Outlook: Water charges

HOPE SPRINGS eternal in the water industry. Some water companies still believe they can persuade the industry regulator, Ian Byatt, to give ground before he announces his final, final price controls in November. They have about as much chance of succeeding as stopping the rain falling on the Welsh valleys. The sight of the Deputy Prime Minister, John Prescott, standing shoulder to shoulder yesterday with Mr Byatt as he unveiled his "win-win" package of lower bills and cleaner water should have been enough to convince the industry that it is in for a soaking.

To see why, it only has to examine the precedents. In every case bar none, the privatised utilities have shown themselves capable both of absorbing the worst the regulator could throw at them by way of price controls and able still to turn the dividend tap full on.

Graham Hawker of Hyder undoubtedly regrets the day he warned that Ofwat's proposals could render the company "unbankable" and he may yet be forced to go down with the ship if Welsh Water resorts to a Competition Commission appeal. Still, at least he's found himself a soulmate in the unexpected form of Northumbrian Water's French owner. After being allowed to take its French customers largely for granted over the years, Suez-Lyonnais des Eaux has discovered that the UK regulatory regime is made of sterner stuff. The French now have the unappealing choice of reducing bills in the north east by 25 per cent or spending months with the Competition Commission.

Mr Byatt has no incentive at all to ease the pain for the water industry or its shareholders, and certainly no intention of doing so. The water regulator retires next July and wants to make the biggest splash he can with this, his last set of price controls. The companies may whine that a 4.75 per cent return on capital is so low it plain makes the eyes water, and they can complain all they like that the regulator's efficiency targets are impossibly optimistic. But history tells us that, a few years from now, we shall all be wondering why Mr Byatt did not turn the screw even tighter.

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