Southern Water may not be able to guarantee that water comes out of its customers’ taps, but whoever it is, they know how to use a metaphor.
The day almost 60,000 Hampshire residents faced having to queue for fresh water until the weekend the company, already £6bn in debt, was told can increase bills by 53% to borrow more.
Interruption of supply to nearby households, schools and hospitals Southampton summed up the challenge of repairing a system tested almost to destruction by Britain’s 35-year water privatization experiment.
On one side, there are customers who are fed up, sometimes literally, of paying higher bills for what looks like failing services and a rising tide of waste water. On the other, investors and creditors without whom the financial model collapses, demanding a better return to pay out money after money.
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In the middle is Ofwat, a regulator that many accuse of creating the current mess through laissez-faire oversight, whose five-year “price review” process concluded this week is, by common agreement, the most consequential since the sale of regional public water companies. extinct in 1989.
What was announced today?
After decades of the regulator scrambling to reduce bills, public outrage over pollution and equally toxic financial engineering has changed water sector policy and priorities, but not the solution.
In its settlement, Ofwat is set to meet demands from businesses to spend, borrow and charge more, provided they improve their performance, reduce wastewater discharges and expand the network to cope with population growth and climate change.
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Spending will almost double to £104 billion over five years, of which £44 billion will be on new infrastructure and resources.
In return, bills will be able to increase by an average of 36%, with a permitted return for investors of just over 4%, an increase from Ofwat’s first settlement earlier this year.
To achieve this, companies which already collectively have £70bn of net debt say they will need to borrow 60% more over the next five years than the last and raise around £12bn of new equity capital .
They will also face a tougher sanctions regime for poor performance.
Will it work?
Whether this regulation will work will be measured not only by the health of the waterways, but also by the balance sheets of companies who now have two months to decide whether to accept Ofwat’s decision or appeal to the Authority. competition and markets.
No one will look closer than Thames waterwhich was earlier this week at the High Court trying to secure a £3 billion loan to keep it afloat, while its creditors scrap for control before an inevitable restructuring.
Ofwat approved a 35% rise in Thames customers’ bills, but it was accompanied by a £18m fine for paying illegal inter-company dividends of more than £190 million.
The regulator will also recoup more than £130 million in bill reductions, a loss of £150 million for a company already on the brink.
Ofwat says this is evidence that it will more closely control executive salaries and dividends to prevent future excesses, but the agreement recognizes that the privatized system only works if investors and those who run the companies are rewarded.
For bill payers, this is still a tough decision to swallow.