Ofwat opts for expediency. It’s time for water companies to stop bleating | Nils Pratley
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Water bill increases are at about the level most firms asked for – but not so for beleagured Southern and Thames. Water bills in England and Wales were always going to rise massively. The question was the degree. Ofwat has landed on figures that, for about three-quarters of the companies, represent roughly what they wanted in order to fund regular operations and build new projects.
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The response in the share prices of the few firms that remain on the stock market always offers the best instant guide to these hellishly complicated five-yearly regulatory determinations. On a bad day in the wider market, Severn Trent and United Utilities were two of best performers in the FTSE 100 index; Pennon, owner of South West Water, was in step in the FTSE 250.
That reaction is understandable when you look at how far the economic regulator has shifted between July’s draft version and Thursday’s final one. The total expenditure allowances for the sector – to be funded from bills – has climbed from £88bn to £104bn over the next five years.
About £7bn of the difference is explained by post-May demands from the Environment Agency that specific extra projects be added – Ofwat had no choice but to grant funding for those. The rest relates to matters of judgment on, for example, companies’ cost of capital, where Ofwat said it is “conforming to market expectations” by nudging upwards. That is a “positive” outcome for the listed trio, analysts at Barclays and Jefferies agree.
The government will be delighted, one suspects. For the bulk of water companies, including most of the unquoted ones, there is no question mark over their “investability”, the word industry lobbyists deploy to try to terrify ministers and regulators. Bondholders and shareholders will not be running for hills at the likes of United Utilities, which asked for a 36% rise in bills and got 32%, or even Yorkshire, which wanted 46% and got 41%. The size of those adjustments is normal in these price exercises.
