MMC gives South West tighter code

The Monopolies and Mergers Commission has imposed tough price controls on South West Water after 10 months of investigation. The decision is a severe blow to South West, the only one of the 10 major water and sewage companies to go to the MMC rather than accept controls proposed by the regulator, Ofwat.

The controls set by the MMC are similar but slightly tighter than those set by Ofwat exactly one year ago. They limit price increases to inflation plus one percentage point to the year 2000 and to inflation for the following five years. The MMC ruling saves consumers pounds 1.50 per household compared with the Ofwat control. South West's shares fell by 15p to 524p.

The MMC also broadly upheld Ofwat's price cap for Portsmouth Water, one of the smaller water-only companies.

Ian Byatt, director general of Ofwat, said: "This is excellent news for customers in the South- west. The company's decision to appeal against the price limits I set caused considerable anxiety for customers who feared their bills might continue to rise well above inflation. I am now completely vindicated in my decision made last July."

Mr Byatt said the slightly more onerous control set by the MMC does not mean that the overall review for the sector had been too generous. He said that the main difference was that South West had slipped back on its capital spending programme in the intervening months.

A report by the MMC noted serious concerns among South West's 1.5 million customers that their bills - on average pounds 300 a year - are about 50 per cent higher than average. The MMC said there was a high level of unwillingness and in some cases inability to pay "even to secure environmental improvements".

The Commission decided to allow the company higher capital and operating spending than Mr Byatt, but less than South West wanted.

City analysts said the whole episode had been bad for South West. One said: "They have been stuffed, basically." Bill Dale of SG Warburg, said: "They have spent almost pounds 3m and 12 months of management time and have got a worse package than the one they had."

He added that the outcome of the MMC inquiry would be ammunition for anyone who felt the whole sector deserves harsher treatment and a fundamental overhaul of the regulatory regime.

South West Water said it had gained something from the higher allowed spending and from some relaxation in the timetable of environmental improvements it has to make. But Ken Hill, finance director, said that any suggestion by Mr Byatt that it had fallen behind on its capital programme so far is "completely wrong".

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