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Ten water companies still use ancient “dowsing” rods to follow the line of pipes underground. It is perhaps not surprising, then, that two of them also struggle to align stakeholder interests.

On Thursday, Severn Trent and Thames Water announced interim results and a governance review, respectively. But they only uncovered age-old contradictions in trying to serve both customers and investors.

Contradiction 1: Prices

Severn Trent’s results made a virtue of the fact it has the lowest bills in England, at less than £1 a day on average — apparently acknowledging political pressure and critical research such as that by the University of Greenwich, suggesting private companies charge £2.3bn a year more than state-owned utilities would. A few lines later, though, Severn says it will make an extra £50m for beating regulator Ofwat’s targets for leaks and sewer flooding. But this “outcome delivery incentive” is delivered through higher bills. It is therefore incentivised in a way that draws criticism.

To be fair to Severn, natural justice suggests less sewer flooding should be rewarded, just as failure is punished. But this system means the supposed virtue of lower bills can only be delivered by stinking performance. In fact, so contradictory are the pressures that Severn has sought to muddy the regulations: deferring £27m of ODIs to soften the blow to customers.

Contradiction 2: Dividends

Severn, as a listed public company, reported a 6.2 per cent rise in its interim dividend — in line with a policy of boosting payouts to shareholders by 4 percentage points above inflation. But this comes as critics express outrage at reports — from the media and those Greenwich academics — showing privately owned water companies have invested no significant new shareholder equity while extracting nearly all the profit as dividends. Public companies like Severn — which says it has needed to attract equity investors to enable £10bn of spending in the past decade — are therefore tarred with private company excesses.

Contradiction 3: Sanctions

Thames Water, one of the private companies so criticised, has ordered a governance review and a closure of its Cayman Islands subsidiaries — after media reports drew critical eyes to excessive pay and opaque structures. But Thames made a virtue of choosing to do this, not having to. As one insider put it, it was the “optics” not Ofwat. It is therefore a system where the regulator can apply fewer sanctions than the media.

For investors, then, listed water companies must also remain a contradiction: a bad investment if the public ultimately votes to nationalise them; a good one if it accepts better service comes at higher prices. Until then, their shares will be buoyed by optics more than stopcocks.

matthew.vincent@ft.com

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