Mr Byatt set his face firmly against any profit-sharing formula for the industry and also said that the companies would be allowed to delay returning efficiency savings to customers for longer than expected.
The announcement cheered the markets and prompted sharp upward movements in the share prices of a number of water companies. Anglian Water rose 51p to 843p while Thames added 50p to close at 895p and Severn Trent closed 35p higher at 929p.
But the regulator's stance threatens to run counter to that of the Government which is expected to outline proposals for a tax on "excess" utility profits when it publishes its Green Paper on utility regulation next month.
Mr Byatt said that his review of prices from 1999 would be based on the existing RPI-X formula remaining in place and not being replaced or complemented by any formal profit sharing scheme.
He also said that companies would be allowed to retain efficiency savings from their investment programmes for five years rather than the two years mooted in earlier discussion papers. Customers will also have to pay for improvements in the quality of water supply up front, rather than when the improvements have been delivered, a move which would have meant greater risk and therefore a higher cost of capital for companies.
However, Mr Byatt stuck by his proposal for a big one-off reduction in water bills in 2000 and said he was "sympathetic" to the idea that prices should not rise by more than inflation thereafter.
Mr Byatt said he accepted that his proposals would be subject to any legislative changes arising from the DTI review of utility regulation. He also said that future price levels would depend on the extent to which ministers imposed new environmental and drinking water standards on the industry and whether consumers would be prepared to forego price cuts to pay for them.
An Ofwat spokeswoman denied that there was any significance in the timing of Mr Byatt's announcement - just a fortnight before the Government Green Paper is expected. She said it had always been planned to issue the price review document in late February and that Ofwat could only work on the basis of government policy as it stood.
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