Byatt sinks plan to turn Yorkshire Water mutual

The outgoing water regulator, Sir Ian Byatt, yesterday vetoed proposals by Kelda to sell its Yorkshire Water business to a customer-owned mutual company and return £1bn-£1.3bn to shareholders.

The outgoing water regulator, Sir Ian Byatt, yesterday vetoed proposals by Kelda to sell its Yorkshire Water business to a customer-owned mutual company and return £1bn-£1.3bn to shareholders.

The decision is a victory for water consumers and community organisations in Yorkshire, led by the Bishop of Leeds, who opposed the radical break-up plans as too risky and too generous to shareholders

Sir Ian's move casts serious doubt on plans by several other water companies, including Hyder and Anglian, to separate the ownership and operation of their water assets.

Kelda immediately announced that it had withdrawn the proposal, first put forward in June as a means of reducing the costs of funding its £1.5bn investment programme.

Although Sir Ian retires from Ofwat in a week's time and hands over to a new regulator, Philip Fletcher, Kelda said it had no plans to resurrect its proposals in the hope that a change of regulator would bring a change of heart.

Sir Ian blocked Kelda's plans on the grounds that it was not clear how customers would benefit, how safety and water quality standards would be maintained and how the independence of the mutually owned company would be guaranteed.

Under Kelda's proposals, it would have continued to operate Yorkshire Water for two years under contract. After that the management contract would be progressively put out to competitive tender.

Sir Ian maintained that he was not saying that mutual ownership was in principle a bad thing and he welcomed ideas as to how new capital structures for water companies could bring prices down while maintaining standards. But he said that Kelda's proposals, as they stood, were not acceptable. "The present system has worked well, and so to an extent I am saying that if it ain't broke, don't fix it," Sir Ian added.

He was particularly critical of Kelda's failure to spell out the benefits of its proposals to Yorkshire Water's three million customers or how it would gain their "informed consent". Sir Ian said that a vote or comparable procedure would be necessary.

Sir Ian said it was not clear that the proposals would reduce risks for the business as a whole. He also criticised Kelda for failing to grasp the importance of the mutual company being fully independent. Its chairman and managing director would have been ex-Kelda executives, both of whom own shares in the company.

Kelda said that it was "disappointed but not surprised" that Sir Ian had vetoed the proposals. John Napier, Kelda's executive chairman, said: "We will continue to have a dialogue with the new regulator. We do believe we have solutions to most of the issues raised by Sir Ian but to be seen to be battling on in the face of opposition from the regulators would clearly not be in anyone's best interests."

Ofwat's consultation document on the proposals drew 110 responses, including 72 from customers and local church and community groups which were overwhelmingly hostile.

Kelda shares held firm, although its bonds fell on fears that its debt rating could be cut.