Unloved but worth holding

Consumers may be irritated by the performance of water utilities, says Alex Brummer, but their solidity and growth potential make them sound investments

The prospects for British water investors over the next few years will be decided between now and next year when the 2010-15 settlement will be reached. The regulator Ofwat has made it clear that the allowed returns will be considerably below the 5.1 per cent granted in the last price review. The companies have submitted their requests. Dwr Cymru, the former Welsh water company, now a mutual funded by debt, argues it will be possible to improve water supply to their customers at the same time as lowering average bills in real terms.

Severn Trent claims that it will be able to reduce the cost of waste water services. Other suppliers have asked the regulator for price caps that give them flexibility in the early years, allowing them to raise prices to twice the level of the retail prices index. Given, however, what has been happening among the energy utilities – where prices have been climbing by 30 to 40 per cent – the rises in water prices could seem modest.

Certainly, the regulator Ofwat, which itself has been the subject of extensive criticism for being too soft on its charges, is likely to be more aggressive with the companies in the current price round. In the submissions made, Pennon, owner of South West Water, has come in lowest, asking for a rate of return of 4.6 per cent. At the other end of the scale, Severn Trent is demanding 4.94 per cent. In their submissions, all of the companies have cited the need for a generous settlement because of higher energy costs and the need to increase maintenance and capital expenditure. Overall, the industry estimates capital costs of £25.5 billion in the five years from 2010-15, against £20 billion in the current period.