Regulators must not go soft on Thames Water now

Who wants to invest in Thames Water? Six parties have made proposals, said the company on Tuesday, adding that it hopes to have a financial restructuring deal on the table by the end of June. Five of the six plans involve write-downs for holders of the senior class A debt. Then came the vague – but crucial – bit. Most of the proposals “are conditional on further, and varying, regulatory support and accommodations being achieved”.

What does that mean? The company will not explain what form of “support and accommodations” it has in mind, but a natural reading says this is a plea for special treatment.

If it’s a naked attempt to bully ministers into overruling Ofwat on bills, it sounds like wishful thinking. Even for a government desperate not to see Thames enter special administration, AKA temporary nationalisation, loading even more pain on to consumers would be a capitulation too far.

The regulator’s “final determination” last December – itallowed a 35% rise in bills, rather than the 59% Thames wanted – was, as the name suggests, meant to allow no room for revision by Ofwat itself. The only route to appeal is to go to the Competition and Markets Authority, but Thames has just asked to suspend that process for 18 weeks while it talks to would-be bidders.

More likely, Thames is referring to matters outside the determination, such as financial penalties for bad behaviour. That could cover a wide sweep, taking in current regulatory investigations, possible new ones, plus fines for failing to hit investment targets in the next five years.

From the point of view of would-be suitors, it would make sense to nail down those risks before committing a penny. You don’t want to “piss away” the fresh money in fines, as one company source put in the Guardian’s report last week. Rather, it would be preferable to wrap everything into a grand settlement with both Ofwat and the Environment Agency, the other important regulator in this drama. The company could throw any yet-to-be-revealed legal risks into the mix.

That, at least, is how one can imagine such a bargain being presented. There would be talk of lines being drawn in the sand, and of clean breaks from the past. In the regulatory corner, officials could claim to have saved a fortune in enforcement costs by dealing with the investigations in one job lot.

Yet outsiders should be suspicious of behind-closed-doors manoeuvres. Transparency is next to zero. A fuzzy “accommodation” in the name of pragmatism can also be code for a regulator surrendering its ability to hold a future board of directors to account.

One should fear a cosy stitch-up to the advantage of the class A bondholders whose first motivation is to minimise their losses. They know their hit would be greater if Thames enters the special administration regime (SAR), thus they have every reason to cajole Ofwat and the Environment Agency into signing a peace deal that encourages a private sector solution.

In reality, Thames may already be beyond fiddles. The virtue of the SAR process is that it promises a properly clean break. Losses would be imposed on bondholders after a pure assessment of the cost of cleaning up the mess. Note that even some of the would-be suitors say it would be as easy for them to invest in Thames on its exit from SAR.

Regulators cannot go soft at this late stage. What’s good for Thames’s bondholders ain’t necessarily good for the poor old customers – or, indeed, for the credibility of the regulatory system.