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Water – PR19 looms

08 Oct 2019 / Insight

By Nigel Hawkins

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  • Since their privatisation in 1989, the 10 water companies have faced a periodic review every five years; it is undertaken by Ofwat, and prescribes customer prices, along with the investment requirements.
  • As part of the ongoing review, PR19, Ofwat will publish its Final Determination numbers on 11 December 2019; they will apply as from April 2020, although water companies do have the option to seek a reference to the CMA.
  • The three quoted water companies – Severn Trent, South West and United Utilities – have been fast-tracked, so their numbers are broadly known.
  • The other seven are facing tough regulatory scrutiny, with several seriously considering appealing Ofwat’s Final Determination via the CMA – Southern, Thames and Anglian are the most likely to do so.

Background

In 1989, the 10 water companies in England and Wales were floated – their shares were heavily over-subscribed. The water companies in Scotland and Northern Ireland were not included, and they remain in the public sector to this day.

Every five years (beginning with 1990), the water companies face a periodic pricing review, which determines the charges that they can levy on their customer base: there is minimal competition at the retail level.

PR19

Ofwat has been working on the current review, PR19, for several years. It will announce details of the Final Determination Ofwat on 11 December 2019, with the new pricing formulas applying as from April 2020 and lasting until March 2025.

Few water companies – South West’s parent company, Pennon, with its Viridor waste business, is an exception – have material non-core revenues; the regulatory outcome is therefore key in determining their finances, their ongoing debt levels and their capacity to pay dividends.

Of the 10 privatised water companies, five – Anglian, Northumbrian, Southern, Thames and Yorkshire – are under private equity ownership, while Wessex is owned by YPL, a Malaysian power company. Dwr Cymru, in Wales, is a not-for-profit company.

All five water companies in private equity have comparatively high debt levels. With PR19 set to be far tougher than its predecessors, these companies face major risks to their long-term financial models.