Byatt puts a plug in water's dividend gusher

When the water industry outlined its "vision of the future" a week ago, one of the things its crystal ball failed to highlight was the danger of being clobbered by a big one-off cut in charges in three years' time.

That became a distinct possibility yesterday after the industry regulator, Ian Byatt, confided to MPs that he saw much merit in applying the same kind of price controls on the privatised water companies as those used by his opposite numbers in gas and electricity. For the water companies, that would mean a very painful adjustment in 2000 so that efficiency gains flow through much more quickly to customers in the shape of lower bills.

With a change of government on the horizon, it is scarcely surprising that Mr Byatt should be thinking along such lines. But regardless of the political climate, there's plenty else driving him in this direction.

When the last set of price controls was introduced in 1995, the regulator decided the industry should be allowed to make a return on new investment of 5 to 6 per cent over the 10-year period. The industry is now making returns of about 12 per cent. Under the present regime, efficiency gains are drip fed to customers over a phased period. The effect of imposing a one-off cut in charges would be to ensure that 50 million customers get much of that benefit in one dollop.

Supposing he is still in the post, Mr Byatt will not sit down to begin doing any serious sums for at least 18 months. But if he were to follow the example of Clare Spottiswoode at Ofgas, whose regulatory approach he much admires, the water industry could be looking at a one-off reduction in revenues of pounds 600m to pounds 800m.

Prices in future years would not come down by anywhere near as much, and might even have to go up, to meet the water industry's heavy capital investment programmes. Nevertheless, the net effect would be a much harsher regulatory environment than the industry enjoys at present.

The water companies have tried to wriggle out of their fate by promising to share an undisclosed proportion of future efficiency gains with customers. Mr Byatt looks like closing off that option. The dividend gusher is not going to be what it was.