Squeeze them till the pips squeak

Did you have a wonderful, indulgent Christmas? Let’s hope so, because that’s the last occasion for quite some time that anyone in the business of utilities will be able to kick back and relax. As 2015 opens with cheery forecasts for the general economy, it’s a different story for utilities.

Belt-tightening is the order of the day. 2014 ended with Ofwat’s final determinations on the price review for water companies, a predictably tough set of settlements that will see a number of companies struggling to slice millions off their business plans. Something will have to give – and in Ofwat’s own territory of Birmingham, there’s a good indication of what that might be. As we report this week, the trade unions fear that Severn Trent’s swingeing job cuts could be the first of many in the sector, as water companies seek to meet their new efficiency targets.

Expect similar pain in the network sector, where distribution network operators are still scratching their heads over where to find the savings of around £1.4 billion Ofgem demanded in its final settlements for RIIO-ED1. While the regulator has explicitly linked some of these savings to smart grids, the fact remains that companies facing cuts of up to 9 per cent from their business plans are not going to be able to deliver the full programmes of work they outlined. For a sector facing crippling skills shortages, increasing incidents of extreme weather, not to mention exploding pavements, that’s a
bitter pill to swallow.

Life is no easier in the non-regulated part of the market, where generators face a lower-than-expected payout in the first capacity auction, and suppliers await the outcome of the Competition and Markets Authority inquiry, and a general election that could usher in Ed Miliband’s price freeze.

When it comes to utilities, the public and political mood is “squeeze them till the pips squeak”. There is still room for efficiency savings in some areas of the sector – and investor returns and company profits in certain quarters can afford to take a hit. But when money’s tight, it’s all too easy to cut spending on frontline service, staff development and research and innovation. That would be disastrous for today’s utilities, which face huge challenges in customer service and technology, not to mention the massive investment required in infrastructure. Let’s hope that tomorrow’s customers don’t live to regret today’s choices.