades to our ageing pipes, sewers and other facilities, so we can continue providing high-quality, affordable services to our customers while keeping pace with population growth, climate change, new laws and regulations and rising energy costs.
“We propose that by 2019-20 our average household bill will be £370 a year before inflation, up from £354 today. This excludes the cost of the Thames Tideway Tunnel, the full impact of which will come into effect in the early 2020s.
“Our customers’ bills are the second-lowest in the country, at less than £1 a day per household, while we continue to invest a record £1bn a year in infrastructure upgrades – more than any other company ever has.
“As a result, Thames Water’s operational performance – as measured by leakage, tapwater quality and sewage works compliance – is close to its best level ever.
“This transformation would never have been possible under public ownership. The UK water industry has made capital investment of £108bn since privatisation in 1989, and this work continues. Far from an example of its failure, the industry is an example of privatisation’s success.”