Thames Water’s dividend policy came under fire in the House of Lords yesterday as peers debated the costs to the consumer of the Tideway Tunnel.

Labour peer, Lord Berkeley, who tabled the question, claimed that if Thames had paid “a reasonable dividend appropriate to a utility for the past 12 years and [majority owner]Macquarie Bank had not taken £48 million a year on management fees,” the project could have been funded out of Thames Water’s assets without any extra charge to the customer.

The £4.1 billion ‘supersewer’ project is estimated to have an average maximum annual impact on Thames customer bills of £70 to £80 at 2011 prices. The increases will come into gradual effect from 2014 onwards with the maximum impact estimated from around 2019.

Lord Stoddart of Swindon said that despite the project being known about for decades, Thames Water has paid out £3.5 billion to shareholders. He suggested that Thames did not pay any dividends for the next 10 years to cover the costs of the Tunnel.

Lord de Mauley, Parliamentary Under-Secretary of State for Defra, replied that this was an “interesting suggestion” but the standard model in the water sector is for customers to pay the financing costs.

“I do not think that we would find investors if we were not able to finance it in this way,” he said.

Lord Berkeley also called on the minister to instruct Ofwat to look at the financing of the Tideway Tunnel again and to look at alternatives such as sustainable drainage systems “so that customers can perhaps get a reduction in their fees rather than this horrendous increase.”

The minister replied that the ring-fence licence conditions on Thames Water include a condition requiring Thames Water to ensure that its dividend policy will not impair the company's ability to finance its functions, while alternatives to the Tunnel have been examined but “none has shown a viable cheaper solution that would simultaneously address the current sewer overflow problems within a decade, deliver value for money and meet environmental objectives.”

Lord Knight of Weymouth contributed to the debate with his backing of the project but shared Lord Berkeley’s concerns over the cost to the consumer. He asked Lord de Mauley how he would ensure that there was proper parliamentary scrutiny of the funding vehicle, which has now been guaranteed by the taxpayer.

De Mauley replied: “Anything that needs to come to Parliament will, of course, do so. If there is anything else that the noble Lord and I think it would be appropriate to debate, we will put it up for debate.”

Thames denies £48m management fee paid to Macquarie

Thames Water has refuted the peers’ claims, saying the figures quoted in the Lords are wrong.

It stated:

"The management fee paid by Thames Water to Macquarie is around £3.5 million a year, not £48 million as Lord Berkeley claims".

A spokesman said:

"A total of £2.6 billion has been paid to shareholders over the past 10 years (since April 2002), not £3.5 billion as claimed by Lord Stoddart." He added that Thames Water had paid £1.4 billion of dividends since December 2006.