Letter to Steve Reed SOS
Mr Steve Reed MP
Secretary of State for the Environment, Food and Rural Affairs
23rd July 2025.
Dear Secretary of State
We note that across the news outlets you are setting out the cost of nationalising the water industry or taking it into public ownership as £100bn. This is a figure you cited in parliament on the 3 June 2025[1].
“We are not looking at nationalisation because it would cost over £100 billion of public money, which would have to be taken away from other public services, such as the national health service, to be given to the owners of the water companies. It would take years to unpick the current model of ownership, during which time pollution would get worse.” Secretary of State for Health.
You set out in your media appearances that this £100bn figure is based on the Regulatory Capital Value (RCV) as determined by Ofwat. The total current RCV of the industry comes to £107bn.[1] The figure has previously been challenged by grassroots campaign groups and as a result The People’s Commission on the Water Sector has investigated this figure in detail. We provided this information to you in our Briefing to MPs and our Final Report (Email Saturday 26th July).
The People’s Commission has found that the £100bn figure is ‘serious scaremongering and based on biased evidence’ (p30).
We set out the evidence below.
1. Flaws in the RCV valuation approach
We are sure that you must appreciate that the RCV is a highly biased figure and not in any conventional way representative of the company value. RCV is a pricing mechanism and reflects what Ofwat will allow the companies to charge in bills, and is therefore created by the regulatory structure, not simply a free market. The figure is based on a calculation of asset value in 1989, adjusted each year by capital spending and depreciation also adjusted by the RPI. It is just a measure of what has been spent on company assets and in no way does it reflect the ‘value’ of the company, in the same way as the value of repairs to a house are unlikely to result in a significant change in its selling price. RCV does not (and is not intended to) capture the costs of underinvestment by utilities, and the cost of externalities such as water pollution.
An important distinction to be made, though, is that the additions to the RCV, the increases in capital spending, are not financed by the water company owners. They come from borrowing that is repaid by water company customers. If the RCV were to be used to allocate value, it should be adjusted to take account of how much is financed by shareholders (next to nothing) and how much by water consumers (virtually the entirety of the RCV). If compensation is linked to shareholder investment in the RCV, this would then lower the cost of nationalisation to zero.
2. RCV is not market value
The RCV is considerably higher than market value. Only two companies are listed on the stock exchange, but their share price gives an indication of their value in the capital market.
(a) Severn Trent has a market capitalisation value (i.e. the value of shares currently on the stock market according to Google in July 2025) of £7.84bn, compared with the RCV of £12bn.
(b) United Utilities has a market value of £7.44bn compared with RCV of £14bn.
The market value might be assumed to be around 50% of the RCV which would take the total down to around £50bn - or considerably lower in the case of Thames Water which has a RCV of £20bn but has struggled to secure just £4bn of new investment.
But the market value also is not a fair way to value a water company as it is based on how much an investor will pay to secure profit from the income stream from water bills. The value is based on future profits to shareholders rather than the public benefit and fails to take account of company performance or how much shareholders have already taken from the assets.
People’s Commission on the Water Sector p21.
3. A fair assessment of water company value.
Water companies are not like other businesses. These are monopolies providing a resource that we cannot live without. Shareholders have been entrusted to manage this precious resource on our behalf. An evaluation of compensation needs to take account of how they have managed their responsibilities in this regard. Once account is taken of the inadequate investment in the sewage infrastructure, the dividends paid, the high debts incurred which have weakened financial resilience and the huge costs required to rectify the damage done under private ownership, the moral and economic case for compensation is weakened even further. The level of compensation payable for taking a water company into public ownership (through for example a Special Administration Regime (SAR)) is at the discretion of the government. For shareholders, it is normal that if the company has more debts than assets, they will receive nothing. The law ultimately has to ensure that a ‘fair balance’ has been struck in the public interest, [2] and in law the value of water companies is likely to be close to zero (McGaughey 2025).
Once in Special Administration it is the government that determines if it is going to provide any compensation and then it would do this based on ‘Fair Value’.
