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Ministers have agreed that Thames Water bills should rise, as they seek to persuade investors to put more money into the struggling company and prevent it sliding towards politically disastrous nationalisation.
Steve Barclay, the environment secretary, has told the company and its regulator, Offwat, that he does not want to see any relaxation of regulations that would allow Thames Water to pump more sewage into rivers.
But ministers admit something must be done to prevent investors walking away from the company after Thames Water shareholders this week ruled out a £500m equity injection.
“We are not thrilled about the rising bills,” said a government insider close to discussions with Ofwat and Thames Water. “But if you have to donate somewhere, it should be on the bills.”
Thames Water has asked to be allowed to raise bills by 56 per cent by 2030, including inflation – or around £262 per household. But the Consumer Council for Water (CCW) has warned that the increases will be unaffordable for many households, and there is a growing campaign to not pay bills.
“Thames Water customers recognize there is a need for investment, but they should not have to pay the price for Thames Water's past failures. They have already paid a high price with the companies' poor complaints record and service levels,” said Mike Kell, CCW chief executive.
Ofwat is studying its decision, with a draft ruling expected in June when the company is expected to renew its efforts to divest billions of pounds of shares from new and existing shareholders. The company needs to increase its bill to support any shareholder investment.
While Barclay accepts that customers do feel they are paying too much for water, there is also widespread anger about the state of Britain's waterways. The Liberal Democrats are putting the campaign against sewage leaks at the heart of their election campaign.
The issue will come into renewed focus on Saturday when the Oxford-Cambridge Boat Race goes ahead despite warnings of “dangerous” pollution caused by sewage in the River Thames.
Barclay met Thames Water's new management earlier this month, and colleagues said he wanted to give them a chance to turn things around. “It seems they have a plan to do this,” one government official said.
Frank Petitgas, a business adviser to Prime Minister Rishi Sunak, has taken part in discussions to find a way out of the crisis at Thames Water, as Downing Street joins efforts to try to prevent the company from failing.
Thames Water is also calling for limits on regulatory fines related to wastewater pollution and other failures, which the company claims drain cash from the company, making it difficult to turn around its performance.
Two directors, including company secretary Rachel Hambrook, resigned from parent company Kimball on Thursday in a sign of the growing distress facing the water monopoly.
Chris Weston, Thames Water's chief executive, said this week that the company was “a long shot” from temporary nationalisation, but did not rule it out, posing a big problem for Sunak in an election year.
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Margaret Thatcher privatized the water sector in the 1980s, and the forced renationalization of Thames Water would confirm in the minds of voters that it was a Pyrrhic failure.
This week, Michael Gove, the Communities Secretary, appears to have confirmed some of these suspicions. “I think for years we have seen Thames Water customers being exploited by successive management teams who were taking profits and not investing as they should have,” he said.
Neither the Conservatives nor Labor want to renationalize the sector, and they must take responsibility for rising bills and sewage leaks, or – in the case of Thames Water – become responsible for delivering water and sewerage services to millions of customers.
“Spending billions of pounds on nationalizing things is not against our fiscal rules,” Rachel Reeves, the shadow chancellor of the chancellor, said last year.
A government spokesman said: “We are preparing for a range of scenarios across our regulated industries, including water, as any responsible government would.”
However, Labor has promised to give Ofwat powers to block the payment of any bonuses until water managers “clean up their filth”, the party said, adding that executives who oversaw repeated breaches of the law would face criminal charges.
An analysis of NHS hospital admissions linked to waterborne diseases, including dysentery and Weil's disease, has risen by almost 60 per cent since 2010, Labor said on Friday.
