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One quirk of the water industry in England and Wales, where customers are beholden to local private-sector monopolies, is the war dance that takes place every five years.
It runs thus. Companies tell regulator Ofwat the financial returns they want in order to keep the taps running, upgrade infrastructure over the next five years and make an acceptable profit — and how much bills will therefore need to rise. Tough talk, and threats about reducing investment in Britain, are the norm. Eventually the regulator publishes a final settlement.
This time, that war dance has proved sufficiently frightening that Ofwat on Thursday said water bills could rise by an average of 36 per cent for the five years from April 1. That’s more than it previously indicated, but less than the industry wanted. Still, it feels like a coup for investors. Shares in the handful of listed water companies traded up on Thursday morning.
But neither side can really claim victory, because this doesn’t fix the industry’s biggest problem: the creaking balance sheets of several water companies including Thames Water. Whether England’s largest water company would need to be temporarily renationalised has been one of the biggest UK corporate stories of the year.
Thames’s situation is particularly dire. It has mountainous debts of £19bn and only enough funds to last until the second half of March. A £3bn emergency loan from senior bondholders should be rubber-stamped in January. Yet it still needs to raise billions of pounds of investment to keep running and make required infrastructure improvements by 2030.
Thames will now pore over Ofwat’s settlement, which proposes a return on equity of 5.1 per cent for the next five years. It has the option to appeal to the Competition and Markets Authority to improve the terms.
But Thursday’s regulatory missive does at least offer predictability, which new investors — as well as creditors — can use to decide how to pull the beleaguered utility back from the brink. On top of a new equity injection, this will presumably involve a debt-for-equity swap to try to return Thames to investment grade and more sustainable lending rates.
In one important sense, higher prices are no win at all, even for the water companies. Even before this week, public trust in the sector was at the lowest levels since surveys began 13 years ago. As bills go up, love of the sector will inevitably go down further — and if Thames and peers can’t clean up their act, the nationalisation debate will come back with a vengeance.
nathalie.thomas@ft.com
