Outlook: Water bunkum

ONE BY one, the various strategies proposed by water companies for coping with the regulator's promised price cuts are bobbing to the surface.

Poor old Hyder, the owner of Welsh Water, is sinking so fast under its debts that it has pressed the nuclear button and warned that a one-off cut remotely approaching 15 per cent will put it in breach of its banking covenants. Thames is telling the Government and anyone else who will listen that if the regulator soaks the industry in the way he threatens to then the quid pro quo must be a dismantling of the barrier on water company mergers.

Now Severn Trent's Vic Cocker has jumped in by unveiling plans to double the size of its non-regulated business to pounds 1bn a year, thereby reducing its dependence on water and sewage services.

Severn Trent is better placed than many to survive the double whammy of swingeing price cuts and a rising tide of expenditure on environmental improvements. Being landlocked it does not have hundreds of miles of coastline to worry about and, although its territory includes the longest river in the country, even the fish are complaining that Trent water is too clean for comfort.

Fortunately for shareholders, the company was saved from overstretching itself by being blocked from buying Wessex Water. The result is that Severn Trent's dividend and interest cover ought to withstand the worst the regulator can throw at it.

The decision to seek salvation overseas is not so encouraging. As countless other utilities, from National Power to Thames itself can testify, diversification and overseas expansion is rarely the panacea it is cracked up to be. As an antidote to executive boredom, it no doubt has its uses, allowing a jet-setting lifestyle for top managers, big expenses and, until the shareholders catch up with you, an open cheque book for extravagant acquisition making. But that's about it.

Investors and customers alike will thank Mr Cocker more if he sticks to his knitting and concentrates on improving operational efficiency in his core monopoly business.

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