The following Statement was made in the House of Commons on Tuesday 16 June.
“I will make a Statement regarding the position of Thames Water and the proposed recapitalisation package under consideration. This Government were elected with a clear mandate to clean up our rivers, lakes and seas, having inherited record levels of pollution incidents from water companies. Thames Water has underperformed for 15 years. It has regularly missed performance targets, it has unacceptable levels of serious pollution incidents, and the company is heavily indebted. This situation, which delivers poor outcomes for consumers and the environment, cannot continue.
To fix this, over the course of the past two years, the company has been undertaking a recapitalisation process to seek vital long-term funding. The Government have been clear throughout that any investor will need to have a credible and robust turnaround plan, the implementation of which must be monitored by regulators and must restore the company’s financial resilience and operational performance. Ofwat, with the support of government, has been in discussions with the London & Valley Water consortium—a group of Thames Water’s creditors—regarding the terms of a proposal. On 6 March, the consortium presented its proposal for Thames Water to both Ofwat and the Government. Ofwat has been continuing its discussions with the consortium since then, and I wanted to update the House on the next stage of the process.
Ofwat is currently evaluating the consortium’s proposal and, as the independent regulator, is responsible for deciding whether to accept it. If Ofwat decides to accept the proposal, this would be subject to a public consultation and a court-sanctioned restructuring process. A recapitalisation process of this size is complex and will take time. As the Environment Secretary, I have several duties, set out in Section 2 of the Water Industry Act 1991. These include protecting consumers, securing the proper delivery of water and sewerage services, and ensuring that companies can finance those services and that statutory obligations are properly carried out. Today, I can confirm that I have sent a letter to Iain Coucher, Ofwat’s chair, outlining my early views on the proposal linked to my Section 2 duties. These should not be taken as, nor do they constitute, a direction from government to Ofwat.
I do not believe that the current proposal goes far enough to protect customers and the environment. I have three particular concerns about the proposal: the unfair cost to customers, delays to vital infrastructure investments, and delays to environmental improvements. The 16 million Thames Water customers are front and centre of my consideration, and I am primarily worried about the impact on them. There is an expectation in the proposal that customers will fund—and therefore bear an undue cost for—investment in the company.
In addition, I am not convinced about the proposal’s request to reduce performance standards, nor about the significant delay to vital infrastructure investments. This would mean delays to environmental improvements, particularly those related to wastewater treatments linked to statutory requirements, as well as to projects that are important for drinking water safety and supply. I am therefore concerned that the long-term resilience of the water and wastewater systems may not be adequately protected. The Government will always act in the national interest, and my priority as Environment Secretary is protecting customers and the environment. We will stand ready for all eventualities.
I conclude by emphasising this Government’s commitment to turning around the water sector. In under two years, we have taken swift, decisive action. We have introduced the Water (Special Measures) Act 2025 to raise standards, enforce accountability, and make pollution cover-ups a criminal offence. We have banned more than £4 million in bonuses for polluting water bosses; we have unlocked £104 billion of private investment to rebuild vital infrastructure; and we have commissioned Sir Jon Cunliffe to lead the most comprehensive independent review of the water sector since privatisation. Together, those steps have paved the way for the landmark clean water Bill announced in the King’s Speech. The Bill fulfils the commitments we set out in the water White Paper earlier this year and will deliver the fundamental reforms that are so desperately needed. This once-in-a-generation Bill will create a single powerful water regulator, moving away from a system where water companies mark their own homework by putting in place stronger, active supervision. This will strengthen water companies’ financial resilience and the long-term stability of the sector, with modernised economic regulation and new powers to drive turnaround where companies perform poorly.
