Water bills ‘to surge up to 40%’ to fix sewage pollution crisis; Jeremy Hunt to meet regulators amid profiteering concerns

Introduction: Water bills “to rise 40% to fix sewage pollution crisis”

Good morning, and welcome to our rolling coverage of business, the financial markets, the world economy, and the cost of living crisis.

UK households have been warned that their water bills could surge by up to 40% by the end of the decade, as companies look to pass on the cost of tackling the sewage crisis and fighting climate change.

The rises are due to be announced next year, The Times reports this morning, adding hundreds of pounds to average bills.

The move has apparently alarmed ministers, as they try to get to grips with the cost of living crisis, but water companies say they needed the extra money to meet strict pollution targets.

UK households have already been hit by the biggest increase to water bills in almost two decades.

But The Times reports that customers are going to be squeezed much harder, to fund investment plans to tackle the UK’s sewage crisis.

They say:

Under a process being run by Ofwat, England’s water companies have been asked to submit investment plans by October to fulfil commitments to tackle pollution from sewage. These include improving storm overflows discharging in or near designated bathing spots and improving 75 per cent of overflows discharging to high-priority nature sites.

Public consultation documents seen by The Times show that, to pay for the work, most companies are asking the regulator to approve real-terms price increases of, on average, 25 per cent between 2025 and 2030.

Water companies are drawing up plans to increase household bills by up to 40 per cent to pay for the cost of tackling the sewage crisis and the consequences of climate change https://t.co/6ZbYAMuttT

— The Times and The Sunday Times (@thetimes) June 28, 2023

Southern Water, they say, plan to increase its charges to customers from £432 to a minimum of £677 by 2030, although it suggests the figure could be as high as £793.

Fresh from bringing in a hosepipe ban, South East Water, is planning to increase its bills by as much as 39% by 2030.

Wessex Water wants to put up its prices by 30%, while Thames Water is proposing rises of 20%.

Yesterday, Thames Water surprised the industry by announcing the sudden departure of chief executive Sarah Bentley, as the UK’s largest water utility struggles with its massive £14bn debt pile and battles to improve its environmental track record.

Also coming up today

Chancellor Jeremy Hunt will meet with the UK’s regulators to discuss the cost of living crisis, and whether firms are competing as they should.

The Treasury are concerned that companies are not passing on their easing cost pressure to consumers fast enough, undermining the government’s target of halving inflation by the end of the year.

Hunt is expected to ask the Competition and Markets Authority (CMA), and the watchdogs for energy, water and communications whether there is evidence of price gouging by companies and if so what they intend to do about it to help households.

Hunt will have “food companies, energy suppliers and banks in his sights”, the FT says.

As we reported yesterday, the UK’s largest mobile and broadband companies have been accused of fuelling “greedflation” after pushing through the biggest round of price hikes for more than 30 years.

We’ll also hear from the head of the Bank of England, Andrew Bailey, and its chief economist Huw Pill, as they attend an annual gathering of central bankers organised by the European Central Bank in Sintra, Portugal.

The agenda

7am BST: GfK’s German consumer confidence report
11.30am BST: ECB holds panel on “Lessons from recent experiences in macroeconomic forecasting”, including Bank of England chief economist Huw Pill
2.30pm BST: BoE governor Andrew Bailey appears on ECB ‘policy panel’, alongside ECB president Christine Lagarde, Fed chair Jerome Powell and BoJ governor Kazuo Ueda

Key events

Estimates that UK water bills could rise by 40% are “probably not unrealistic”, according to Sir John Armitt, the chair of the National Infrastructure Commission.

Armitt tells Today that the government’s focus has been to keep bills down, meaning bills didn’t rise in real terms over the last 10 years.

But there has also been under-investment in the UK’s water system for “a very long time”, he points out.

So bills arguable need to go up to fund higher investment, either through a nationalised company (in which case taxpayers fund it) or through a private company (where customers pay through their bills).

Armitt adds that the estimates for infrastructure spending are very significant.

It is thought that £50bn needs to be invested to bring sewage overflows down to “an acceptable level”.

Plus, it’s estimated that £20bn is needed to ensure we have enough water by 2050.

Armitt says:

So as you can see, we’re talking about very large sums of money to restore and enable our water infrastructure and our sewage infrastructure to be fit for purpose.

The country must decide what quality of infrastructure we want, and then decide how we will pay for it, and what we can afford, he concludes.

Darren Jones MP adds that renationalisation is an option “if the company goes bust”.

He tells the Today programme that:

At the moment Thames Water, to take an example, is having to scrabble around trying to find a private finance solution to its problems, which should never have happened in the first place.

The government is always the supplier of last resort, because people need water and electricity, so it must step in if a company which is too big to fail is in serious trouble.

Jones says:

If we end up in a situation where the private owners of these companies have completely messed it up, then there is no choice for the government other than to bring it into public ownership and to run it.

He adds that, as some water companies are in better financial health than others (such as Thames Water), the wholesale nationalition of every water company across the counrty probably isn’t the answer.

But, the companies must be put onto “a sustainable footing”, in whatever form of ownership that is, based on better, closer regulation and better conduct by firms’ directors.

Darren Jones MP: Water industry suffered from poor corporate behaviour and regulation

Darren Jones, the Labour MP who chairs parliament’s Business and Trade Committee, says the water regulator, Ofwat, has a case to answer over the problems in the industry.

Speaking to Radio 4’s Today programme, Jones says he is “increasingly sick” of seeing the same failings.

Jones explains:

We know that companies that are too important to fail must be regulated differently to other companies.

These regulators were set up, not just to try to keep consumer prices down after privatisation, in natural monopolies, but to ensure that the conduct of the owners and managers of these companies acted in the interest of the country and consumer.

