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Abnormal Returns in the UK Water Industry Since Privatisation

This paper explores the scale and behaviour of abnormal returns observed in the equity of the 10 Water and Sewerage Companies (WASCs) in England and Wales that were formed at privatisation of the UK water industry in 1989. The paper uses the CAPM and employs techniques of the Kalman Filter to generate estimates of time-variation in both systematic risk (beta) and abnormal returns (alpha) coefficients. It is demonstrated, first, that there is substantial time variation to both risk and abnormal returns; and, second, that there is evidence of political and regulatory impacts upon both risk and returns. The paper also confirms that significant excess returns were generated in the early history of the privatised water industry, although it suggests that these have not been substantial since the early 1990s. It suggests that over-estimation of the systematic risk faced by investors in the sector may imply further excess returns in the next regulatory review period.