Additionally, the reforms will strengthen the consumer advocate, providing a more independent, authoritative voice that can challenge the system, drive improvements in outcomes and ensure that customers’ interests are put first. We will also improve water quality by cutting pollution at its source. Finally, we will avoid the situation we are discussing today happening again: our reforms will give the new regulator the powers to ensure water companies do not accumulate unmanageable levels of debt. More broadly, they will secure the long-term stability of the sector and ensure that companies are financially resilient. Put simply, our reforms will deliver better outcomes for customers and the environment.
My Lords, I thank the Minister for answering on this Statement in your Lordships’ House. Thames Water has scandalised our country while asking its customers to pay more for less. For the sake of customers and taxpayers, we now need stability, not uncertainty. This Statement has not announced any change to the situation of Thames Water. There is a recapitalisation proposal and Ofwat must evaluate it. All that the Statement has announced is that the Secretary of State has sent a letter to Ofwat’s chair outlining her own views, but she has made it clear that it does not count as direction from the Government. What, then, does this letter hope to achieve exactly? What specific changes to the proposal does the Secretary of State want? When do we expect Ofwat’s decision, and how long will the public consultation on it take?
I want to correct the record on one point that was made in the other place. It was in 2006, under this governing party’s last Government, that Thames Water investors acquired and leveraged the company. Why was action not taken then to prevent this happening?
During the passage of the Water (Special Measures) Act, we proposed strong action against those responsible for failings. Can the Minister confirm that the penalty regime will not be watered down as reforms to the water sector continue to be rolled out? In those debates, we sought assurances from the Government and attempted to amend the Bill such that, in the event of a special administration regime, consumers would be protected from any liability in a bailout and the Secretary of State could impose leverage limits on water companies to prevent a recurrence of this appalling situation. The Government did not accept these amendments. Does the Minister have any regrets or a change of view on these points?
My Lords, I want to return to a point I raised in this House only last week when I asked whether the Government were delaying the clean water Bill pending resolution of the Thames Water situation. We were told then that the Government were ready to deploy a special administration regime, if required. Yesterday’s Statement raises a straightforward question: what has changed?
We are told that the Secretary of State has set out early views in a letter to Ofwat, but the underlying facts have been evident for so long: specifically, a highly leveraged company, prolonged financial fragility and ongoing environmental failure. Can the Minister share what threshold the Government are applying for intervention? Given that Thames Water has been operating without an investment-grade credit rating for a long period, does the Minister consider that this constitutes a breach of financial resilience expectations and, if so, why has it not triggered special administration, particularly on performance?
The Secretary of State has said she is not convinced by the latest recapitalisation proposal. That is significant. On what specific grounds has that conclusion been reached, and what tests are the Government applying to determine whether any proposal is credible, financeable and in the interests of the consumer?
Sixteen million customers are trapped in this monopoly. Does the Minister accept that a substantial proportion of customer bills is already being directed towards servicing debt? Indeed, one-third of every Thames Water bill is already spent solely on servicing the company’s massive debt. In assessing the current proposal, what explicit protections are being put in place to ensure that customers are not required, either directly through higher charges or indirectly through weaker outcomes, to absorb the cost of that debt?
My Lords, I thank noble Lords for their questions on this Statement. There are quite a lot of questions, so I will do my best to cover them but, as always, if I have missed anything out, we will get back to noble Lords.
First, it is important to point out that this letter is the Secretary of State simply offering her preliminary views. That is in line with the duties in Section 2 of the Water Industry Act 1991. She puts forward those preliminary views for Ofwat to consider when it is making its decision, because it is important to be clear that it is for Ofwat, not government, to decide whether it rejects or accepts the proposal. Of course, the Secretary of State’s preliminary view, which is why we are making the Statement, is that she is not convinced that the proposal in its current form delivers for customers or for the environment, as mentioned by the noble Baroness, Lady Grender.
Also, while the company is considered to be stable at the moment, we stand ready for all eventualities. That includes being ready to apply for a special administration regime, if that becomes necessary. It is also important to clarify that there is a very high bar for the use of a special administration regime. The law states that special administration can be initiated only if the company becomes insolvent, or if it is in such serious breach of its principal statutory duties or an enforcement order that it is inappropriate for the company to retain its licence.