And for too many years, decades even, we’ve allowed these companies to be operated with high risk stakes, with high levels of debt, with wealth being extracted from the companies, with investment not being high enough.

And then, once again, we’re in a situation where we’re being told that customers, taxpayers are going to have to pick up the bill for a failure of good corporate behaviour at these companies, and by the sounds of it poor regulation.

Q: Would renationalising this industry lead to a better result?

Jones says it’s an option, but not necessarily the right one.

The issue here isn’t about the ownership model, it’s about the conduct, he insists, and “the behaviour of the directors and the shareholders who own and operate these businesses”.

He cites debt levels, the cost of debt, the areas that the companies are putting their money into, dividends to shareholders,and executive pay as areas where water companies have had the wrong priorities. The energy industry has the same problems, Jones warns.

He says:

These companies have been allowed to not invest for the future, even though we know in many ways what we needed them to do for the future, and the regulators have allowed them to get away with it.

Mike Keil, senior director at the Consumer Council for Water, has said there must be a ‘strong safety net’ to protect households who cannot afford higher water bills to fund investment in the industry.

With nearly a quarter of households struggling to pay their water bills during the cost of living crisis, Keil told The Times:

“Customers support the need for investment in enhancing the environment and the resilience of our water and sewerage services but we know that could lead to some substantial bill rises.

“Investment on the scale being proposed must come with a strong safety net to protect households that cannot afford their bill.”

Ofgem proposes binding rules to protect struggling customers

Elsewhere in the cost of living crisis, the energy regulator is proposing that new rules brought in to protect struggling prepayment meter customers should be a compulsory part of licence conditions for suppliers.

The voluntary code of practice, unveiled in May, bans forcibly installing prepayment meters (PPM) into the homes of people over the age of 85 and gives extra protections to vulnerable households.

All UK household energy suppliers signed up the code but regulator Ofgem said it now wants to make the voluntary arrangements “binding”.

It has also proposed that suppliers get compensated for a type of credit offered to the most vulnerable PPM customer, PA Media explain.

Neil Kenward, director for strategy for Ofgem, said:

“We are committed to ensuring robust protections are in place for vulnerable customers.

“The voluntary code of practice for prepayment meters enhanced protections, setting clear rules for when a prepayment meter is or isn’t acceptable, as well as new requirements around the installation of prepayment meters.

“We are now seeking to make these voluntary arrangements binding, and we welcome all views on this statutory consultation.”

We have published a statutory consultation on introducing the below PPM Code of Practice into the licence and guidance for energy suppliers.

Subject to the outcome, we expect to publish licence modification decisions later this year

Respond here
➡️https://t.co/RtzTxZWFFk https://t.co/lLDiY09N4k

— Ofgem (@ofgem) June 28, 2023

Minister: some water companies are in difficult positions

Children’s minister Claire Coutinho has declined to comment directly on reports that the Government has been drawing up contingency plans to prepare for the possible collapse of Thames Water.

Coutinho told Sky News:

“I certainly think there are water companies like Thames Water which are in difficult positions, but I think our position as Government is to make sure that we have the right policies in place to see consumers protected but also that we’re dealing with things which are really important to the country, like dealing with the sewage leaks.

So what we’ve been asking companies to do is to make sure they’re putting forward investment plans and then what we’ve separately been doing is helping households with their family finances through cost-of-living support.”

George Eustice, the former secretary of State at the Department for Environment, Food and Rural Affairs, has predicted that water bills will not rise as fast as the industry wants.

Speaking on Radio 4’s Today programme, Eustice explains that the ‘pricing rounds’ agreed with the industry mean bills won’t rise until 2025.

The investments needed in new storm overflows were expected to raise bills by £42 on average between 2025 and 2050, Eustice explains, but “inflationary pressure, and new obligations put on water companies” mean this may be “quite a bit higher”.

Q: So are bill increases of 40% possible?

Eustice says this figure has been put out by the industry ahead of their negotiations with Ofwat.

I think the figure will be far lower than that, when it comes to it.

There is some variation across the country, Eustice adds, saying investment costs were higher in post-industrial towns in the north Midlands, where there were more storm overflows to deal with.

Q: Shouldn’t companies have spent more on intrastructure in the past, rather than paying out billions of pounds in dividends?

Eustice argues that pension funds and investment funds expect to see a return, if they’re putting money up for investment.

One challenge at the moment is that the political noise around this issue “drives away investors and makes it harder to raise the money,” he warns.

Ministers ‘weigh contingency plan for collapse of Thames Water’

In another worrying development, Sky News is reporting that the government has begun drawing up contingency plans for the collapse of Thames Water.

The news comes less than a day after the surprise exit of Thames Water’s CEO, Sarah Bentley.

Sky says there are “growing doubts” in Whitehall about the ability of Britain’s biggest water company to service its £14bn debt-pile.

One option could be to put Thames Water into a special administration regime (SAR), as happened with energy company Bulb in 2021.

Sky reports:

The talks within Whitehall, which involve the Department for Environment, Food and Rural Affairs (DEFRA), Ofwat and the Treasury, remain at a preliminary stage and relate at the moment only to contingency plans which may not need to be activated.

Thames Water serves 15m customers across London and the south-east of England, and has come under intense pressure in recent years because of its poor record on leaks, sewage contamination, executive pay and shareholder dividends.

Exclusive: Whitehall and Ofwat, the water regulator, are drawing up contingency plans for the possible collapse of Thames Water, Britain’s biggest water company, which could entail a special administration like that used when Bulb Energy failed in 2021. https://t.co/RrrPkM4csI

— Mark Kleinman (@MarkKleinmanSky) June 27, 2023