Water regulator hints at price rises in the pipeline

The water regulator yesterday gave his clearest warning yet that households can expect a hike in water bills from 2005.

Philip Fletcher, director general of Ofwat, said the fall in water bills since 2000 would be reversed in the next five-year period of regulation, which begins in 2005.

"The big message is that there is no pot of gold this time," said Mr Fletcher. "The additional pressures that are now evident exceed the efficiency gains available."

Between 2000 and 2005, water bills will have dropped by 12.5 per cent. Mr Fletcher said this was only possible as a results of the massive efficiency gains achieved by the industry in the preceding 5 years, when it beat regulatory targets "by miles". This time, companies have surpassed targets but by much smaller margins. Mr Fletcher will release a draft version of the new regulatory settlement next summer. Companies have to make their submissions to Ofwat in the next two weeks.

Analysts estimated that, given another massive investment programme required of companies in the 2005-2010 period, bills may have to rise fairly steeply. One analyst said that, in the initial few years of that period, increases of between 5 and 10 per cent a year are likely.

Mr Fletcher confirmed that he anticipated capital expenditure in the next review would be around the £13.7bn that will be spend under the current five-year plan. Figures on the investment required and the returns allowed to companies are crucial to the industry.

The heavy investment needed is driven by new European environmental standards on water and waste water, as well as increasingly demanding consumers.

Mr Fletcher said he remained concerned that mergers take away comparators which he can use for regulating the industry. He revealed that Ofwat had commissioned a study of the economies of scale available in the industry, an argument often deployed by companies to justify mergers.

He also gave backing to the equity model in the sector. "One potential advantage of equity is that it leaves a company with options that appear to narrow when it chooses a debt structure," Mr Fletcher said.

He added that, in formulating the next regulatory settlement, he would take into account companies' dividend cover needs. He made clear that he did not view the unusually high dividend paid by United Utilities, saying United was not putting consumers interests in "jeopardy".

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