The company, which yesterday reported a 6 per cent increase in taxable profits, said it was facing an additional pounds 1bn spending between 1995 and 2000 because of new EC standards for water and sewage.
At the time of its flotation, the company expected to spend pounds 2bn in that period to bring water and sewage standards to EC levels. It will now have to spend pounds 3bn.
Domestic water charges could double to an average pounds 300 a year to meet the additional standards. Without the extra expense, Thames's prices, which are the lowest in Britain, are expected to rise to about pounds 200 a year by 2000.
Under a pricing formula agreed at the time of privatisation three years ago, Thames was allowed to lift water prices by 4.5 per cent above inflation every year until the end of the decade. But the additional costs mean that prices may have to go up by 8.5 per cent above inflation, it said.
The formula - known as the K factor - is to be reviewed by Ofwat, the consumer watchdog, in 1995. It is understood to be demanding a cut in the K factor for most companies to about 2 per cent above inflation, but most water companies are resisting the move.
Mike Hoffman, Thames's chief executive, said: 'We would would like the original price profile agreed at the time of privatisation to be retained for the full 10 years. That will also enable us to meet most of the new requirements.'
In addition, the company is calling for more flexible legislation so that it can phase its capital expenditure over a longer period. Thames said this would enable it to control the level of price increases.
However, Mr Hoffman rejected recent calls for water companies to borrow much more than their prospectus forecasts to pay for the rising environmental costs. 'We are not going to roll over and pile up our debt,' he said.
The company, whose chairman, Sir Roy Watts, was found dead in the Thames last month, reported that taxable profits increased from pounds 236m to pounds 251m in the year to 31 March on turnover up 16 per cent to pounds 1.04bn.
Earnings per share rose 8 per cent to 59.3p. The total dividend was lifted 9 per cent to 21p a share.
The results reflect an interest charge that has more than tripled to pounds 31m on borrowings up from pounds 327m to pounds 518m, equivalent to a third of net assets.
Thanks to continuing high capital spending, the group's net debts are likely to jump by another pounds 100m this year. But London's water ring main, designed to improve water supplies at a cost of about pounds 400m, is expected to be completed this year, 21 months ahead of schedule.
The company's non-core operations were hit by recession, with taxable profits dropping from pounds 6.4m to pounds 2.8m. However, Thames said the business was capable of making annual profits of about pounds 20m on total sales of pounds 300m over the next few years.
The shares closed 2p lower at 504p.
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