Ex Ofwat director warns price controls will test company management and investors

Ofwat's plans for PR19 will end the “days of easy money” in the water sector and bring challenges for the companies in managing investor expectations a former director of the regulator has warned.

Former Ofwat senior director, Richard Khalid (pictured), now water expert with consultant PA Consulting, commented on Ofwat’s recently published PR19 draft methodology saying: “The days of easy money in the water sector are over. PR19 will be a tough review for companies with a significantly lower cost of capital and a focus on operational outperformance.

“Ofwat will expect companies to deliver more for their customers, a more resilient network, and affordable bills. In this climate, companies will need real financial and operational strength to meet the demands of both customers and investors.”

He said regulatory reward would be reserved for water companies that show “significant ambition and innovation in serving customers and whose bills are affordable.” He said water company management teams would need to focus on operational outperformance and so face “significant challenges in meeting and managing the expectations of investors who are used to high returns.”

“Investors have seen significant returns over the last decade, but a renewed focus on operational outperformance will threaten those returns, “ Khalid warned.

He forecast that Ofwat’s call for greater value-for-money for customers may also mean companies will need cash from equity as well as debt.