James Moore: Water boys the winners with Ofwat?

Friday 27 November 2009 01:00 GMT

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Louise Thomas

Louise Thomas


Outlook Northumbrian Water's response to Ofwat's final decision on how much it can squeeze out of its customers over the next five years was a really quite outstanding piece of corporate verbal diarrhoea which said absolutely nothing.

Imagine Sir Humphrey had been born in the North-East and then read this statement from John Cuthbert, the chief executive of Northumbrian Water: "The proposed price limits are just one part of a detailed pack of information provided by Ofwat. The board need to consider the detail carefully before reaching a conclusion on the final determination and the board will make an announcement in due course."

What Mr Cuthbert and his mates were saying in private last night was probably something rather different. It's not exaggerating too much to think it may have been something more along the lines of: "Hooway the lads from Ofwat. Cheers"

That's because they will be able to increase prices, and quite sharply, over the next five years. The average cut in household water bills of £3 that Ofwat is demanding across Britain by 2015 masks some sharp variations between different companies. Northumbrian, on the face of it, has done particularly well.

But it's a fair bet that even Mr Cuthbert's colleagues at the quoted water companies that will have to cut bills won't be drinking their own product when they finally get out of the office tonight. They are more likely to indulge in something chilled and fizzy and French given Ofwat's initial findings which were far less generous and threatened to blow holes in the balance sheets of the weaker companies.

No more worries about that. The market told its own story with investors apparently delighted with the outcome. On a bleak day for shares, with events in Dubai sending the FTSE 100 into a pronounced tailspin, the reputation of the utilities as a safe haven in troubled times was enhanced. There were only three risers on the blue chip index yesterday and two of them (Severn Trent and United Utilities) were water companies.

No doubt there will be lots of back-slapping and well done old chaps when the water boys hit the investor roadshow circuit following the recent round of results statements. The industry's intensive lobbying campaign will be hailed as a stunning success, and shareholders will most likely be told that talk of dividend cuts and rights issues is now almost certainly just that.

Leave it to the obligatory trade association to gnash its teeth and wail about the unfairness of it all. Water UK is clearly happy to be playing the villain in this pantomime, whinging that investment over and above what has been agreed with Ofwat will now be "difficult" and that leakage programmes may have to be curtailed.

Well, Water UK would probably have said something similar had Ofwat caved in and allowed its members to charge double.

Interestingly, though, the Consumer Council for Water was rather more positive, awarding the settlement "seven out of 10" despite the apparent climbdown by the regulator. Which suggests that, actually, the watchdog may have played a rather good game.

It will probably take months, if not years, to work out who has really won this particular game of water polo. The devil lies in pages and pages of densely worded detail.

But Ofwat used the tactic of setting the industry up for a brutal settlement with its initial proposals. They called for an average cut in household bills of £17 and were described even by the consumer council as "probably unrealistic".

But, then, in appearing to listen to the industry's objections and coming back with something a good deal less painful, it has won a decent settlement for consumers and made it politically difficult for the water industry to go running to the Competition Commission with lawyers holding appeal submissions.

This is not the end of the matter, or at least it shouldn't be. Water UK's threats about the possible cancellation of leakage programmes need to be nipped in the bud, and quickly. With the impact of climate change looming ever larger at a time of increasing demand you can hardly tell consumers they have to conserve supplies when the companies that supply them are merrily pouring water down the drain.

But, in an industry where competition is still a dirty word, yesterday is probably about as good as it gets.

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