Fresh Ofwat dam on water prices expected

BRITAIN'S water companies are bracing themselves for a new demand from Ofwat, the industry watchdog, to restrict their price increases for millions of consumers next year.

A similar move by the regulator last year led to total annual savings of about pounds 40m for customers.

There is a growing fear in the industry that Ian Byatt, director-general of Ofwat, is likely to demand similar controls with effect from next April.

The industry's capital costs and spending on building works have fallen sharply because of the recession. As a result, Ofwat is expected to demand that some of the cost savings be passed on to consumers in the form of lower price rises.

In some cases, capital costs are estimated to be running between 10 and 15 per cent below projections made at the time of privatisation.

'I would not be surprised if the regulator was planning to take action,' one senior water company executive said. His views are shared by counterparts from other companies contacted by The Independent.

Last year's restrictions were prompted by Ofwat's concern that efficiency gains by the companies were much higher than expected. In addition, some of the utilities had not spent as much as envisaged on meeting EC environmental regulations.

Andrew Stone, water sector analyst at Daiwa Research, said: 'The issue of clawbacks to consumers has returned. The regulator, under the terms of the water licence, is entitled to seek reductions in tariffs such as the one made last year.'

Ofwat's move is expected at a time when many of Britain's privatised utilities are facing mounting pressure to cut prices. Last week, British Gas announced a 2 per cent cut in domestic gas bills, which together with an earlier 3 per cent reduction, will save an estimated pounds 27 a year per family.

Earlier this month BT agreed to new price controls that are expected to cut private telephone users' bills by about 3 per cent.

Any similar steps by Ofwat are likely to be taken in the next few weeks to provide the industry with sufficient time for a formal response later this year.

A spokeswoman for Ofwat said: 'If we feel there is a need for an interim adjustment we will do so. We have no plans to do so at present.'

Under a formula set at the time of privatisation, water companies are allowed to raise prices substantially above the inflation rate. But last year they agreed to impose increases below the maximum level following pressure from Ofwat.

In consequence, most of the 10 privatised utilities restricted the increases to between 1 and 1.5 per cent above inflation - compared with about 4.5 per cent above inflation to which they were entitled.