The Fair Value of the company is usually determined by setting up a Fair Value Commission as it has previously done for nationalising industries
The Fair Value Commission would assess shareholder risk (in a monopoly vital service industry with guaranteed income) and the company performance (failing) and would inevitably require compensation to be much less than shareholder investment. As we said previously in Law it could be zero.
Pension liabilities need to be guaranteed (this is at no cost to government).
The People’s Commission has found that the costs of transition to public ownership, as determined by the Fair Value Commission could not be higher than market value and is likely to be close to zero.
4. Nationalisation and government spending
The SoS has indicated that spending money on nationalising water companies would, as well as being expensive, take money away from government spending on the NHS. However, this is not the case, first, because any reasonable court would find that the costs of compensation are minimal and second, water utilities will continue to be self-financing and will pay off any costs associated with the transition to public ownership. Private shareholders are interested in owning water companies for the profit they make from the revenue streams provided by water bills. If these funds were retained within the water companies, they can be used to pay off the debts and lead to major reductions in financing costs, which are currently around 30% of water bills.
Water company debt in privatisation is expensive. PR24 (the water companies business plan for the next 5 years) is framed in terms of securing £104 bn of private sector investment (as for example by the Environment Secretary in June 2025)[3] but Ofwat has stated that this is funded by the 36% increase in customer bills, not by the private sector.[4] However, in PR24 the costs of financing debt and equity (return on capital) is increasing from £11.057 billion in the previous period, to £22.047 billion. [5] A £3bn emergency loan that Thames Water took out from a group of hedge fund creditors in January 2025 was charged at an interest rate of 9.75% p.a. These are the costs of having water in the hands of the private sector.
In future, as standalone self- financing public entities, water utilities would be able to issue bonds, attracting a significantly lower interest rate than current water company financing (currently the bond rate is half the current private sector debt payments) to refinance any temporary transition costs, which will be ringfenced and not have any bearing on the nation’s health spending.
The People’s Commission has found that the government would not need to spend less on the NHS with nationalisation.
5. The costs of running the water sector in public ownership.
Financial costs will fall substantially in public ownership:
(a) Surplus funds are reinvested. Under a public water system, surplus funds can be reinvested thereby reducing costs and promoting social equity. There are no dividend payouts.
(b) Cheaper debt. Any borrowing required would be raised by public bodies at lower cost (close to the Bank of England base rate, currently 4.25% p.a.) than commercial borrowing (Thames Water’s latest loan cost 9.75% p.a.).
(c) Costs of regulation fall as information is open and transparent, rather than hidden requiring investigations. There is no need for costly criminal investigations.
(d) Inflated financing costs disappear. Currently of every £175 spent by the water companies, £75 goes to servicing the financial overheads. In Scotland (a public model but using commercial loan principles) 13% is spent on the overhead, because borrowing is cheaper.
(e) There is no incentive to inflate costs. Currently the pricing value of water companies is linked to the spend on capital which incentivises inflated capital costs.
The People’s Commission has found that the total reduction in costs could provide more funding to address the failings of the water companies to maintain the assets they inherited.
In conclusion the People’s Commission on the Water Sector finds that refinancing of the water sector in public ownership will be cheaper than the current privatised system.
We would welcome an opportunity to discuss these matters with you and your advisers.
Yours Sincerely,
Prof Becky Malby,
Dr Kate Bayliss, Prof Frances Cleaver, Prof Ewan McGaughey
The People’s Commission on the Water Sector
[1] https://www.ofwat.gov.uk/publications/rcv-updates-models-2024-25/
[2] Lithgow v United Kingdom [1986] ECHR 8, [120].
[3] https://hansard.parliament.uk/Commons/2025-06-03/debates/F4189110-6F74-4C84-B2B4-7F5A3B632235/ThamesWater
[4] Channel 4 News Fact Check https://www.channel4.com/news/factcheck/factcheck-water-bills-in-england-and-wales-to-hit-record-high
[5] Ofwat (2024) PR 24 Final Determinations City Briefing. 19th December Available here https://www.ofwat.gov.uk/wp-content/uploads/2024/12/PR24-final-determinations-City-briefing.pdf
[1] Hansard (2024) Thames Water, volume 768, debated 3 June 2025, available here