The UK’s biggest water company has been fined £18.2m for “unjustified” dividends which the regulator said broke shareholder payment rules.

Thames Water has been hit with the penalty by water regulator Ofwat over the combined £195.8m in dividends paid to shareholders in October 2023 and March 2024.

It’s the first time Ofwat has used such enforcement powers to ensure firms link shareholder payments to their company performance. The powers came into effect in May 2023.

As well as the fine, £131.3m in dividends will be clawed back by Ofwat as it said Thames Water “failed to consider” the wider impact of the dividend issuance.

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The regulator said Thames Water breached obligations under its licence condition.

Since the water company’s credit rating dropped below investment grade in April it has been unable to make further dividend payments without Ofwat’s approval.

The announcement is intended to serve as a warning to other water companies, Ofwat said.

Its chief executive David Black said: “Ofwat’s £18m penalty and clawing back the value of £131m in unjustified dividend payments is a clear warning to the whole sector: We will take action against companies who take money out of these businesses, where performance does not merit it.”

Thames Water said it took its licence obligations “very seriously”, “including those relating to the declaration and payment of dividends,” a spokesperson said.

It said it only made the payments after considering “the company’s legal and regulatory obligations”.

What’s going on at Thames Water?

Thursday’s penalty was the latest in a series of fines for the troubled utility. In August it was slapped with a £104m levy for sewage discharges. A year earlier in July 2023 it was fined more than £3m after admitting to polluting rivers.

Thames Water has found itself in a perilous financial position and this week won High Court approval to pursue a £3bn emergency loan.

If approval had not been granted Thames Water said it would run out of cash by 24 March and would likely be pushed into a government-backed special administration regime, a form of state ownership.

The penalty comes on the same day all English and Welsh water utilities had their business plans for the next five years agreed.

Average water bills will increase by 36%, equivalent to an extra £31 each year, and an investment of £104bn.

How much bills will increase depends on where you live and the settlement agreed for each local supplier.

Ofwat said it did “not at all” consider Thames Water’s financial position when making its bill rise and investment determination.

Average water bills in England and Wales will increase by 36% over the next five years, the water regulator Ofwat has said.

The rise is equivalent to an average extra cost of £31 per year.

Water companies had asked for an average rise of 40%.

The regulator’s draft determinations issued in July said bills would rise by an average of 21% up to 2030.

It comes as almost 60,000 homes across Hampshire are without water because of a “technical issue” at a Southern Water supply works.

Southern Water customers will experience the biggest rise in the cost of bills of all eleven water and wastewater companies – a 53% hike. The company had sought an increase of 83%.

Customers of Wessex Water will have the lowest, 21%, bill rise.

The 16 million customers of the UK’s biggest water company Thames Water will see bills become 35% more expensive, below the 53% increase requested by the utility.

By 2030 a typical annual bill will cost £588.

Paying the most every year in five years’ time will be Dwr Cymru customers, with an average annual bill of £645.

Why are bills going up?

Bills are going up as the utilities face a range of problems – including higher borrowing costs on large levels of debt, creaking infrastructure and record sewage outflows into waterways.

Ofwat has now agreed to investment plans by the water companies. Funding this investment is another reason bills have been allowed to rise.

The regulator has approved £104bn in funding, above the £85bn agreed with firms in Ofwat’s draft determination but just below the £108bn the companies wanted.

Higher bills will not solve the financial woes at some of the utilities, including Thames Water, which this week won court approval to pursue the next phase in securing a £3bn emergency loan.

If approval had not been granted Thames Water told the High Court it would run out of cash by 24 March and would likely be pushed into a government-backed special administration regime.

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Ofwat chief executive David Black said: “We recognise it is a difficult time for many, and we are acutely aware of the impact that bill increases will have for some customers. That is why it is vital that companies are stepping up their support for customers who struggle to pay.

“We have robustly examined all funding requests to make sure they provide value for money and deliver real improvements while ensuring the sector can attract the levels of investment it needs to meet environmental requirements.”

The US central bank has announced an interest rate cut, just hours before the Bank of England is tipped to refrain from following suit.

The Federal Reserve cut its main funding rate by a quarter point to a new target range of 4.25%-4.5%, as markets had expected, but signalled that future reductions would happen more slowly.

A resurgence in the pace of inflation is a big worry, with the prospect of new trade tariffs under Donald Trump from 20 January also risking a leap in the pace of US price growth in the New Year as imported goods would cost more.

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Data on Tuesday showed resilient consumer spending among other reasons for Fed policymakers to be wary of inflation ahead.

The Federal Open Markets Committee expected two rate cuts in 2025. Market expectations had been for four just weeks ago, in line with the Fed’s September guidance.

Fed chair Jay Powell told reporters solid growth, improved employment and progress in the battle against inflation meant the central bank was in a “good place”.

But he acknowledged that “policy uncertainty” relating to the incoming Trump administration was a concern for the inflation outlook among some of the committee’s membership.

“We just don’t know very much at all about the actual policies, so it’s very premature to try and make any conclusion”, he added.

Government bond yields, which reflect perceived future interest rate paths, ticked upwards.

The dollar found support, gaining 0.5% against both the pound and euro, while major US stock markets retreated.

The Fed’s rate decision was announced just hours before the Bank of England gives its own rate verdict.

No cut is expected while financial markets are expecting a similar message on the possible interest rate path ahead.

UK yields – the effective cost of servicing government debt – have moved sharply higher this month, with the gap between British and German 10-year bond yields rising to its highest level in 34 years earlier on Wednesday.

It reflects the diverging interest rate outlooks for the Bank of England and European Central Bank, which has been cutting rates consistently to boost the euro area’s economy.

The UK’s problem is that the paces for both wage and price growth have accelerated.

At the same time, economic growth has stalled.

The scenario presents the Bank with a particular challenge.

Its governor Andrew Bailey has admitted that the budget’s effect on businesses is casting the biggest question mark over the future rate path.

Worries include the extent to which firms seek to recover costs from tax hikes and minimum pay rises in the form of price rises.

On the other hand, the pressure on wage growth could be eased if firms carry out their threat to limit pay growth as a result of the budget burden.

As it stands, UK borrowing costs look set to be higher for longer, hampering the economy as they are designed to do but also driving up the government’s bill to service its debts.

While the Bank is widely expected to hold off on a cut on Thursday, financial market forecasts for a reduction in February, seen as nailed on just weeks ago, are now running at just 50% in the wake of the latest wage and inflation data.

Just two rate cuts are priced in for 2025 currently.

What the Bank has to say about the price pressures it is currently seeing will be closely scrutinised.

Commenting on the US outlook Matthew Morgan, head of fixed income at Jupiter Asset Management, said: “As it stands, the market expects only two further cuts in the whole of 2025. This is perhaps not surprising given consumer spending, policy uncertainty (particularly around tariffs) and jobs looking in decent health.

“However, we think we are likely to see [US] rate cut expectations increase next year as growth softens. The labour market is clearly cooling, inflation is softening, and Europe and China are a drag on global growth.

“Given the high inflation of the Biden presidency was very unpopular with the public, we think Trump will be wary of overdoing inflationary policies, like tariffs. Together with potential government spending cuts in the US, next year could well see positive conditions for the performance of government bonds.”