New water watchdog plans to shake up industry's structure

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Fresh moves to restructure the water industry are in prospect after a clear signal from the new water regulator that he is in favour of separating the ownership of assets from their operation. Such moves could see some companies no longer keeping a listing on the stock market.

Fresh moves to restructure the water industry are in prospect after a clear signal from the new water regulator that he is in favour of separating the ownership of assets from their operation. Such moves could see some companies no longer keeping a listing on the stock market.

Speaking for the first time since taking over as head of Ofwat in August, Philip Fletcher said that allowing water companies to put the operation of their networks out to tender could be the best way of introducing competition into the industry.

Mr Fletcher's predecessor, Sir Ian Byatt, favoured direct competition between water companies, whereby one supplier develops water resources in another supplier's area and then uses its pipes to supply customers. The practice is known as "common carriage."

However, Mr Fletcher said: "I think we will see more change in the next few years as a result of restructuring rather than through common carriage and direct price competition."

In his last act before retiring, Sir Ian blocked proposals by Kelda to sell the assets of Yorkshire Water to a customer-owned, debt-financed mutual company which would then have contracted the management of the network back to Kelda.

Mr Fletcher said that he fully supported Sir Ian's decision on the grounds that Kelda's proposals were too risky for Yorkshire Water's customers. But he said he was open to other suggestions as to how water companies could be restructured so that their utility operations were no longer equity-funded and owned by shareholders.

"I await with interest developments in this field," he said, adding that several proposals had already been put to him.

These include new capital structures whereby conventional equity is replaced by debt and preference shares and the incentive for managements to perform comes from the debt ratings given by credit agencies rather than the returns demanded by shareholders.

Mr Fletcher ruled out any further consolidation among water companies saying that the number of suppliers had already fallen from 39 at the time of privatisation 11 years ago to 24 now. He added that there were only 10 large water and sewage companies. "It is very important that I don't lose comparators and as we only have 10 water and sewage companies that is quite a small number to ensure benchmarking between them."

But Mr Fletcher said the idea of developing regional water grids or even a national grid, an idea proposed by the British Waterways Board using its network of canals, could be a "third force" in improving competition within the industry.

He said he supported the idea of extending the licensing system so that new entrants would be required to have a licence to use the pipes of an incumbent water company. The water industry has raised the spectre of supplies being contaminated unless there is rigorous control of companies entering the market and applying for abstraction licences.

Talks are under way between Ofwat, the Environment Agency and the Drinking Water Inspectorate over how best to introduce more competition into the industry without compromising safety.

Mr Fletcher's predecessor clashed with the Environment Agency over his insistence that efficiency gains should be handed back to customers in the form of lower bills rather than used to further raise environmental standards.

However, Mr Fletcher said he had no plans to embark on a fence-mending exercise with other regulators, saying that his relationship with them would continue to be "robust".

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