Water shares have bubbled up on hopes an agreement can be reached with the industry regulator over new licence proposals.
After the market closed on Tuesday, Ofwat issued a clarification of its proposals for licence changes and changes to price controls, which analysts said struck a more conciliatory tone than before. An earlier statement from the regulator on the issue hit shares in the sector hard. Now Ofwat has said it recognises the water and sewage sector needs to remain attractive to investors, and it encouraged them to discuss the planned changes further. Analyst John Musk at RBC Capital markets said:
[Recently] we noted that more likely than not, given the level of discretion these proposals will grant Ofwat and the potential for a lower level of cash flow predictability in the sector, at least one of the 21 water companies if not majority/all in concert) will reject Ofwat's proposals and this could force the issue to be resolved by the competition commission.
Ofwat, however, released a clarification document yesterday where it welcomed constructive responses and proposals on how to address any concerns. This is a softer tone and suggests that there may be a middle ground here.
JP Morgan said:
The softening of Ofwat's stance on a competition commission referral reduces the near-term risk of negative newsflow and highlights how important a consensus driven outcome is to this process. (This) should help reassure the market that UK water regulation remains sensible and proportionate.
In reaction to the Ofwat statement, United Utilities is up 15p at 674p, the biggest riser in a FTSE 100 which has edged around 6 points lower. Severn Trent is 22p better at £15.69 while Pennon has put on 5p to 609p.
