Weather-wise, it has been a reasonable summer for water companies. No droughts and, as yet, no severe storm flooding to deal with. But there is one area in which this summer is quite unlike those of the recent past. As the general economic outlook deteriorates, water companies fear that their bills will not be paid as household budgets are stretched by steeper mortgage payments and climbing energy and food bills.

They fear this with good reason. Since 1999, water companies, alone among the utilities, have not been able to cut off non-payers or even to threaten them with that sanction. Severn Trent today said that while it had not experienced any material deterioration in customer debt, it was monitoring the situation closely. United Utilities has also recently remarked on the increased risk of rising bad debt.

Ultimately, water companies will not have to stomach this problem themselves. The regulatory process means that if bad debts rise, then the water company can claw back the money through the next price review. In other words, if some households can not or will not pay their bills, the cost will be spread across the industry, leading to higher bills for everybody else. In the short term, shareholders will take the hit but, in the long term, customers eventually pay.

Meanwhile, Severn Trent continues to trade 3 per cent below its regulatory asset value, which ought to provide a floor for the share price. The water sector saw its valuations cut at the turn of the year, when the credit crunch burst the takeover bubble that had been keeping it buoyant.

However, Severn Trent drifted further downward than its peers, largely because of the Serious Fraud Office case over misreporting of leakage data hanging over it. That was resolved three weeks ago and the company can now put its legal issues behind it.

There is some difficulty in predicting where the water sector will go because of the forthcoming price review, which begins this summer and will finally be implemented in April 2010. However, Severn looks considerably cheaper than its peers and with a new, albeit experienced, management team in place there is a strong chance that it will continue to outperform the regulatory settlement whatever the weather forecast.

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