Water company shares rise as Ofwat proposes reduced bills

Listed water companies had a lot to consider on Monday morning, after Ofwat published its final determinations for the next regulatory period.

The water regluator has ordered the privatised water operators in England and Wales to reduce their bills by £50 per customer over five years, while also spending £51bn to improve their services and invest in infrastructure.

One of the biggest concerns outlined by Ofwat is the continued incidence of leaks, with the regulator requiring the companies to slash the amount of water lost to leaking pipes by 16%.

That, it said, would save enough water to serve everybody in Birmingham, Bristol, Cardiff, Leeds, Liverpool and Sheffield.

The water companies have also been told to spend £450m on looking for new sources of water in preparation for a drier climate.

“Today we’re firing the starting gun on the transformation of the water industry backed by a major investment programme to deliver new, improved services for customers and the environment and resilience for generations to come,” said Ofwat chief executive Rachel Fletcher.

“Now water companies need to crack on, turn this into a reality and transform their performance for everyone.”

Fletcher told the Today programme on BBC Radio 4 that the regulator had been clear that this round was going to be a “tough” review.

“We think this is the greenest package ever for water companies.”

Water companies have two months to decide whether they accept the final determination, or to appeal it, with the new pricing structure set to come into effect from 1 April.

United Utilities released a short response to the determination, noting that the final determination contained a “significant amount of detail” that the company would review “thoroughly”.

“We now have a period of two months to decide whether to accept the final determination and will respond to Ofwat and other stakeholders once this decision has been made,” the FTSE 100 company said.

Severn Trent responded in more detail, noting that its total expenditure allowance was being increased by a further £91m over the next five years, in addition to the £100m increase it received in the updated cost modelling in July, which it said in part reflected a reduction in the annual shift in the frontier efficiency target from 1.5% to 1.1%.

The FTSE 100 firm said the benefit of that, however, was offset by a number of other adjustments, including the reduction in wholesale weighted average cost of capital of 16 basis points, reducing revenue by around £75m over the next five years, and a reduction to the regulatory capital value run-off.

That run-off would be worth around £40m over the five-year asset management plan period - ‘AMP7’ - but value neutral in the long term, as seen by an increase in the company’s AMP7 regulatory capital value growth to 3.8%.

“We estimate the changes since July 2019 mean an overall reduction of [around] £50m in total revenue for AMP7,” Severn Trent said in its statement.

“We welcome the positive adjustments Ofwat has made to the targets for our supply interruptions, compliance risk index and mains repairs customer outcome delivery incentive measures for AMP7.

“In combination, these changes will have the effect of de-risking our plan, as reflected in the movement on our P10/P90 ranges from -3.9%/+1.7% to -2.83%/+1.9%.”

On Hafren Dyfrdwy, Severn Trent noted that revenue would increase by £3.6m across the next five years, adding that the company would benefit from a number of positive customer outcome delivery incentive adjustments.

The third of the listed water companies, Pennon Group, said the key elements of the final determination for its South West Water operation included a post tax real cost of capital for the industry of 2.92% on a CPIH basis, or 1.92% on an RPI basis.

It also included a total expenditure allowance of £2bn in wholesale and residential retail, consistent with South West Water's draft determination in April.

The outcome delivery incentives also reflected the priorities of Pennon’s customers, the board claimed, and was also aligned with South West Water's draft determination earlier in the year.

“Ofwat's proposed final determination package is now being reviewed, and South West Water has until 15 February to respond,” Pennon’s board said.

At 1034 GMT, shares in United Utilities were up 0.77% at 912.8p, while Severn Trent’s stock added 0.25% to 2,426p, and Pennon Group rose 0.55% to 989.8p.