Ian Byatt, director-general of water services, said: "Meeting shareholders' wishes for ever-higher dividends could be inconsistent with the longer- term investment needs of the industry." He added: "Whilst I do not control dividends, I do not expect companies to make decisions which could jeopardise the longer-term interests of the industry."
Mr Byatt said he was aware that the City was placing pressure on water companies to increase their dividends, possibly because of the threat of a "windfall" tax on utilities if the Labour Party came to power.
However, he said continued dividend growth well above the rate of inflation was acceptable only if companies consistently made substantial savings from efficiency. These would have to go beyond savings he had already assumed in setting existing price controls.
Mr Byatt welcomed North West Water's move, but he added: "I do not think the special dividend for shareholders would have been acceptable without the payout to customers."
Jack Cunningham, shadow industry secretary, said: "Handing back a tiny fraction of monopoly profit as a public relations exercise is not good enough."
North West Water said that the initiative for a payment to customers came from the company rather than the regulator, although Mr Byatt had been kept informed.
Sir Desmond Pitcher, chairman, said there had been discussion on whether to make an annual payment related to the size of bills but that Ofwat and North West had agreed on a £6.50 flat rate.
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