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Regulatory risk weighs on UK Water industry

Date: 16-Feb-04
Country: UK
Author: Tom Bergin

The industry is pressing government for overdue regulatory guidance which will be key in deciding the tariffs companies can charge from 2005 to 2010.

Industry speculation the government delay is due to internal wrangling has added to the uncertainty that analysts said will weigh on water stocks.

"We believe that the political dimensions of PR04 (the tariff plan) have increased significantly in recent weeks, and that this a negative development," investment bank Merrill Lynch said in a research report titled "Whitehall Hiatus", after the seat of British government oficialdom.

The government was due to issue its guidance on how the industry should be regulated in late January but now it will not be issued until late February at the earliest.

"The date has unfortunately slipped. A new date has not been set," a spokesman for the Department for the Environment, Food and Rural Affairs (Defra) said.

Water companies are eager to see the guidance, which they need to formulate strategic business plans due to be submitted to the regulator, Ofwat, by April 7. Tariffs will be set in the light of these plans.

"Everyone is waiting for the guidance in order to finalise their business plans," said a spokeswoman for water and power utility United Utilities (UU.L: Quote, Profile, Research) .

Merrill Lynch said the industry recently sent the government a letter pressing it to act promptly while bankers said the regulatory uncertainty effectively put a block on takeovers in the industry for the time being.

ECONOMICS VS ENVIRONMENT

The water industry has told the government it will need to invest 20 billion pounds ($38 billion) between 2005 and 2010 to maintain existing infrastructure and meet proposed new environmental standards.
Industry sources said the environmental agencies are keen to see investment in raising environmental standards but the government is concerned this could necessitate sharp rises in water bills - unpopular in a what could be an election year in 2005.

The government's view will effectively decide how much will be invested and over what period and thereby determine the companies' earnings.

The public wants any bill increases to be gradual but the companies expect most growth in capital spending to be towards the beginning of the 2005-2010 period.

The government's guidance could lead to a harsher regulatory environment for companies.

"Should Defra send a strong signal of support for this customer preference then some companies could well be financially squeezed," Merrill said.

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