Ofwat acts to end water companies' cross-subsidy

(First Edition)

OFWAT, the water industry regulator, has appointed KPMG Management as consultants in its drive to stamp out cross-subsidies by water companies, writes Mary Fagan. The watchdog is concerned that some firms use profits from their monopoly water and sewage business to cut prices in other operations below levels that the market would otherwise allow. Water company share prices dipped on the news.

Since privatisation, most of the water companies have diversified into other areas. Although Ofwat has no power to regulate these operations, it wants to ensure that they do not work against the interests of water and sewage customers. Ofwat is already consulting on licence amendments requiring the firms not to cross-subsidise. KPMG is to advise on how costs should be allocated to various parts of a water company. The consultants will also establish ways of setting payments for transactions between subsidiaries and of ensuring that all such transactions are at arm's length. Auditors will be expected to report on whether the guidelines are observed.