U.K. Water Bills to Drop 5% in 2015 After Price Review

(Bloomberg) — Households in England and Wales received a
boost today when Britain’s water regulator published a final
price ruling that means the average customer bill will fall
about 5 percent beginning in April.

Ofwat announced the prices that 19 water and waste
companies, including United Utilities Group Plc and Severn Trent
Plc
, can charge for the five-year period starting 2015. It said
average water rates will drop by 5 percent, reducing bills by
about 20 pounds ($31) to 376 pounds a year before inflation. The
U.K.’s current inflation is 1.3 percent.

The water regulator sets limits on how much utilities can
charge users every five years. The decision is designed to
support 44 billion pounds of investments in infrastructure and
repairs to curb leaks and sewer flooding including into the
Thames River while keeping household costs as low as possible.
The price review had been subject to consultations, with some
utilities tweaking and re-submitting lower rate plans.

“We are bringing down bills so customers can expect value
for money while investors can earn a fair return,” Jonson Cox,
Ofwat’s chairman, said in a statement. “Companies will need to
stretch themselves to deliver much more with the same level of
funding as in previous years.”

The decision means United Utilities, Britain’s largest
publicly traded water company, will see its water and sewer
bills decline an average of 3 percent over the five-year period.
On Oct. 3, it proposed cutting bills 4.1 percent.

‘Relative Winners’

United Utilities and Thames Water Utilities Ltd. are viewed
as “the relative winners following Ofwat’s announcement,” said
Neil Griffiths-Lambeth, associate managing director of project
and infrastructure finance at Moody’s Investors Service Ltd.

Rates at Severn Trent, the U.K.’s second-largest publicly
traded utility, will drop 5 percent. Coventry-based Severn Trent
today said it disagreed with Ofwat’s ruling excluding two
maintenance projects totaling about 60 million pounds.

Ofwat reduced the allowed weighted average cost of capital
to 3.74 percent compared with 3.85 percent in an earlier draft.
The cut in WACC, a measure of the cost of debt and equity
financing, should provide scope for attractive returns,
according to a note from Deutsche Bank AG.

The fall in WACC is “rather surprising,” said Andy Cox,
U.K. head of deal advisory for energy at KPMG LLP. Unlike
Deutsche Bank, that may have a “significant impact” on the
appetite of those already invested and cause potential investors
to look elsewhere for better returns, he said.

Shares of United Utilities, which serves northwest England,
climbed 4 percent to 907 pence at 3:45 p.m. local time while
Severn Trent advanced 2.1 percent to 1,955 pence.

Takeover Attempts?

Clarity over customer tariffs with today’s ruling makes
Britain’s water companies more vulnerable now to takeover
attempts, Michael McVeigh, director of corporate finance at
Ernst & Young Global Ltd., said on Dec. 10.

“On acquisitions, we are likely to see equity stakes of up
to 15 percent changing hands rather than 100 percent of
majority,” KPMG’s Cox said. “There will be many factors for
acquirers to consider, some of whom may be new to the
industry.”

Severn Trent in June 2013 rejected a 5.3 billion-pound
takeover proposal as too low that was led by Borealis
Infrastructure Management Inc. of Canada.

Companies will have two months to accept Ofwat’s decision
or challenge it.

“With bills held down by 5 percent and service driven up
over the next five years, customers will get more and pay
less,” said Cathryn Ross, chief executive officer of Ofwat.

One caveat to Ofwat’s announcement is that water companies
are allowed to add inflation into bills each year so rates for
some may still rise from what they are now.

The regulator said people benefiting from financial support
will more than double to about 1.8 million by 2020 from 760,000
who benefit from some assistance from their water company.
“Over the next five years, companies are putting in place
measures such as social tariffs which are forecast to help an
additional 1 million people,” Ofwat said.

To contact the reporter on this story:
Louise Downing in London at
ldowning4@bloomberg.net

To contact the editors responsible for this story:
Randall Hackley at
rhackley@bloomberg.net;
Reed Landberg at
landberg@bloomberg.net
Ana Monteiro

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