In another sign of his increasing concern at recent substantial hikes in dividends, Ian Byatt, the regulator, attacked the companies yesterday for paying "scant attention" to financial figures in their annual submissions to Ofwat, the watchdog.
He also raised the spectre of tougher price controls from 2000, by suggesting the companies were setting aside too much cash from their profits to cover depreciation charges. A similar argument was used by Clare Spottiswoode, the gas regulator, in her long-running dispute with British Gas over pipeline charges.
Mr Byatt has written to all the large water and sewerage groups asking them to submit special reports on dividends and depreciation by next month. He warned that if they continued to fail to explain the way dividends between the main regulated utility businesses and the quoted holding companies were calculated, he would inset tougher provisions in their operating licences.
Each year the companies make annual returns to Ofwat giving detailed operating results for their main regulated water and sewage businesses. But Mr Byatt said the latest set of data did not clearly show the flows of money between different parts of their businesses.
"The water companies need to articulate their dividend policy at the time of their public results. I'm not saying that there's been no progress on this issue since I first made my concerns known, but it hasn't been good enough," Mr Byatt said.
He added that he wanted to see companies provide greater detail on regulated dividends at their next set of results for the six months to the end of September, to be published at the end of the year. "I'm not saying I want to control dividends, but I'm equally determined to get better transparency."
At the last set of annual results most water groups reported unexpectedly large rises in dividends, typically in the high teens. South West Water's increased by 20.3 per cent, while Thames water's payout soared by 22 per cent.
Most pointed to customer rebate schemes or increases in discretionary investment programmes as a sign that consumers were sharing in the distribution alongside investors. But the level of information about dividends paid by the core regulated businesses, the main source of earnings, varied widely between the companies.
The additional concern over depreciation charges came after Ofwat found the companies were setting aside much bigger sums for depreciation than the amount of cash spent on maintaining the assets themselves. A larger depreciation charge would artificially reduce profits at a time when the companies are negotiating the next price review. Mr Byatt has already called for a substantial one-off drop in customer bills.
Separately, Ofwat yesterday approved the second move towards water competition, with a plan by Anglian Water to service business customers outside its own region. Anglian will take over a sewage treatment works on the former RAF Finningley base near Doncaster, which is due to be developed in a housing estate. The base is in Severn Trent's sewerage area.
Earlier this year Anglian won the first so-called "inset appointment", taking over the provision of water to a chicken plant supplied by a neighbouring drinking water company.