Thames Water could appeal to the Competition Commission to demand better terms from the UK’s water regulator if a review of water bills comes in too low.

The privatised company, bought from Germany’s RWE in 2006 by a consortium led by Macquarie Bank, believes it could face a credit downgrade if Ofwat estimates its cost of capital at less than 5.25 per cent.

Most analysts expect Ofwat to come in with a figure of about 4.85 per cent, in line with lower estimates from the UK’s other privatised water companies. But that may not be enough to finance Thames Water’s £5.5bn capital spending amid rising bad debts from customers and a tough credit environment, said Mark Braithwaite, chief financial officer.

“Ofwat has a duty to ensure we can finance our functions,” he said. “We have to be confident that our allowance lets us finance our core functions and capital programme. Ultimately we have the right to go to the Competition Commission.”

Ofwat will announce its five-year draft plan for prices and expenditure next month. Thames Water is bidding for a 7 per cent increase in bill costs over the next year, from £283 to £313, rising to £331 by 2014.

The company says that 60 per cent of its five-year spending programme would go on maintaining existing service levels to a growing customer base. At present, Thames provides drinking water to 8.5m people and wastewater to 13.5m.

A further 30 per cent of spending would go on new statutory obligations and the Thames Tideway project, a rerouting of London’s sewer network, while 10 per cent would go on service improvements.

In preliminary results on Monday, the utility said that pre-tax profits had risen from £419.2m to £435.1m in the year to the end of March.

But borrowing costs are expected to rise sharply, Mr Braithwaite said. The company currently borrows at a rate of 0.25 per cent above the London interbank offered rate, compared with about 2 per cent above Libor in more recent utility financing deals.

● FT Comment

Thames Water’s corporate motto – “if customers had a choice, they would choose us” – tells you all you need to know about the anomalous nature of the water sector. Customers do not have a choice and the water companies are in the same boat. Their revenues and capital expenditure are set in five-year plans agreed with Ofwat, so Thames can only raise profits by reducing its business and financing costs. The key uncertainty in the sector is over Ofwat’s price review: if it comes in low, Thames’ equity-holders will take the immediate pain, but the knock-on effect may send bond prices lower. Thames’ bond yields look attractive at 7 per cent or higher, but its most recent debt issues are rated lower than comparable ones by Severn Trent and Southern Water.

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