The cap is thought to limit the average price increase to between one and two percentage points above inflation, although analysts believe some companies may be limited to increases less than inflation. In recent years they have been able to increase prices annually by between three and 11 points more than the retail price index.
The caps are certain to anger water company shareholders. Some, including Prudential and Barclays de Zoete Wedd, have already expressed concern and the companies may come under pressure to agree to a Monopolies and Mergers Commission inquiry rather than accept price limits that they think too onerous.
Ian Byatt, director-general of Ofwat, believes that water firms could do much more to increase efficiency. He also disagrees with the companies over how their assets should be valued and has said that they should have a much lower rate of return in future.
Although meetings with the companies will discuss the caps, it is thought Mr Byatt will be unwilling to move significantly. If the companies fail to agree with the limits, the matter will be referred to the MMC. Mr Byatt will announce his final verdict on 28 July.
The water companies will spend billions of pounds over the remainder of the decade, largely on meeting environmental and quality standards. Mr Byatt's formulae will allow them to meet their legal requirements, but he has sparked a debate about how much the customer is prepared to pay for quality and whether consumers should be given more choice as to how money is spent.
View from City Road, page 19Reuse content