New research from the EDHEC Infrastructure & Private Assets Research Institute (EIPA) entitled “Generous When It Mattered: Regulated Returns and Financial Resilience in English and Welsh Water,” asks whether financial pressure in the English and Welsh water sector arose from inadequate regulated returns or from the financing structures individual companies adopted. The market evidence does not support the first explanation.

In effect, the findings challenge persistent regulatory under-remuneration as an explanation for the sector’s financial difficulties, highlighting the importance of equity buffers, financial claims elsewhere in the group and owners’ capacity to restore capital.

Key Findings:

• Companies operating under the same regulatory regime had constructed materially different financial structures. Several companies transferred substantial liquidity to other group entities through upstream loans. These were not equivalent to dividends when made, but their scale and eventual recoverability determined what remained available inside the appointed companies when it was needed.

• The inflation shock exposed the consequences. Neither gearing nor index-linked exposure alone determined the outcome. Resilience depended on the equity already available to absorb financing and operating pressure, and on the capacity of owners or group companies to restore it.

• The analysis does not establish capital structure as the sole cause of distress. Ownership, governance, operating performance and expenditure requirements were not independently assigned and also consumed financial headroom.

• What follows is a distinction between price-setting and financial-resilience regulation. OfWat can continue to use a notional capital structure to determine the efficient return funded by customers. That benchmark does not measure the resilience of companies whose actual structures depart from it.

📖 Read the full publication:
Generous When It Mattered: Regulated Returns and Financial Resilience in English and Welsh Water.