Outlook: Thames flows west in search of regulatory relief

WELCOME TO Soprano country. The New Jersey mafioso must have seen the limeys coming; Thames Water has agreed to cough up big time without a severed horse's head even in sight. That at least was the interpretation the market placed upon Thames' decision to fork out a whopping pounds 577m for E'town - no, lamentably not another Internet venture but America's fourth biggest publicly-quoted water company.

In his eagerness to make a bigger splash in the world's biggest water market, Thames' Bill Alexander has not stinted. Whereas Yorkshire Water got away with paying ten times operating profits when it went divining for a US water business, Thames is paying 14 times. Moreover, Yorkshire's acquisition of the Connecticut-based Aquarion brought with it an army of high-spending, bulge bracket households in Rhode Island. Thames, by contrast, has bought itself a mixed bunch of domestic, commercial and industrial consumers in a state which, as viewers of the television series based around a small time mafia family will recall, boasts some less than salubrious neighbourhoods.

That said, nobody can quarrel with the margin, which even a protection racket would find hard to beat. Operating profits last year were $52m on turnover of $145m, and another rate increase will be in the pipeline as soon as the deal is done. Those are the kind of figures that ought to provide food for thought for the financial illiterates who produced yesterday's trade union report comparing water profits here and in Europe.

E'town is earning a nice fat 11.25 per cent return on capital and can go along to its regulator any time it thinks it has a case to squeeze even more out of its customers.

That will not last forever, of course. Incentive-based regulation is slowly beginning to seep into the American scene, which means that companies like E'town will have to start working harder for their profits and taking a much closer look at their bloated cost bases.

Even so, the returns on offer are the kind of figures which make the eyes water among UK utility bosses like Mr Alexander. Along with the rest of the industry he will discover on Thursday just how bad the soaking will be from Ian Byatt at Ofwat. Faced with sinking under an ever more punitive price regime at home, it is hardly surprising that Thames should be fleeing to a place where the regulators, if not the locals, take a more benign view of what enterprise should be allowed to earn.