View from City Road: Outlook for water decidedly wet

Nothing that water companies have said since Ofwat issued its discussion paper on the cost of capital in July 1991 seems to have budged the views of Ian Byatt, industry regulator. His proposal that the companies earn a real return of just 5 per cent on new investment is at the lower end of the tentative 5 to 6 per cent range put forward in 1991 and far away from the 9.5 per cent sought by the industry.

That is tough enough. But Ofwat is also insisting that any scope for real dividend increases from the core water businesses after 1995, when a new water pricing regime will be introduced, must come solely from efficiency gains.

The key point is that Ofwat will allow no free lunches in water pricing, beyond what is strictly needed to meet environmental requirements. Real dividend growth must come from diversification outside water. Only Wessex Water has succeeded in this task so far, a sobering thought for water investors.