Thames escapes fine as leak targets are relaxed

Thames Water escaped a fine yesterday for failing to meet its leakage targets after agreeing to spend an additional £150m of shareholders' money to speed up its mains replacement programme.

The water regulator Ofwat also relaxed Thames's leakage targets for the next two years because it said the company had no chance of meeting them. Philip Fletcher, the chairman of Ofwat, denied that the regulator had let Thames off the hook and said it was likely the company would be fined if it failed to meet its new leakage target for this year.

Thames caused uproar last month when it revealed that it had missed its leakage target for the fourth year in a row, despite imposing water restrictions on customers through a drought order and reporting a 23 per cent increase in profits to £479m. Customer bills are also rising by 24 per cent between 2005 and 2010.

Ofwat said the extra £150m would be enough to replace a further 230 miles of mains on top of the 772 miles that Thames is already committed to renewing by 2010. Mr Fletcher described the additional spending, which will come out of Thames's own pocket, as "restorative justice" and said it was much more effective than a fine, which would have gone direct to the Exchequer.

"I'm interested not in gestures but a practical outcome which will benefit London," he added. "This is a better result than a fine. The money goes into the problem and it comes at the expense of shareholders, not customers." Thames had already volunteered to spend the extra £150m in an effort to escape a maximum fine of £66m, or 10 per cent of its water division's turnover. Ofwat has now converted that offer into a legally binding undertaking. It has also prevented Thames from adding the extra expenditure to its regulatory asset base and making a financial return on it at the expense of customers.

Thames had been set a target of cutting its daily leakage rate this year to 805 million litres - enough to fill 322 Olympic-sized swimming pools. Ofwat has now agreed a figure of 840 million litres. The target for next year has also been eased although Thames has been set a marginally tougher one for 2009-10 when leaks will have to be down to 720 million litres a day against an original target of 725 million.

Thames has one of the oldest networks in the country with a third of its mains dating back more than 150 years. Mr Fletcher also said that acute congestion in central and north London, the two parts of the Thames area in most urgent need of repair, made it more difficult to dig up the streets and fix the leaks.

The Federation of Small Businesses called on the Department for the Environment, Food and Rural Affairs to refuse to grant Thames its drought order until the benefits of its drive to reduce leaks had begun to show through.

The furore over Thames leakage rate could not have come at a worse time as the company's German owners RWE prepare for a £7bn flotation of the business. Mr Fletcher said the decision to sell Thames was a matter for RWE but he added that Ofwat would be watching to ensure that the sale process did not distract its management.