Domestic competition could hit water firms’ earnings, say analysts

The unexpected plans to introduce competition into the domestic water market would increase business risk and could hit the earnings of incumbent water companies, according to analysts at Moody’s.

In an investor note, analysts said fluctuations in customer numbers will increase cash flow volatility and, where revenue losses cannot be offset by cost savings, pressure earnings.

The note also suggested the introduction of domestic competition ahead of the upcoming price review in 2019 may require the re-opening of the existing price control, creating “significant uncertainty” for companies and their investors.

“Given the need for new legislation and time required for its implementation as well as not to disturb an existing price determination, household retail competition is unlikely to materialise before 2020,” the analysts added.

The two Welsh water companies, Welsh Water and Dee Valley Water, could be “less affected” by the introduction of domestic competition because the Welsh government has taken a “wait-and-see” approach, they added, although “additional regulatory scrutiny is likely to apply”.

The document was published by the Treasury on 30 November, and outlines plans to boost competition in a number of sectors including water to get a “better deal for consumers”.

The announcement came as a surprise to the water industry, which has been focused on opening the market to competition for non-domestic customers in 2017 and was not expecting domestic competition to follow so swiftly.

Ofwat will review the costs and benefits of opening up the household retail market and report to the government next summer. The government will then “work with water companies to begin the transition to retail competition before the end of this Parliament”.