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.
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.