Ofwat Raises Alarm Over Financial Health of Key Water Companies in South East England

The water regulator responsible for overseeing England and Wales has sounded the alarm over the precarious financial situations of companies that supply water to over 20 million customers in the southeast of England.

This comes against the backdrop of growing public discontent with the water industry's track record on service quality and pollution.

In its latest report on the financial resilience of the sector, Ofwat has once again identified Thames Water, Southern Water and SES (Sutton and East Surrey) Water as companies urgently requiring action to secure their long-term financial stability.

Furthermore, the regulator has also expressed concerns about the financial health of South East Water, which serves approximately 2.2 million customers.

Consequently, South East Water has been added to the "requires action" category, reserved for companies with the lowest financial resilience scores in the industry. The inclusion of South East Water in this group means that the company will be subject to increased scrutiny and regulatory oversight.

Ofwat's decision to include South East Water alongside Thames, Southern and SES underscores the magnitude of the financial challenges faced by these water suppliers. Notably, South East Water has come under scrutiny for allocating more resources to dividends and servicing its substantial debt over the past two years than investing in essential infrastructure improvements.

A study conducted by the University of Greenwich revealed that the company spent £232 million on distributing dividends and servicing its debt between March 2020 and March 2022. In stark contrast, only £179.8 million was allocated to upgrade infrastructure, encompassing critical projects such as pipe replacements and water supply enhancements.

South East Water primarily serves customers in Kent, Sussex, Berkshire and Surrey and the company's operational practices have come under heavy criticism during the summer. During this period, around 6,000 households were left without access to running water for up to a week.

South East Water attributed this crisis to the increased prevalence of remote working, which resulted in a surge in water demand. The company was compelled to implement a hosepipe ban, a measure that underscored the pressing need for infrastructure improvements.

The inclusion of South East Water in Ofwat's "requires action" category signifies the regulator's concerns about the company's "increased financial pressures" in conjunction with a noticeable decline in its operational performance.

David Black, the chief executive of Ofwat, emphasised the regulator's expectations for water companies to maintain a level of financial flexibility that enables them to navigate periods of economic volatility and fulfil their commitments to both customers and the environment.

Black stated: "Where we have seen cause for concern, we have also seen some companies responding to the challenge and we expect them to continue to work on improving their financial resilience."

Interestingly, some water companies have successfully responded to the regulator's concerns and have taken tangible steps to enhance their financial stability. Notably, Yorkshire Water and Portsmouth Water, which were categorised as requiring action by Ofwat last year, have made significant progress.

They have successfully transitioned out of the lowest category of financial resilience, marking a commendable shift in their operational practices. Ofwat expects that other companies in the industry will follow this trend and will continue to closely monitor their efforts to bolster financial resilience.

In light of Ofwat's latest report, it is evident that the financial health of water companies in the south-east of England remains a matter of significant concern. The overarching goal is to ensure that these companies are equipped to withstand financial challenges while concurrently delivering reliable, high-quality services to their extensive customer base.

The regulator's actions underscore the importance of striking a balance between financial stability and operational excellence in the vital water supply industry. This balance is crucial not only for the well-being of customers but also for the protection of the environment.

The coming months will be crucial as these companies grapple with the imperative to secure their financial futures while upholding their commitments to the communities they serve.