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Water companies in England and Wales are proposing sharp increases in household bills to pay for a record £96bn of investment in the water and sewage network.
The plans, to be submitted to regulator Ofwat on Monday, would see bills rise by an average £156 a year per household by the end of the decade. They cover the period from 2025 to 2030 and represent a near doubling of the £51bn in the previous five-year period.
Water companies are natural monopolies so Ofwat decides how much they can charge customers for the maintenance and upgrading of infrastructure over five-year regulatory cycles.
However, this year’s discussions will be the most fraught since privatisation 34 years ago with Ofwat required to balance calls for investment with public anger over sewage outflows and the effect of price increases during a cost of living crisis.
It also needs to reassure water company investors that there is sufficient stability in the regulatory system for them to continue financing companies, many of which are struggling with debt-laden balance sheets and asking for equity from shareholders.
David Henderson, chief executive of Water UK, the industry trade body, said: “While increasing bills is never welcome . . . approving the plans is necessary so that we can provide the highest-quality drinking water for a growing population, ensure the security of our water supply in the future and reduce the use of storm overflows as much as possible.”
The proposals include £11bn for reducing overflow spills; pipes to transfer water from the wetter north to the south; and the construction of 10 reservoirs — none have been built in three decades. Ofwat has a year to review and decide the plans.
Bills currently average £448 per household but vary by region and are adjusted for inflation each year. Severn Trent, which covers the Midlands and Wales, has already said it is seeking to raise bills by 38 per cent, or around £139 per household, by 2030. Other companies such as Southern Water, which was criticised for discharging raw sewage and storm water near popular swimming beaches during the summer, are expected to announce even larger rises on Monday.
David Black, chief executive of Ofwat, sought to stave off a consumer backlash by reassuring households that they would “only pay for future investment, not to put right past failings”.
“As families struggle with higher household bills it is important that the much needed improvements in performance and investment offer customers value for money,” he added.
He insisted that the regulator would hold companies to account by incentivising delivery, and imposing financial penalties on those that fail.
Thérèse Coffey, environment secretary, said: “I have been very clear with Ofwat, the regulator, that customers should not pay the price for poor performance and they should use the full powers we have given them on behalf of consumers.”
But there are increasing concerns that the regulator and government’s punitive language and hefty fines will deter investors. The companies are burdened with £60bn of debt — up from zero at privatisation — and although equity injections have been rare since privatisation, many have been asking shareholders for cash.
Dominic Nash, analyst at Barclays Research, said: “Investment in the water sector should not be taken for granted. We believe recent Ofwat and Defra announcements have increased risk for investors and could lead to less investment in the sector, rather than more.”
In 2020, four water companies had their appeals upheld by the Competition and Markets Authority after Ofwat rejected parts of their initial plans. The regulator was concerned that the companies would carry out the investments more cheaply, which under the complicated regulatory system allows them to divert some of the excess to shareholders, a clutch of private equity, pension and sovereign wealth funds. Many experts expect a repeat of the appeals process next year.
Feargal Sharkey, a water campaigner, said: “The question is what’s happened to our money? Where has it gone? If they had used the cash to deal with sewage and build some reservoirs they wouldn’t be asking for such big increases now.”