Examination of Witnesses (Questions 180-185)
MR PHILIP
FLETCHER, MR
BILL EMERY
AND MS
FIONA PETHICK
5 NOVEMBER 2003
Q180 Alan Simpson: I do not have
any doubts you are going to be needed for some considerable time
to come, but it is this role as a proxy for a perfect market.
I think you are also there as a proxy which protects the public
interest.
Mr Fletcher: Absolutely.
Q181 Alan Simpson: We accept that.
I know during the break we had you were kind enough to supply
some figures about investments which had taken place in terms
of new equity issues during the last five years. You have just
said in response to Michael Jack that in terms of the equity element,
the protection of that part in respect of dividends which you
regard as legitimate has to reflect the fact the equity element
is a lot more expensive to raise at the moment. As an explanation,
that would make sense if people had been seeking to raise equity.
Will you confirm what I think you said during the break, which
is in the last five years there is only United Utilities which
have come up with a new share issue and that is of £0.5 billion
and another £0.5 billion to come?
Mr Fletcher: Yes, they are raising
£1 billion and they have taken half of it in advance of the
periodic review and effectively said that shareholders can think
again when they know the outcome of the regulator's review next
year. Yes, that is quite right, there has only been one rights
issue, I believe, since privatisation, but that does not mean
that effectively equity is not being raised because the equity
base of the industry is still there and still effectively growing
and affected by the prices which people will pay for the shares.
Q182 Alan Simpson: Let us be real
about this. Once you have sold your shares, whatever market trading
is taking place it is not coming back to you.
Mr Fletcher: They have their equity
base there and they are drawing money from the debt markets. Of
course if you talk to Glas Cymru they will say in a non-standard
way they have equity too, the equivalent of equity in the shape
of the lower price paid for the business relative to its assessed
regulatory value. So there are proxies for equity besides the
straightforward shares.
Q183 Alan Simpson: I am still at
the stage of looking at this as money for old rope. My reading
is that dividends paid out since privatisation have been over
£18 billion, in the last five years in a difficult time they
have paid themselves out over £7 billion for half a billion
new equity issues. How, on the basis of that, can you justify
putting the bill for the improvements that will take place entirely
on the customers and not on the shareholders?
Mr Fletcher: Two quick factors
on the dividends. First of all, the dividend goes with the capital
value of the equity and the shareholder is looking for a reward
on both, so if the share prices are depressed (and they have been
running below the regulatory capital value since 1999) that is
one factor. Another special factor is that a number of companies
have been switching from equity to debt, and have paid special
dividends, which I think are included in your figures, which are
a rather special case. On your wider question, we must ensure
that customers are not ripped off, and that is where I absolutely
agree with you, and for the whole of the next year Ofwat will
be giving its best shot to ensure that customers finish up with
no more than they absolutely have to pay while the companies can
finance these very big programmes going forward.
Q184 Alan Simpson: In that assessment
you will be building in a presumption that those facing water
poverty ought not to be pushed over the edge in whatever price
rises come through?
Mr Fletcher: That raises a whole
new set of issues around the whole business of water poverty.
I am very concerned about customers who find it difficult to pay
their bills and that is why the prices must not be over-high,
but at the same time it is equally important that I stick to my
statutory duty of enabling companies to finance their functions
and do not hold prices at a completely artificially low level
to the point where the stability of these companies is at any
way put at risk.
Q185 Chairman: If you felt you wanted
to expand on that point, perhaps you could do so in a note. I
am sorry to squeeze you in between two bells, as it were, but
I know from experience that we will not recover a quorum after
a second vote. Thank you very much, all three of you, for coming
and we look forward to inevitable and no doubt pleasurable further
contact.
Mr Fletcher: Chairman, thank you.
If there are any other written questions which members wish to
put me, of course I will always try and respond to them.
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