Outlook So, raise a glass of H2O to Ofwat if you're the household bill-payer. The water industry regulator's unexpectedly tough line on the next round of price increases should mean savings for customers of most water suppliers. On the face of it, however, the determination is not such good news for water companies, particularly those with higher levels of gearing, and the market sent the listed utilities into a spin, assuming the worst about their future dividend policies. Logical enough if you think this is a zero-sum game where a victory for customers is a defeat for shareholders.
Still, all is not yet lost. For one thing, Ofwat's announcement yesterday was provisional – the final verdict on pricing will come in November, and the regulator does have a history of backing down in the face of hostile campaigns over pricing from the water sector. Some in the industry are already talking of complaints to the Competition Commission should the regulator stick to its guns.
Moreover, Ofwat itself has said its figures are based on an assumption that the economy will recover after a year of recession – the downturn is hitting the sector's revenues, particularly from corporate customers – but it will review the determination should its prognosis prove over-optimistic.
It is possible that Ofwat's verdict on allowed cost of capital – 4.5 per cent versus the 4.6 to 5 per cent companies had asked for – could have a negative effect on the credit ratings of the more heavily indebted water businesses, though in most cases the agencies say there is some room for manoeuvre on their assessments.
On the plus side, the water sector retains some major advantages over other utilities: it has not been vulnerable to political interference, the investment outlook is clear, and its access to long-term debt remains good, despite fear about rating downgrades. Moreover, at some companies, as Ofwat itself points out, there is clearly room for efficiency improvements, with the standard of performance across the sector far from uniform to say the least.
As ever in a negotiation process, water companies felt obliged to ask Ofwat for more than they had a right to expect, particularly since the regulator has in the past been attacked for being too soft on the sector. In an era of low inflation and concern about household finances, for example, Thames Water was never going to get agreement for the 17 per cent price rise it wanted to impose.
It is possible that we will see some trimming of dividends (the consensus is that shareholders in United Utilities and Severn Trent are the most vulnerable), but the fact that both water companies and consumer groups yesterday had complaints to make about Ofwat's determination tells you that the regulator probably got the balance about right this time.Reuse content