UK water regulator clamps down on profits

As expected, the latest price determination from UK water regulator Ofwat has sought to ease the pressure on consumers by bringing down bills.

The latest pricing review from UK water industry regulator Ofwat, covering the period 2015-2020, will see the bills that water companies can charge their customers fall by an average of 5 percent over the period – or £20 per customer.

As part of the review, allowed profits have been cut – leading observers to speculate that some companies will need to review their dividend policies or perhaps raise new equity in order to protect their balance sheets.

“Ofwat significantly reduced allowed returns to make consumers benefit from the cheap financing currently available in capital markets,” said Dr Matt Firla-Cuchra, a power and utilities partner at financial advisory firm KPMG. “This means that the cost to consumers of servicing approximately £60 billion of private capital employed in the industry will be over 25 percent lower than in the past.”

He added: “The reduction in the weighted average cost of capital (WACC) also means that companies which are locked into long term financing at higher rates will face a financial squeeze with negative impact on dividends and, in some cases, need for refinancing and reductions in leverage.”

However, on the other side of the coin, Ofwat has allowed companies to pass on almost all of their proposed costs outlined in their business plans to customers. In the case of Thames Water, costs associated with the building of the so-called Thames “super-sewer” could eventually add an estimated £80 annually to customer bills.

“We are bringing down bills so customers can expect value for money, while investors can earn a fair return,” said Ofwat chairman Jonson Cox. “Companies will need to stretch themselves to deliver much more with the same level of funding as in previous years. We will achieve more resilient infrastructure and better service as a result.”

Water UK, which represents UK water and wastewater service supply organisations, said “the regulator has set a tough review, which has challenged companies to balance a range of priorities including delivering environmental improvements while remaining financeable and keeping bills affordable”.

There is speculation that, with clarity for the period ahead having now been provided, merger and acquisition activity in the sector may be expected.