The last of Britain’s three FTSE-listed water companies is due to report its financial results this week, but there’s little doubt any news on the performance of Pennon will be drowned out by a wider crisis in the industry.
Pennon, which owns South West Water and Bournemouth Water, is expected to set out an increase in revenues following a boom in holidaymakers to the West Country over the last year that bolstered water volumes. But beyond the regulated returns a set of troubling, but familiar, issues have welled up for the sector.
Water companies have faced calls to be renationalised for years because of ongoing concerns over their financial engineering, tax avoidance, hefty investor payouts and a long list of crimes against the environment.
In simple terms, they are regional monopolies whose prices are set by regulator, Ofwat, every five years to make sure water is readily available at an affordable price. This allows well-run water companies to achieve reasonable and fairly predictable financial returns, and has helped to make listed water companies a favourite of utility and infrastructure investors.
In return, water companies are expected to be responsible custodians of the beaches, reservoirs and waterways they manage. But this fundamental element of the social contract between water companies and the communities in which they work has been repeatedly soiled by the pollution, leaks and spills that have marked their record in the UK.
Following each moment of reckoning the industry has promised a watershed moment of accountability that will result in a more sustainable future. But each time, as sure as the tides, water companies plunge back into scandal.
A recent report, by Surfers Against Sewage, found earlier this month that water companies spilled raw sewage into the coastal bathing waters used by holidaymakers and families over 5,500 times in the last year, a surge of more than 87% from the year before.
Just weeks later water companies were plunged into the centre of a major investigation by the financial and environmental watchdogs after several of them admitted they may have illegally released untreated sewage into rivers and waterways.
The investigation by Environment Agency and Ofwat is expected to demand that water companies reveal the scale of any illegal releases of sewage from their treatment plants, and to explain how environmental performance and compliance has been taken into account when deciding on paying out dividends and executive bonuses.
The companies included in the investigation have not yet been named. But they are likely to include Southern Water – the supplier for 4.2 million customers in Kent, Sussex, Hampshire and the Isle of Wight – which was fined a record £90m over the summer for deliberately dumping billions of litres of raw sewage into protected seas over several years for its own financial gain.
A month later Southern announced what it called “good news for our customers, the local environment and the regional economy” in the form of the return of Australian infrastructure investor Macquarie. It promised Southern a £1bn emergency equity injection and setting plans to invest £2bn over the next four years, or the equivalent of £1,000 per Southern Water household, on upgrades of half the company’s treatment and sewage networks.
Macquarie is best known in the water industry as the owner of Thames Water between 2006 and 2016, a period in which it raised Thames’s debt and earned billions from the company through dividends while paying next to no corporation tax. Macquarie also oversaw a series of pollution failings, culminating in a £20m fine for tipping raw sewage into the River Thames which was a record at the time.
Why the water regulator allowed an investor like Macquarie another chance to play a major role in England’s critical national infrastructure is unclear, but it is likely to further erode public trust in this vital sector. It is in the regulator’s hands to take action, or watch another chance to reform the industry drain away.