Early price review should cut water bills

Water bills are set to begin falling from the end of the century after the industry regulator, Ian Byatt of Ofwat, confirmed that he is to review price controls earlier than planned.

The announcement yesterday sent the share prices of the water companies into reverse although some industry representatives welcomed the move as a means of obtaining regulatory clarity.

The current price controls, which limit increases to the retail price index plus 1 per cent, were introduced in 1995 and were due to run for 10 years.

But Mr Byatt announced yesterday that he had decided to review the price limits for all 29 water and sewerage companies in 1999. "The water companies are now reporting substantial efficiency savings. We will take full account of these at the next review in order that they can be passed on to customers," he said. "Customers have seen prices rising for too long."

The average water bill has risen from pounds 118 in 1989, the year of privatisation, to pounds 218 now - an increase of 85 per cent. The huge increase has been justified on the grounds of the pounds 30bn expenditure programme the industry is undertaking to improve water standards and clean up rivers and beaches.

The rate of increase has, however, been getting progressively slower. In the first five years after privatisation water charges rose by 68 per cent and sewerage charges by 65 per cent. Since 1994 they have risen by 8.3 per cent and 13.1 per cent respectively, said Ofwat.

Prices had only been due to rise by an average of 0.4 per cent between 2000 and 2005 under the existing price review and in some areas such as Yorkshire, Severn Trent and North West, they would have been frozen.

It is now almost certain that prices will start to come down in real terms. "We would not be reviewing the controls early if we expected to keep them as they are at present," said an Ofwat spokeswoman.

The water companies' licences allow for a review to take place half-way through the current price control and it has been widely assumed in the industry that Mr Byatt would take advantage of this.

Pamela Taylor, chief executive of the Water Companies Association, said the announcement represented an important opportunity for the industry, adding that it had not come as any surprise. "This review will enable all parties - companies, the Government, the Environment Agency and Ofwat itself - to create a much needed stable framework within which companies can best serve our customers' needs."

The extent to which the water companies are achieving savings beyond those assumed by the regulator when he set the price controls will become apparent later this month when Mr Byatt publishes his annual report of capital expenditure by the industry.