Thames said it needs a return of at least 5.7% to attract new equity into its business. — Bloomberg
LONDON: The UK water regulator is for the first time considering boosting returns for investors, after the crisis at Thames Water pushed up the cost of borrowing across the industry.
Under current plans proposed by Ofwat, equity investors will get a return of 4.8% for the next five-year price control period that starts in April.
But the rising cost of debt means the regulator may need to relent on allowed returns, according to a person familiar with the matter.
Thames said it needs a return of at least 5.7% to attract new equity into its business.
The heavily indebted utility is desperately seeking new investors to provide as much as £3.3bil to fix chronic leaks and sewage spills before it runs out of money next year.
Until now, Ofwat officials have privately maintained that its proposed return for investors is generous enough, and is at the upper end of recommendations by analysts.
But in making its final ruling, currently due Dec 19, Ofwat must consider market conditions as well as the arguments put forward by stakeholders.
Since its draft determination in July, the cost of debt has soared.
In recent months, Yorkshire Water, Anglian Water and Welsh Water have all borrowed at rates higher than Ofwat has currently factored in, a sign that contagion risks after the default of Thames’ parent company have already started to materialise.
That means Ofwat may need to raise the allowed return in its final determination, said the person familiar, who asked not to be named discussing commercially sensitive matters.
In line with previous price reviews, Ofwat is also expected to raise the amount that companies can charge customers and invest, compared to its draft determination in July, the person said. — Bloomberg
