What started as a trickle over lockdown could risk becoming a flood, at least when it comes to the number of water companies collapsing in the current business environment. Due to a tidal wave of unpaid water bills which have mounted over the course of the pandemic, a new report suggests water retailers are struggling to survive.

Keeping heads above water

Just as bodies like Ofcom keep an eye on what our broadcasters put in front of our eyes, so does Ofwat monitor the state of the water industry in England & Wales, regulating it and keeping businesses in check. Scotland and Northern Ireland have their own respective water regulators, but the function they carry out is identical.

The UK Water Retail Council (UKWRC) is representing the interests of 18 water suppliers, and published a report through Economic Insight, which suggests that not only are a number of water retailers close to collapse, but that customers are being excessively charged and that business might be spending much higher sums of money on their water bills than they have to.

An increase in water retailers holding bad debts has arisen since the pandemic emerged, while the water retail sector has been making losses for a number of years, with the water industry having been privatised in the late-1980s. The lack of income due to unpaid water bills meets these other issues and they all flow into one conclusion: the prospect of collapsing water retailers and customers being offered fewer providers to find the best deals.

Counting the cost

Signs of trouble in the water retail sector were apparent before COVID-19, with Ofwat publishing final determinations for water retailers over a five-year period back in December 2019. Reports from this time suggested that 12 out of 15 rated water retail operators had a negative rating from Smart Water Magazine.

To make matters worse, Ofwat’s final determinations were expected to signal one of the worst declines in the sector’s credit quality since the 1980s privatisation boom. Ofwat proceeded to cut returns on capital for these companies to 2.96 per cent, the lowest level in over 30 years. The intention was to cut customer bills by roughly £50 on average.

A number of water companies publicly claimed Ofwat’s terms were harsh and unfinanceable, but some withdrew support for this ‘water rebellion’ and the regulator proceeded to put the plans into place, fixing the official allowed returns rate at the new 2.96 per cent level for the years 2020-24. This tight financial straightjacket made it hard for water retailers to invest and improve. The UKWRC’s Economic Insight Report is flashing a red light, suggesting imminent systemic retailer failure.

This would suggest an opportunity to find distressed businesses in this sector in the coming months, but caution may be necessary when doing so, given the structural issues at play in the UK water markets and the persistent issues surrounding profitability.