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Regulator Ofwat has waded through a torrent of controversy to set the water sector’s future price rises. Thursday’s draft ruling will not resolve the crisis at the weakest companies, notably Thames Water. But the regulator has probably done enough to balance the needs of consumers, investors and the environment, securing the water industry’s current operating model for now.
Debt-laden Thames Water, which must now try to raise new equity, will go into a special “turnaround oversight regime”. The regulator insists this is not a precursor to a special administration regime (Sar), in effect a form of nationalisation.
But Ofwat is mulling the appointment of an independent monitor to scrutinise the company’s performance. That might ease the transition to a Sar if required — as remains very possible. It also might give the regulator some sway over the company’s longer-term future: among other options, Ofwat suggested a break-up of Thames into two or more licensed entities. Hacking back its complex structure would have considerable merits.
Thames, which will run out of money next spring unless it finds new investors, had said it needed a 5.7 per cent return to attract new equity investment. No dice. To be sure, Ofwat has increased the allowed return on equity beyond the 4.1 per cent it mooted in late 2022. But so far it has only gone as far as 4.8 per cent. It might need to go higher, given the global fight for infrastructure capital, according to consultant Martin Young. A Barclays survey suggested investors might demand more than 5 per cent.
But the reaction from public markets suggests Ofwat’s plan was well pitched. The share prices of Pennon and Severn Trent, for example, jumped by 10 per cent and 4 per cent, after the companies’ business plans were judged outstanding.
It is no coincidence that listed companies are towards the top of the class. A stock market quotation confers transparency over corporate governance, accounting and performance. It ensures rights issues are open to all investors, and allows cleaner investor exits. Consortium-owned companies struggle to raise new equity if their investors’ interests are not aligned.
The listed companies are also — crucially — typically less geared than peers. That chimes with Ofwat’s new preference for a bigger equity buffer to improve resilience: the notional gearing in its calculations has dropped by 5 percentage points to 55 per cent since the last review.
After the embarrassment of an all-out crisis at the country’s largest water utility — starved of funds under its former private equity owners — Ofwat is now nudging companies towards the stock market. It is considering introducing an allowance for the costs associated with relisting. That is a small but useful contribution to the messy task of putting the regulated sector on a stronger footing.
vanessa.houlder@ft.com
