CCW’s response to Ofwat’s provisional decision to accept undertakings from Thames Water for section 19 of the Water Industry Act 1991

At this point it is not clear what these business plan revisions will look like in practice, or the extent to which they might impact upon operational delivery for customers. In order to assess the success of this undertaking, it will be important for Thames Water to clearly define how any revised company business planning differs to what has been committed to previously. In addition, Thames Water should also provide delivery timelines for any revisions to the company business plan, and confirm whether any adjustments to its performance commitments will be required.

Whilst we support the intentions behind these undertakings, the undertakings must be consumer focused, transparent to customers, and consider any risks and longer term sustainability obligations. It is important that consumers are informed how any changes will affect the service they receive from Thames Water. Ofwat must ensure consumer interests, specifically in terms of the service they receive and affordability, are placed at the forefront of any actions taken to improve Thames Water’s financial resilience.

Thames Water has committed to taking all reasonable steps to raise substantial equity investment into its business i.e. the Equity Raise. This should have a significant impact on both Thames Water’s ability to secure the finance necessary to deliver a quality service for its customers; and meet its statutory and regulatory obligations.

Whilst Ofwat is under duty to pursue an enforcement order if Thames Water fails to comply with the proposed undertakings, there is little detail on what may happen in the event that the Equity Raise (and indeed the rest of the undertakings), though complied with in full, fail to achieve the desired outcomes.

Thames Water currently face substantial capital financing risks, operational challenges, and a poor liquidity runway. If Thames Water’s below Investment Grade credit rating is sustained, this risks perpetuating the inadequate service to customers and the environment seen in recent times, which cannot persist.

We welcome the focus that Thames Water has committed to in appointing two non-executive directors to its Board, to provide oversight to the Equity Raise. However, there is no clear timeframe provided for the appointment of these individuals. Given Thames Water has already commenced the Equity Raise with specific milestones agreed with Ofwat, this raises concerns around the decision to appoint two non-executive directors, specifically whether this is an efficient allocation of Thames Water’s resources.

If these two individuals are to have the impact desired by Thames Water, it may be prudent to limit the scope of the Equity Raise until the non-executive directors are in place. This will ensure their input is maximised, avoiding any potential misalignment in the future.

Thames Water has also agreed that Ofwat will appoint an independent Monitor, who will track and review Thames Water’s compliance to the proposed undertakings. It is expected that the Monitor will provide monthly reports to Ofwat, and where deemed appropriate make recommendations on any additional steps Thames Water should take to restore the required Investment Grade Rating.

CCW understand the merits of having an independent Monitor and we support this initiative to assess compliance with the undertakings, however we have concerns around the proposed appointment process and the reporting mechanisms.

We are concerned with the decision for Ofwat to consult with Thames Water on the identity of the Monitor, as well as for Thames Water to be responsible for the Monitor’s remuneration. Involving Thames Water in this appointment may risk creating perceived or actual conflicts of interest. These proposed arrangements risk undermining the intended independence and impartiality of this process, which is crucial at a time when customer trust in the water sector is at an all-time low.

To protect the integrity of this undertaking and ensure consumer interests are at the forefront, we recommend that Ofwat independently appoint the Monitor without any involvement from Thames Water. We also strongly recommend that the Monitor’s remuneration is not covered directly by Thames Water, and that the Monitor is remunerated by Ofwat to retain their independence.

Given the importance of these undertakings to consumers, we recommend that the Monitor actively engages with CCW on any findings during their appointment. We also recommend Thames Water’s customers are kept informed on the work of the Monitor in order to be transparent and build consumer confidence in the arrangements.