How not to run a water utility

Clashes overCPIH the water supply turned deadly in “Chinatown”, a 1970s film set in Depression-era Los Angeles. “Middle of a drought, and the water commissioner drowns,” one character marvels. The casualties in Britain’s latest water-based drama are corporate. On April 5th the parent company of Thames Water, Britain’s largest water company, defaulted on £1.4bn ($1.7bn) of debt. An elaborate and protracted restructuring looms.The list of culprits is long. One is the company’s heavily indebted financial structure. Its debt-to-equity ratio is 78%; the industry average is 68% and Ofwat, the regulator, suggests 55%. That debt is dispersed across a Byzantine corporate structure. Significantly, much of it is inflation-linked. In theory that shouldn’t be a problem; although inflation is up, water bills—the firm’s main source of revenue—are also inflation-linked. The problem is that debt payments are linked to the retail-prices index, which since 2020 has risen by ten percentage points more than , the inflation measure to which water bills are linked. Some of Thames Water’s bonds are pricing in a near-wipeout.