Watchdog boss slams water firms over excessive returns

Jonson Cox, who previously managed Yorkshire Water and Anglian Water, highlighted growing dividends to shareholders while customers are under significant financial pressure.

“The last few years have been very kind to the owners of water companies at a time when life is very challenging for customers,” said Mr Cox in his maiden public speech.

“Cash distributions from water companies to shareholders in the first two years of AMP5 (regulatory period) have been running at an annual rate of up to one-quarter of shareholders’ equity in the regulated water companies.”

Mr Cox, who joined Ofwat in November 2012, is also balancing it with his role as chairman of Coalfield Resources, the listed owner of embattled miner UK Coal. He recently led the group through a major restructuring, but it is now fighting a major fire at a Midlands colliery.

Mr Cox has described his challenge at Ofwat as: “How do you regulate a public service business that’s a monopoly?”

Mr Cox, whose new role has been described as “poacher turned gamekeeper”, canvassed companies, customers, investors, advisers and other regulators.

In his speech to the Royal Academy of Engineering, Mr Cox said water bills have increased cumulatively by more than 12.5 per cent since 2010 while household incomes have fallen by as much as five per cent.

“I am surprised that companies have not taken more steps to recognise customers’ pain as bills go up,” said Mr Cox, who was managing director of Yorkshire Water from 1996 to 2000.

“I think it is the right time to challenge boards to put their customers’ concerns on at least an equal footing as their shareholders and over the rest of this AMP period.”

The AMP5 (asset management plan) runs from 2010 to 2015. During that time Yorkshire Water, the region’s main supplier, said it is investing £3.5bn in infrastructure.

Yorkshire Water’s results for the year to the end of March 2012 show operating profits dipped 3.3 per cent to £303.3m, weighed down by higher costs. But dividends surged 35 per cent on a year earlier to £63.4m.

Turnover increased three per cent to £893.6m, while bills rose by 3.4 per cent.

“It is clear that most regulated companies are paying dividends well above those assumed in the last periodic review,” said Mr Cox.

Yorkshire Water’s net debt increased 6.8 per cent to £3.16bn. The company now has 79.7 per cent gearing compared with 73.9 per cent a year earlier – meaning debt vastly outweighs its equity.

Yorkshire Water was bought in 2008 for £3bn by a consortium of companies which includes Citi, the government of Singapore, Infracapital (part of M&G) and Reef Asset Management.

Mr Cox highlighted the perceived risks in some of the highly-complex, highly-leveraged, holding companies in the sector, and called for “transparency of corporate structures”.

He said while capital structures have previously been deemed a matter for boards and shareholders, this can only be the case if the structure does not “pass liability or risk back to customers and the public purse – or indeed damage the legitimacy of the entire sector”. “Public trust is hard-won and easily lost,” he said.

“I want us to move to a less intrusive form of regulation, but to do this we need to see strong, open leadership by the boards of water companies, and their holding groups, in the interests of customers and the public as well as shareholders.

“It is a great shame that we have had to point out the disparity between the current returns enjoyed by owners and a tough time for customers.”

Yorkshire Water said it is “open and transparent”. It expects dividends over the rest of the regulatory period to be “much lower” as a percentage of its equity base.

“The nature of regulation in the water sector allows good efficiently-managed companies to earn an appropriate level of return,” said the company. “This approach encourages companies to be efficient. Customers benefit from this in the form of lower bills at subsequent price reviews.

“As we are now planning for the next price control period, it is appropriate to ensure that the current regulatory structure strengthens the confidence of all of our stakeholders.”

Stock market listed Severn Trent said: “We certainly welcome his call to focus on customers and to encourage sustainable financing of the industry.”

Northumbrian Water, owned by Hong Kong’s richest man Li Ka-Shing, did not comment.

A watching brief on sector

Yorkshire Water supplies water and sewerage services to about 4.9m people and 130,000 businesses in Yorkshire.

Northumbrian Water also supplies some customers in North Yorkshire, while Severn Trent supplies customers in Rotherham, Sheffield and Scunthorpe.

They are among 10 companies which supply water and sewerage services across England and Wales.

As these companies have a monopoly in their respective regions, water regulator Ofwat aims to ensure they provide a good service and do not charge higher prices to increase their profits. Ofwat was established in 1989 when the industry in England and Wales was privatised.