Concern over plans to split water assets from management

The water regulator, Ian Byatt, yesterday fired a warning shot at publicly owned water companies planning to turn themselves into mutual organisations and contract out the operation of their networks.

In his last public appearance before he retires in July as head of Ofwat, Mr Byatt said he would be opposed to the creation of "nice cosy little mutuals" funded wholly by debt because they could be less efficient.

Kelda, owner of Yorkshire Water, is considering separating the ownership of its water assets, and Western Power Distribution, the US company planning a bid for Hyder, intends to sell the assets of Welsh Water to a not-for-profit company and hive off the operation of the business to United Utilities.

Presenting his 11th annual Ofwat report, Mr Byatt set out three concerns about the proposed new form of water company ownership. First, there needed to be genuine competition to select the operator of the network. Second, the owners of the mutual company - its customers - needed to have the power to replace management if it was acting inefficiently. Thirdly, he questioned what the incentives for greater efficiency would be if the company were run on a not-for-profit basis. "Any new form of ownership, such as a body owned by its customers, should be concerned with its customers' interests, not political objectives," he said.

Ofwat officials said that "virtually every investment bank in London" was hawking around plans to convert the ownership of water companies so that the assets are financed by debt, not shareholders' equity.

Mr Byatt would not be drawn on whether he had received direct proposals from companies and said he had not discussed the issue with ministers.

Water companies have been drawn to the idea because of the increasingly stringent regulatory environment and more onerous investment programmes that have forced them to find ways to finance operations more cheaply. The industry is faced with a £15bn programme of environmental spending over the next five years, while having to cut bills by 12 per cent.

Mr Byatt presented his valedictory annual report in the august surroundings of the Banqueting House in Whitehall, accompanied by a score by Handel - although not his "Water Music".