A cross-party Commons committee has told the Government to reject the creditor-led rescue proposal for Thames Water and explore alternatives including special administration or emergency legislation to take control of the company's financial affairs.
The House of Commons Environment, Food and Rural Affairs Committee published its report on Friday 18 September, warning that Thames Water is approaching the end of its financial runway and arguing that the proposed takeover by the London & Valley Water creditor consortium does not offer a satisfactory long-term solution.
The committee said ministers should consider placing Thames Water into the Special Administration Regime (SAR), which would allow an administrator to take control while essential water services continue and the company is restructured for new ownership.
Committee says creditor proposal should be rejected
The committee recommends that the Government reject proposals made by Thames Water's creditors, operating as London & Valley Water.
MPs said they believe the consortium's priority is to extract immediate value from Thames Water rather than steer the company towards long-term success.
They also raised concerns about the lack of publicly available information concerning the more than 100 companies making up the consortium.
Committee chair Alistair Carmichael said MPs did not believe the “opaque consortium of 100 hedge funds and others” had the interests of the public, Thames Water or the environment at heart.
The committee's conclusions are recommendations to the Government and are not binding. Ministers have not, through the publication of the report, placed Thames Water into public ownership or special administration.
Special administration or emergency legislation
The committee said ministers should explore all potential alternatives, including placing Thames Water into the Special Administration Regime or introducing fresh legislation designed to stabilise the company before more suitable owners can be found.
SAR allows the Government and water regulator Ofwat to seek the appointment of an administrator if a water company becomes insolvent or fails to carry out essential functions. The administrator is responsible for maintaining services while the business is restructured and new owners are sought.
However, the committee said existing legislation leaves uncertainty over whether special administration can be triggered on poor-performance grounds alone, potentially exposing the Government to a legal challenge.
It recommends clearer thresholds allowing regulators and ministers to intervene when a water company suffers chronic failure, while maintaining SAR as a last resort.
Thames Water expected to run out of money
Carmichael said the company is likely to enter special administration once its money runs out at the end of the year unless another solution is reached.
Thames Water supplies around 16 million customers and has been struggling with a heavy debt burden alongside repeated criticism of its environmental and operational performance.
The committee argues that short-term liabilities incurred by the Government under special administration could potentially be offset by a future sale once the company had been stabilised and a new buyer found.
MPs warn of £900m in penalties
The report also examines what MPs describe as a “doom loop” in which fines for poor performance leave a struggling company with less money available to invest in improvements, potentially contributing to further failures and penalties.
The committee says Thames Water is likely to accrue more than £900 million in penalties over the next five years.
It supports stronger powers for a future supervisory water regulator to intervene earlier where companies show signs of financial weakness or persistent poor performance.
The committee opposes proposals for regulatory “forbearance” that could reduce penalties as part of a turnaround plan, arguing that the public could regard such an approach as rewarding failure.
Committee calls for tougher scrutiny of creditors
MPs also identified what they consider a regulatory gap concerning creditors who acquire effective economic control of struggling water companies.
Current due-diligence requirements focus principally on shareholders, while creditors such as London & Valley Water may exercise substantial influence without necessarily being treated as ultimate controllers.
The committee recommends extending safeguards and due-diligence requirements to creditors when they become, or are likely to become, the economic owners of a water company in practice.
Creditors defend rescue proposal
London & Valley Water disputes the committee's characterisation of its role.
A spokesperson for the consortium said its investors had never controlled Thames Water or received a dividend from the company and had instead provided funding to cover a significant revenue shortfall.
The consortium says its enhanced proposal will address feedback from Ofwat and ministers and argues that its plan is the fastest route to resolving Thames Water's financial problems.
Thames Water has said the company needs to be recapitalised and placed on a firm financial footing, warning that delays to recapitalisation could slow its turnaround.
Decision remains with Government
The committee's intervention substantially increases political pressure on ministers over the future of Britain's largest water company, but it does not determine what happens next.
The Government must decide whether to continue considering a creditor-led restructuring, pursue special administration or examine another route for stabilising Thames Water.
The committee cautioned against rushing wider changes to special-administration legislation solely to deal with Thames Water, saying broader reforms should be considered as part of changes to regulation across the water sector.