Comment: Returns for water investors will start to dry up

"The customer's demand is for more and more for less and less. The losers can only be shareholders"

Public relations has never been a strong point for any of the privatised utilities. The oldest of them, British Telecom, is only just beginning to get it right. After an encouraging start, British Gas has of late repeatedly shot itself in the foot. The regional electricity companies were always hopeless at it. But it is the water companies that have become this summer's hate institutions. Hit by what they insist are exceptional drought conditions, they do little to help their position with an adequate display of concern and action.

The fault is not entirely their own. The seeds of this and most recent water debacles were sown at the time of privatisation six years ago. Water companies were hedged around with a bewildering array of financial rules, regulations and general paraphenalia, in part designed to make them saleable to the City. Divorcing the state from the vast costs of meeting tough new environmental and water standards was part of the Treasury's purpose.

Privatising what was in essence a tax destined only to rise was never going to be easy. A charging system based on usage would have helped the position. However, metering is still a long way off for the vast majority of households. In the meantime most of us continue to pay a flat rate regardless of the water company's ability to deliver a standard service. In no other private sector business would this be tolerated or even remotely possible.

In the midst of it all comes the announcement and implementation by the water companies of a series of share buy-backs costing hundreds of millions of pounds. The financially literate might reasonably think of this as a wholly unconnected balance sheet restructuring which will ultimately reduce the cost of capital to water companies - the official explanation, this - but to those trying to come to terms with the industry's insistence that if it is to do anything the customer will have to pick up the tab, it looks like a quite breathtaking display of waste and arrogance.

So far the City has taken a remarkably sanguine view. Share prices have scarcely been affected. This is a public relations problem that will be solved with the first rainfall, is the general view. There are all kinds of reasons for believing this may be misplaced. Certainly it is a problem not likely to go away without considerably higher expenditure than currently envisaged. The weather may be exceptional but hosepipe bans are not. They seem to happen in one part of the country or another almost every year now.

Water companies are required by the regulator to spend sufficient to ensure that hosepipe bans do not occur more than once every eight years, that drought orders do not have to be implemented more than once every 40 years, and that standpipes need to be installed only once in 100 years.

These criteria are based on past weather patterns. It may be that these patterns are changing. In any case present levels of spending are plainly inadequate; a change in the rules looks highly likely. While in theory water companies are allowed to earn an adequate rate of return on any new investment, in practice public and political pressure is such that they may have to dig deep into their own pockets. To some extent this is already anticipated. Yorkshire Water has said it will share efficiency gains with the customer by undertaking a "discretionary" investment programme worth pounds 125m over over five years. This is over and above what the regulator already requires the company to spend. Any hope that this sort of largesse might alleviate the problem must fast be receding, however.

Though Ian Byatt, the regulator, insists that the charging regime will not be reviewed again for another five years, the customer's demand is for more and more for less and less. The losers can only be shareholders. In the long term, investors must reconcile themselves to considerably smaller returns from these businesses.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
people
News
A survey carried out by Sainsbury's Finance found 20% of new university students have never washed their own clothes, while 14% cannot even boil an egg
science...and the results are not as pointless as that sounds
News
i100
News
politicsIs David Cameron trying to prove he's down with the kids?
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

Auschwitz liberation 70th anniversary

Woman sent to three Nazi death camps describes surviving gas chamber
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea