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Water companies in England and Wales are proposing hefty increases in household bills to pay for a record £96 billion investment in water and sewerage networks.
The plans, due to be submitted to regulator Ofwat on Monday, expect electricity bills to rise by an average of £156 a year per household by the end of the decade. They cover the period 2025 to 2030 and are almost double the £51bn in the previous five-year period.
Water companies are natural monopolies, so Ofwat decided to charge customers for infrastructure maintenance and upgrades over the five-year regulatory cycle.
However, this year’s discussions will be the most fraught since privatization 34 years ago, with Ofwat needing to balance calls for investment with public anger over sewage outflows and the impact of rising prices during the cost of living crisis.
It also needs to reassure water company investors that the regulatory system is stable enough to allow them to continue financing companies, many of which have debt-laden balance sheets and require equity from shareholders.
David Henderson, chief executive of industry trade body British Water, said: “While increasing water charges are never popular… approval of these plans is necessary so that we can provide the highest quality drinking water for our growing population and secure water supplies for the future. safety and minimize the use of storm overflows.”
The proposals include £11 billion to reduce overflows; pipelines to carry water from the humid north to the south; and the construction of 10 reservoirs – none of which have been built in three decades. Ofwat has a year to review and decide on the plans.
The current average bill per household is £448, but this varies by region and is adjusted annually for inflation. Severn Trent, which covers the Midlands and Wales, has said it plans to increase water bills by 38% by 2030, or about £139 per household. Other companies, such as Southern Water, have been criticized for releasing raw sewage and heavy rains are expected to see larger rises near popular summer swimming beaches on Monday.
Ofwat chief executive David Black sought to stave off a consumer backlash by assuring households they would “only pay for future investments, not to correct past failures”.
He added: “As households struggle to cope with higher household bills, it is important that much-needed performance and investment improvements provide customers with value for money.”
He insisted regulators would hold companies to account by incentivizing delivery and imposing financial penalties on those who failed.
Environment Secretary Thérèse Coffey said: “I have made clear to the regulator Ofwat that customers should not have to pay the price for poor performance and they should use the full powers we give them on behalf of consumers.”
But there are growing concerns that punitive language and hefty fines from regulators and governments will scare away investors. The companies are saddled with £60bn of debt – up from zero at the time of privatization – and many have been demanding cash from shareholders despite few equity injections since privatization.
Dominic Nash, analyst at Barclays Research, said: “Investments in the water sector should not be taken for granted. We believe the recent announcements by Ofwat and Defra increase investor risk and may lead to investment in the sector Decrease, not increase.”
In 2020, the Competition and Markets Authority upheld an appeal by Ofwat after it rejected parts of the four water companies’ original plans. Regulators worry that these companies will be able to invest more cheaply, under a complex regulatory system that allows them to transfer some of their excess funds to shareholders, private equity funds, pension funds and sovereign wealth funds. Many experts expect the appeals process to be repeated next year.
Water campaigner Feargal Sharkey said: “The question is where did our money go? Where did it go? If they had used the cash to treat sewage and build some reservoirs, they wouldn’t be asking for it now Such a huge increase.”
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