Byatt faces water challenge

Ofwat proposals: Industry told to cut bills by 14 per cent and invest pounds 15bn over five years

NORTHUMBRIAN WATER yesterday threatened to appeal to the Competition Commission after being ordered by the industry regulator Ofwat to reduce domestic bills next year by 25 per cent.

Hyder, the owner of Welsh Water, also indicated that an appeal was a possibility after being told to cut charges by 14 per cent from next April and reduce its capital expenditure programme by pounds 700m.

However, the overall package of cuts unveiled by Ian Byatt, the director- general of Ofwat, was not as draconian as feared and the share prices of some water companies rallied on the news. Thames, Severn Trent and Yorkshire, all ruled out an appeal to the Commission.

Flanked by John Prescott, the Deputy Prime Minister, Mr Byatt announced that water bills would fall by an average of pounds 34 or 14 per cent next April and stay down for the following four years. At the end of the five-year period to 2005, he said customers would be pounds 38 better off on average.

At the same time, Mr Byatt said the water industry would still have sufficient resources to fund a pounds 15bn investment programme over the next five years, pounds 7bn of which would be spent improving the quality of drinking water and cleaning up beaches and rivers.

Mr Prescott, described the proposals as a "win-win" package for consumers while Mr Byatt warned investors: "There is no doubt profits will be lower. They will come down and largely stay down."

The new price controls set a rate of return for Britain's 26 water companies of 4.75 per cent compared with 7.5 per cent at present and will also force the industry to improve efficiency substantially. The water companies will have to achieve cost savings of nearly 3 per cent a year and improvements in their capital maintenance and environmental investment programmes of 11 and 14 per cent respectively.

The new environmental obligations, coupled with the squeeze on prices, will require the industry to borrow an extra pounds 7bn, taking the gearing of many companies up to 50 per cent.

Shares in Yorkshire Water, which is facing a 15 per cent cut in bills next year, fell most heavily, losing more than 6 per cent, while shares in Thames and Hyder fell by between 3 and 4 per cent. But shares in Anglian Water, which has escaped with the smallest percentage cut in charges, rose nearly 5 per cent.

Northumbrian Water, now part of the giant French utilities group Suez Lyonnais des Eaux, described the price reductions as "unrealistic and unsustainable". It has been told to cut its average pounds 244 bill by pounds 62 next April and then hold keep them virtually unchanged for the next four years. Tony Harding, the company's managing director, said it would be seeking to change Mr Byatt's mind before final controls are set in November. "If the final determination is not different, the company will be forced to consider an appeal."

Hyder, which had warned that Ofwat's initial price curbs could render the company "unbankable", said it still had a number of concerns. Ofwat has factored in a cut in Welsh Water's environmental programme from pounds 1.7bn to pounds 1bn and told it to improve operating efficiency by 22 per cent by 2004/5.

Graham Hawker, Hyder's chief executive, said it would continue to press Ofwat for an outcome that was "deliverable".

The National Consumer Council and Consumers' Association welcomed Ofwat's announcement but said there may be scope for further cuts in bills beyond 2000 while the Environment Agency said warnings from some suppliers that maintenance work could suffer would not wash.

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