The House of Commons EFRA Committee has published a report on the future of Thames Water which calls on Ofwat and the government to withdraw from negotiating with the L&VW consortium and urges the government to either put the company into Special Administration or to consider emergency legislation that takes control of its financial affairs before more appropriate owners can be found.

The MPs are also calling for new regulations to increase oversight of failing water companies and clearer conditions for placing a company in Special Administration, based on poor performance, in future reforms. 

According to the Committee, Thames Water has been at severe risk of financial collapse for years,

"The dire situation at Thames Water, and longstanding performance issues at other companies, have laid bare the deficiencies in the regulatory regime intended to protect water sector customers from entrenched financial instability and poor performance," the report says.

L&VW - "mostly distressed debt specialists who lack the proper investment strategies and expertise to save a major infrastructure company and protect a vital national resource"

The Committee is excoriating in its commentary on London & Valley Water (L&VW), the potential buyers of Thames Water, saying:

“We are concerned that due diligence has not been carried out on this consortium of the company’s senior creditors; their demands, however, demonstrate that they will not prioritise the swift turnaround in performance that Thames Water so desperately needs.

“Whilst keeping the company in limbo by drawing out negotiations, these creditors are simultaneously reaping millions in debt interest and fees. We have grave concerns about the creditors’ behaviour during the bidding process in which they have exercised unchecked power over prospective new owners and rescue packages. L&VW is an opaque consortium which is failing to live up to the transparency the public expects of the water sector. What we do know of its composition suggests it is mostly distressed debt specialists who lack the proper investment strategies and expertise needed to save a major infrastructure company and protect a vital national resource.

“The fact that the suspension of regulatory requirements is being considered makes it clear that it is too late for any turnaround regime to save Thames Water from the financial engineering and mismanagement that has engulfed it. After years of being loaded with debt while paying large dividends, followed by a failure to raise equity or turn performance around, it is now effectively controlled by a group of creditors whose agenda does not align with the public interest.

"Given this, Ofwat and the government should withdraw from negotiating with the consortium."

“We do not believe this opaque consortium of 100 hedge funds and others has the interests of the public, the company or the environment at heart”

EFRA Committee Chair Alistair Carmichael MP said:

“Thames Water's 16 million customers have largely lost faith in it. They are sick of seeing their waterways polluted, their bills going up, and drinking water gush through broken pavements while supplies run low.

“We believe Thames Water can be turned around, but not by giving the keys back to the people who have been joy riding in the family car. The government should reject offers from the company’s creditors in return for relief from fines for pollution and poor service. We do not believe this opaque consortium of 100 hedge funds and others has the interests of the public, the company or the environment at heart.

“This will likely see Thames Water placed in Special Administration once its money runs out at the end of the year. But this may be the only way to reset the fortunes of this company and put it on a sustainable footing in the long-term. Liabilities that the government will face in the short-term may be offset by a future sale of Thames Water once a new buyer can be found.

“It is unbelievable that the legislation as it is currently drafted apparently leaves the government unable to trigger Special Administration on performance grounds alone. We recommend strengthening the Special Administration Regime so that a future regulator can intervene earlier and with legal certainty where it sees chronic failure. A loophole that allows bondholders to take control of a water company without oversight must also be addressed. The chaos of another Thames Water-style saga must not be repeated, and steps must be taken to stop the ‘doom loop’ that besets some companies, where fines for failure compound their inability to improve and leads to increased customer bills.”

The report’s chapters and recommendations are summarised below.

Reforming the Special Administration Regime

The special administration regime (SAR) entails the government and regulator Ofwat appointing an administrator to take over management of a water company’s services if it becomes insolvent, or fails to carry out basic functions. The administrator ensures continuity of services while the company is restructured and new buyers are found. Approval from the High Court is required to appoint an administrator.

The SAR – and the potential loss to investors it entails – should be a credible threat to encourage sustainable and effective company management. But the current regulations for SAR are vague, which means that applying to place a company in SAR for performance failures alone risks a legal battle. Insolvency appears to be the only credible avenue for triggering a SAR. This allows heavily indebted companies to operate in unacceptable conditions, with atrocious outcomes for customers, the environment, and the stability of the wider industry.

The Committee recommends reforming the SAR legislation with clearer thresholds for when a water company should be placed in special administration. SAR should continue to be a last resort but Ministers and regulators should be empowered to apply SAR when thresholds are met.

The report also recommends that an insolvency SAR should be triggered earlier if key provisions of an improved Turnaround Oversight Regime, such as a direction to inject new equity, are not met.

However, the Committee cautions against a rushed reform of SAR legislation if it would be solely to address the Thames Water case. These changes should be made as part of wider reforms to the water sector.

The future of Thames Water

The Committee recommends that the government reject the proposals made by Thames Water’s creditors, London & Valley Water (L&VW), believing the priority of this consortium is to extract immediate value from Thames Water, not steer it to long-term success. MPs are also concerned about the lack of publicly available information about the 100+ constituent companies in the consortium.

Ministers should explore all potential alternative options, including SAR or fresh legislation, to draw a line under this debacle and restore stability to the sector by putting Thames Water on a sound footing for new buyers.

If the government decides that emergency legislation is required to place Thames Water in SAR, this legislation should be limited in scope so that it does not become a precedent for widescale government intervention in other companies. SAR should continue to be seen as a last resort.

Due diligence on new creditors

Current regulations only require ‘due diligence’ checks on shareholders of water companies rather than creditors such as L&VW. In addition, L&VW are not subject to some legal requirements as they have not been defined as “Ultimate Controllers”, despite being recognised as the “economic owners” of the company since Thames Water’s shareholders walked away from the business.

The Committee recommends that future regulation must recognise the control that creditors can exert over a company facing insolvency and ensure that Ultimate Controller safeguards apply to them when they become, or are likely to become, economic owners in practice. Regulators or the company should be required to carry out appropriate due diligence checks on the suitability of all prospective owners and controllers of water companies, whether they are shareholders or creditors.

Turnaround regimes

Thames Water, alongside other poor-performing water companies, has found itself in a “doom loop” of fines for poor performance compounding its problems by leaving it with less money to invest in improvements. The company will likely accrue over £900 million in penalties over the next five years.

Thames Water was placed in a Turnaround Oversight Regime by Ofwat in 2024, after the company’s shareholders cancelled their investments and withdrew from the company. This Regime involves greater monitoring and gives Ofwat the ability to challenge business plans and impose some additional customer protections if needed, but it does not change how the company is governed or regulated.

Thames Water has demonstrated that Ofwat's turnaround regime is imposed too late and has limited capacity to tackle vicious cycles of penalty and failure.

The Committee examined proposals by the Independent Water Commission to introduce a new supervisory regulator and strengthen the Turnaround Oversight Regime by giving the regulator greater powers of direction over a failing company. The Committee supports this but disagrees with the Commission’s suggestion that “forbearance”, or relief from fines, may be necessary to help a company improve. L&VW has proposed this as part of an offer for further investment and a buyout of Thames Water. This will be unacceptable to the public who will see it as rewarding failure. The report says 

"The IWC’s proposal to include regulatory forbearance in turnaround regimes is, however, objectionable. It would be loathed by campaign groups and customers, would be unfair to other companies that abide by the rules and is contrary to the ‘polluter pays’ principle. A well-regulated system would never need such a measure."

The report recommends that a future supervisory water regulator must have the power to intervene sooner when companies are beginning to demonstrate a lack of financial resilience or persistent performance issues that are not improving rapidly enough. This should avoid companies beginning a vicious cycle of penalties and chronic underperformance.

Click here to download the full report