My Lords, the Minister will be aware that it is not necessarily just ownership of a water company that is the deciding factor, and there are other jurisdictions in which leakage and sewage going into rivers and the sea are problems. I think of Denmark, where the vast majority of water companies are in the public sector, and sewage spills and water pollution were serious issues in the recent election. I ask for an assurance from the Minister that, when the water Bill reaches this House, the cost of regulation will not increase for water companies, and that they will be able to use the resources they have to deliver wastewater, and clean water to consumers, and to ensure that they have the infrastructure in place.
Clearly, we need to see the water Bill to see the detail on that and many other issues that people have a particular interest in. The Government are clear that we do not want to have overburdensome regulation. That is important. The regulator is there to help support the industry and make sure that it works properly for customers and the environment. I am sure that the detail of that will be considered in the Bill, but it is not the Government’s approach to make regulation more difficult for consumers and organisations.
My Lords, the dire position of Thames Water is, above all, a regulatory failure. Does the Minister accept that Ofwat’s record as a regulator has been absolutely woeful? Above all, it failed to require water companies to invest over a long period of time in appropriate infrastructure of all kinds.
I suggest to the noble Lord that the fact that we are talking about removing Ofwat and bringing in a single, more powerful regulator in the water Bill answers his question. It is not just about who the regulator is but about what the regulator’s priorities are: what is it setting for water companies to achieve? There has not been enough investment in infrastructure, and that has been one of the failures of regulation over the past 20 years.
My Lords, when the water industry was privatised over 30 years ago, it was almost entirely debt-free. Since then, as the Minister said, debt has been racked up. The Minister said that there will be provisions in the new water Bill for creating a new regulator. Further to the previous question, because of Ofwat’s pathetically inadequate attempts to regulate the tide of corporate greed, will the new regulator be able to check racking up greater and greater debts, unless it is specifically for investment to serve its customers?
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The Minister has herself stated:
“Investors would not have the confidence to invest money if the special administration regime could be triggered without allowing a company to rectify any performance issues”.—[Official Report, 4/11/24; col. 1373.]
Can the House have the same assurance again, and will it still stand after the Makerfield by-election result and any future leadership change?
A special administration of Thames Water risks making lenders to Thames Water whole. That could represent a 50% gain on the current traded value of Thames Water debt. Can the Minister clarify that, in the event there is a special administration, this would not be the case? It is important that this situation is clear so we can be confident that the creditors negotiating to recapitalise Thames Water do not stand to win if these negotiations are unsuccessful.
There are still reckless calls for nationalisation. That could cost the taxpayer £20 billion and would drive away investors. It is money that could and should be spent on our nation’s defence, the first duty of any Government. Further to that, would a nationalisation process increase the risk that lenders were made whole and generated a profit out of the failure of Thames Water?
We keenly await the upcoming water reform Bill to address the failings of regulators, not just companies. The Government hope to introduce a new single regulator, integrating the functions of Ofwat, the Environment Agency, Natural England and the Drinking Water Inspectorate. How can we be confident that Thames Water’s process will continue to operate smoothly with this organisational uncertainty? As we have seen this week in other areas of the Defra brief, we desperately need the Government to get a grip of arm’s-length bodies, and we will scrutinise the provisions in detail when the Bill comes to this House. In relation to this question, I declare an interest, as my daughter is an employee of one of the funds named in the press as a participant in the Thames Water recapitalisation.
I have asked quite a few questions of the Minister, and I hope she is in a position to answer them and elaborate on the purpose of this Statement. I very much look forward to her response.
Related to that, reports suggests that creditors are seeking adjustments to regulatory expectations. Can the Minister confirm whether any relaxation of performance or environmental standards has been proposed and share with us unequivocally whether the Government would permit such an approach?
