UK water prices soar way above inflation: Pressure from shareholders and EC quality standards have led to a 60% increase in costs, survey says

WATER prices in Britain have risen on average by four times the rate of inflation over the past year, according to the latest annual survey by National Utility Services. This brings cost increases to almost 60 per cent over the past four years.

The survey says that the price increases are a result of pressure on water companies from shareholders and of the need to comply with European Community directives on water quality. The NUS also notes that as the water companies operate as a monopoly within their own franchise areas they are not subject to normal market forces.

The debate over water prices will reach a climax early next month when Ofwat, the industry regulator, sets out the basis for new price control formulae for the water companies to take effect in 1995.

Water prices have become an increasingly contentious issue in recent months. