Thames Water fined £104m over wastewater failures in landmark Ofwat investigation
Three water firms have been fined £168m for failing to manage their wastewater treatment works and networks properly, Ofwat has announced today.
Thames Water has been fined £104m, Yorkshire Water has been fined £47m, and Ofwat charged Northumbrian Water £17m.
These fines are related to the companies’ poor management of wastewater treatment works and wider sewer networks, including their operation of storm overflows.
These overflows are meant to release water only in exceptional circumstances, like heavy downpours or snowfall, to prevent sewage from flooding homes.
However, Ofwat’s findings revealed that all three companies have allowed untreated wastewater discharges from storm overflows in non-exceptional circumstances.
The discharges have harmed the environment and customers, with high spill levels linked to operational issues at treatment sites, indicating poor operation and maintenance.
The regulator said the companies had failed to upgrade necessary assets to meet local needs and were slow to understand and comply with pollution control obligations.
The breaches varied in scale between the companies. Alongside the fines, Ofwat said it would also consult on enforcement orders, which could require each company to rectify these issues to meet their legal and regulatory obligations.
Ofwat said it will ensure customers are not double-charged for additional maintenance costs.
‘A catalogue of failure’
Ofwat’s chief executive, David Black, said that the organization had “uncovered a catalogue of failures” by the water companies in managing their sewage works, leading to excessive spills from storm overflows.
“Our investigation has shown how they routinely released sewage into our rivers and seas, rather than ensuring that this only happens in exceptional circumstances as the law intends.
“The level of penalties we intend to impose signals both the severity of the failings and our determination to take action to ensure water companies do more to deliver cleaner rivers and seas.
“These companies need to move at pace to put things right and meet their obligations to protect customers and the environment. They also need to transform how they look after the environment and to focus on doing better in the future.
“Looking to the future we want transform companies’ performance under our new price control that starts in April next year, so we reduce spills from sewage overflows by 44 per cent by 2030 compared to 2021 levels.”
There has been cross-party support for Ofwat’s decision to fine the three companies, with environment secretary Steve Reed saying he “welcomes the decision” to crack down on the “unacceptable destruction of our waterways”.
He said: “This government will fundamentally reform the water sector. We have announced our first steps to clean up the water industry in our Water (Special Measures) Bill, to cut sewage pollution, protect customers and attract investment to upgrade its crumbling infrastructure.
“We will outline further legislation to transform and reset our water industry and restore our rivers, lakes and seas to good health.”
Liberal Democrat environment spokesman Tim Farron agreed, and added: “After years of inaction and failure under the last Conservative government, it is welcome to see the regulator finally impose proper fines.
“This should only be the start if these polluting firms are to clean up their act. We now need a ban on bonuses and an end to bumper profits in the industry.
“Sadly this is all a game of catch up after Conservative Ministers turned a blind eye to this environmental scandal.”
Liberal Democrat MP for Richmond Park Sarah Olney said: “For years under the last Conservative government, Thames Water was allowed to get away with polluting our rivers with filthy sewage. It is therefore welcome to see they are finally being held to account for their actions.
“However, this should just be the start. We now need a ban on bonuses and an end to huge profits for polluting water companies – forcing them to clean up their act and end this sewage crisis for good.
Thames Water’s £15bn debt bill
Thames Water has been grappling with significant financial challenges for years as it hunts for vital investment to address its mountain of debt.
Last month it said that its liquidity at the end of June was £1.8bn, “sufficient to fund our operations for the next 11 months”.
The utility giant also revealed that it was due to run out of money by next May. Efforts to secure additional investment from existing shareholders have failed due to the company being labelled “uninvestable.”
Much of the more than £15bn it owes was accumulated while it was owned by Macquarie, the Australian infrastructure bank, which sold the utility in 2017.
Analysts estimate Thames Water’s debt to be around 80 per cent of its enterprise value, making it the most heavily leveraged water company in England and Wales.
Compounding its difficulties, more than half of Thames Water’s debt carries interest rates that rise with inflation, exacerbating the financial strain amid recent high inflation rates.
A company spokesperson stated that any redress must be “deliverable, affordable, and financeable” to effectively address the issues and that Ofwat “may decide to impose a reduced or no financial penalty” if the company could commit to taking “appropriate measures to secure compliance”.
They added: “We take this matter very seriously and have cooperated at every stage of Ofwat’s investigation.
“We regard all untreated discharges as unacceptable, even when they are permitted, and are taking action to improve the health of our rivers as a key area of focus and investment.”
Danni Hewson, head of financial analysis at AJ Bell, said that this latest fine would “ratchet up the pressure on the water company, with the negative press associated with Ofwat’s findings likely to make it even harder for it to attract investment.
She added: “The chunky fine announced by Ofwat today comes with more bad publicity, which is rather awkward for a company scrambling to persuade potential investors that the utility is investible despite being bogged down in debt.
“Then there’s the fact that Ofwat is also considering other breaches, meaning this fine might not be the last Thames Water has to swallow.”
Is a breakup needed?
In an interview following the announcement, Ofwat boss David Black Times Radio that Thames Water should ‘look at the potential to break themselves up’ following the regulator’s proposed penalty.
Speaking to Dominic O’Connell, he said: “We do think there are benefits from exploring different structural options. And so we’ve set out in our draft determination that they should look at the potential to break themselves up.
“We see two key benefits of that. One is it might bring more operational focus to the business. They’re a very large water company. They’re the largest in England and Wales, but also it would allow them to access financial markets more easily.
“That said, it’s not a quick solution. So a breakup would take some years.”
The regulator also said that it thinks Thames Water does not currently qualify for special administration: “We have assessed Thames’ situation against that legal framework. And we do not think at this point that they would qualify for special administration. It is a matter that we’ll keep under review.”
Water companies ‘disappointed’ with decision
Thames Water is not the only water company facing financial difficulties. Yorkshire Water has been struggling under the weight of more than £6bn worth of debt, while Northumbrian Water contends with a reported £3.5bn.
A Yorkshire Water spokesperson said the company takes its “responsibility to protect the environment very seriously” and that it wanted to reassure the public that it had “already taken considerable action to improve”, including work at 10 storm overflows.
However they added that Yorkshire Water was “disappointed” with Ofwat’s response to the investigation.
Northumbrian Water echoed this sentiment. A spokesperson said: “We are very disappointed by Ofwat’s decision to impose a penalty in respect of its flow to full treatment investigation and don’t recognise some of the standards of compliance that Ofwat is enforcing.
“These are a departure from its previous practice and appear inconsistent with those of the Environment Agency and the government and with Ofwat’s own practice in the past.
“We’re working really hard to continue to deliver for customers and the environment and will continue to comply with and exceed government regulations.”