On environmental performance, Thames Water was responsible for over 100,000 hours of sewage discharges last year. How are the Government weighing that record when considering the suitability of the current ownership and the current financing model?
Finally, the Government have repeatedly stated that special administration remains an available option. Can the Minister clarify what specific conditions would need to be met for that mechanism to be triggered, and over what timeframe?
Since the Conservative privatisation over 35 years ago, some £85 billion of bill payers’ money has gone mostly to overseas shareholders and executives, through things such as bonuses. Is it not time to blow the final whistle on this failed experiment and put the interests of the public and our environment first?
Regarding creditors and shareholders and what they would recover upon an exit of a SAR, again, the purpose of a special administration regime is not to bail out water company shareholders or creditors; it is to ensure that water and wastewater services continue if a water company fails. When a water company exits from special administration, which could be either via rescue or through transfer, the special administrator, not the Government, determines the level of repayment to creditors by applying the relevant insolvency legislation. The level of recovery that creditors may expect will be in accordance with the relevant insolvency legislation, and it is very unlikely that all creditors’ debt would be repaid at the end of a special administration, because of the priority order of repayment. I hope that helps answer some of the questions from the noble Lord, Lord Roborough.
The noble Baroness, Lady Grender, discussed the performance grounds. To apply successfully for a special administration on performance grounds, a strong evidence case must be made to the courts. In determining whether to apply to the court for a special administration regime, the Secretary of State must have regard to all the relevant facts and matters pertaining at the time and act in accordance with the applicable statutory duties.
On the environmental obligations raised by the noble Baroness, all companies must continue to meet their statutory obligations to customers and the environment, and regulators will continue to have a range of enforcement tools at their disposal.
It is not possible for creditors to ask for the debt to be repaid during a special administration regime because there is a moratorium on legal proceedings during a SAR that takes away a creditor’s ability to enforce debt repayments. However, employees have some protection in being able to recoup certain debts, such as unpaid wages, via the Redundancy Payments Service.
On customer impact, we have always been absolutely clear that Thames Water must meet its statutory and regulatory obligations to its customers and the environment. The Secretary of State has set out her preliminary views on this to Ofwat in the letter. The next steps are of course for Ofwat to decide. However, many concerns have been raised about not just Thames Water but other water companies and their approach to the environment, which is one of the reasons why, as a Defra priority, we will bring in a new water Bill later this year. A key element will be looking at environmental impacts.
People are obviously frustrated. One of the very first meetings I had when I became a Minister nearly two years ago was about Thames Water. It has been going on for a long time—it was going on before this Government. The business has been underperforming now for 15 years, which is a long time. It has regularly missed its performance targets and has racked up too much debt. It was right that the Secretary of State wrote to Ofwat to set out her preliminary thoughts on the next approach. Ofwat, with the support of government, has been in discussions with the London & Valley Water consortium—a group of Thames Water’s creditors—on the terms of the proposal being put forward. Clearly, a recapitalisation process of this size is complex and takes time. Although we will establish, through the forthcoming Bill to which I referred, a new, single, powerful regulator to replace Ofwat—so that we can work better when water companies fail in future—until the new regulator is established, Ofwat’s role remains. Therefore, it is still Ofwat’s decision on how we go forward.
I want to be clear that the Government are working with all water sector regulators to monitor carefully the performance of all water companies, including Thames Water. As I said earlier, if there are ever any problems, we stand ready to intervene, should it be required, because it is important that the continued provision of a vital public service in water supply and wastewater is continued. We will always act to protect the public interest.
We believe that any proposal has to be in the best interests of both consumers and the environment. It is important to note that the Secretary of State has written at this stage because we need time to understand the proposal and work it through. There are about 16 million Thames Water customers, so any decision that Ofwat makes must be done in the full understanding of various opinions, as well as on what is best for consumers and the environment. I hope that I have covered most of the questions raised; I will write if there are any further answers to give.