One huge area of uncertainty for the sector has now gone, with the election result. The Secretary of State is unchanged, and substantial change in policy or direction of travel appears unlikely.
The new water minister remains unknown at the time of writing. Rory Stewart MP has joined George Eustice as Under Secretary of State, but with ministerial responsibilities yet to be announced.
What then for the fortunes of the companies during AMP6? It is clear that in order to successfully look after all stakeholder interests the companies must operate on a level of efficiency which is a step-change removed from AMP5. The two large listed companies, Severn Trent and United Utilities, have promised dividend growth over the period from their respective AMP6 starting points, the announcements of which helped to reassure the market.
The RPI+K pricing formula gives the companies inflation proofing, but low inflation depresses their cash flow. This effect could be exacerbated if Ofwat were to seek to switch from RPI to the Consumer Price Index, which generally produces a lower figure than RPI.
Based on the sector’s track record over the last 25 years, the strong likelihood is that most companies will step up to the challenge, get on with delivery in an effective and efficient manner, and produce successful outcomes for all stakeholder groups.