In late 2009 OFWAT, the UK regulator, published a final determination for water prices for the next period. On average, OFWAT decided that the water companies must keep customer bills flat while embarking on massive capital investment plans. That produced the usual chest-beating from the regulated utilities who promised that the end of civilisation was at hand. The Daily Telegraph, for example, reported in mid-January that “United Utilities is expected to embark on a’"major’ cost-cutting drive that could see it shed 10pc-20pc of its workforce, as it prepares this week to accept harsh restrictions on pricing set by the regulator.”
A longer story in the Financial Times later that month reported Professor Martin Cave, an expert in utility regulation at Warwick University, saying the he suspects that the industry has been “crying wolf”. “It’s difficult to reconcile the cries of outrage with the fact that they’ve accepted the judgment,” Prof Cave said.
In the preceding five years bills had been allowed to rise more quickly than inflation. Profits were higher than expected as the companies were able to borrow at lower rates than had been assumed by OFWAT. Many investors, the FT suggested, had grown used to equity-like returns for risk levels more akin to fixed income securities.
Then, at the beginning of February, the price of shares in Northumbrian Water soared when it was believed that a Canadian-based Teachers’ Pension Fund was buying the shares – possibly even mounting a takeover. Then on February 18 the Fund announced it was ruling out any such plans. The stock price fell back.
