As inflation rises it will “flatter shareholder returns” and “in turn question the legitimacy of the sector”, Jonson Cox has warned water companies, as he suggested shareholder returns could grow by 65% over the next three years.
The outgoing chair of Ofwat, speaking at the Westminster forum on priorities for water management, described the threat to trust and legitimacy that rising returns would bring – especially during a cost of living crisis.
“Companies are going to have to think about this and the impact on their legitimacy as they push for large investment and increasing bills but needing to maintain customer support,” Cox said.
As a monopoly sector with steady index-linked returns and opportunities for dividends Cox described it as “a highly prized investment opportunity”.
He outlined an assumption based on a 70% debt / 30% equity split, as is the sector average; 33% index-linked debt which is the Ofwat norm in its modelling and composite inflation based on half RPI and half CPiH, which in November was 11% but Cox said his calculation includes an assumption this declines 5% over three years.
He concluded: “To the shareholder equity over three years this simplified model results in 65% increase in value. When that comes through in share prices or in valuations, what will this do to water company legitimacy? We talk about citizen science but I’m sure we will have citizen finance too.”
Cox has worked throughout his tenure to address corporate behaviours and legitimacy of the sector particularly related to shareholder returns and bills.
He said Ofwat was looking to strengthen the financial resilience benefits for the weakest company but had been met with sector resistance instead of accepting a “standard of legitimacy”.
“The public mood in the middle of a cost of living crisis is not favourable on the behaviour of utilities and let’s not fuel that, let’s act responsibly as a public service provider should,” he said.
Last week Secretary of State George Eustice said the Department of Environment, Food and Rural Affairs had selected its preferred candidate to take over from Cox, who has chaired Ofwat since 2012.