Water regulator turns off the dividend tap

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The trickle-down effect, as applied to utility regulation, looks like having a particulary nasty impact on the water industry even though the City did not quite seem to take it on board yesterday.

Where Clare Spottiswoode of Ofgas and Stephen Littlechild at Offer have already gone, Ian Byatt at Ofwat has decided to follow. Yesterday he duely spelt out what the water companies have seen coming for months which is why they have been splashing out cash on dividends with an abandon that borders on desperation. The party is finally over.

The big water and sewerage businesses hoodwinked Mr Byatt during his last price review in 1995, producing a regime which allowed bills to rise well above inflation and enabled companies to pay out huge amounts of cash to shareholders. Between 1991 and 1995 the real return in the water industry never fell below 12 per cent. Even last year it was 11.45 per cent, against Ofwat's target of 6-8 per cent. The latest round of dividend payouts has averaged more than 17 per cent. And all this in what Mr Byatt emphasised yesterday was a "low risk" industry.

The industry can kick and scream as much as it likes - and the path to the MMC is littered with corpses - but it now faces double figure price cuts from 2000 and stiff price curbs in the years that follow. This is worse than anything the companies had predicted and enough to slash their profits by perhaps as much as 20 per cent. In short, Mr Byatt is going to "do a Spottiswoode," replicating the attack on British Gas which so publically backfired on the company last week.

But the outcome for water could be worse than in gas, or the electricity grid. In the latter cases the regulators argued today's consumers were paying through the nose for tomorrow's investment programmes which most likely would cost a lot less. Yet the water industry now faces a continued massive investment commitment and price cuts on top.

Should the companies try to make the most of the present lenient regime by continuing the dividend party, they will be clobbered harder in the next one. If the regulator gets his way - and he undoubtedly will with strong policital support - then in three years' time the industry is going to have quite a hangover.

Railtrack escapes head-on collision

Meanwhile in another part of the forest the Fat Controller was making up with the rail regulator. Sir Bob Horton is not best known for flinching from a fight. But even he can see that when a runaway train is coming down the track the sensible thing to do is jump aside and then get on board again when it has slowed down.

The agreement Railtrack reached yesterday with John Swift QC is not the total climbdown the enemies of rail privatisation would like to depict it as. On the other hand, Railtrack has been left in no doubt who Mr Swift thinks should be in the driving seat.

To recap, Mr Swift had threatened to pack Railtrack off to the Monopolies Commission unless it agreed to amendments in its licence allowing the regulator to set mandatory targets for meeting its 10-year pounds 16bn investment programme.

Sir Bob replied, not unreasonably, that it was Railtrack management and not the regulator who were paid to exercise their commercial judgment as to what investment was needed and where. With a regulator breathing down its neck, it might indeed spend the sums allocated annually but it would not necessarily be good investment. Why spend pounds 100 when you can get the job done for pounds 80?

The solution the two sides have come up allows each to claim a small victory, even though the strangulated prose of their joint statement is hardly an aid to comprehension. Railtrack has agreed that if it does not deliver on its investment programme then the regulator can penalise it. How well or badly it is performing will not be measured in terms of "input" - the amount invested - but by what sort of output it delivers - by which they mean trains that run on time and as advertised.

In return, the regulator has agreed that by amending Railtrack's licence he will not be imposing another layer of bureaucracy or putting himself in a position to second guess its judgement. The practical effect on Railtrack will be to toughen its investment programme - not just over the remaining four years of the current price control but over a 10-year period. That means more pressure on shareholder returns. It could have gone to the MMC to argue the point. But frankly with the lesson of British Gas still fresh in the memory, that would have been about as sane as standing in the path of an oncoming express.

NatWest's troubles are not over yet

NatWest Group will be hoping it has finally drawn a line over a truly horrible period in its affairs with its statement yesterday detailing what action is being taken over the options mispricing scandal. But having had its weaknesses so embarrassingly exposed first by the options fiasco, then the profits warning, and finally the failed merger talks with Abbey National, it may not be that easy.

The three page statement released yesterday was hardly the fulsome "independent report" or mea culpa on the affair we had been led to believe it might be. If this sets the tone for dealing with City scandals, what hope is there that Hambros will publish the results of the Norton Rose inquiry into the CWS affair? Not much seems to be the answer.

To be fair on NatWest, there are plainly good legal and commercial reasons for not publishing the findings in full. With regulators pushing full steam ahead with disciplinary action and the possibility of criminal proceedings, NatWest has plainly been constrained in what it could say.

Nor does it want to make itself a laughing stock by disclosing in all its embarrassing detail the full story of how Kyriacos Papouis duped his superiors.

All the same, by leaving so many questions unanswered, NatWest is falling a long way short of offering the reassurance customers and shareholders require that all is now fine on the ranch.

The rotten apple and the people who controlled him have been removed, systems of control have been strengthened, and new top management has been installed. But it's clearly going to take some while to eradicate the culture of disregard that allowed this to happen.

As for NatWest Group more generally, the underlying structural problem remains much the same. NatWest Markets is not big, strong or cohesive enough to play with the big boys, nor has NatWest's British retail banking operation been able to reinvent itself in the same way as Lloyds and Barclays

In both market places, investment banking and retail banking, NatWest is in danger of being marginalised. The trials and tribulations of NatWest are by no means over yet.

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