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.Reuse content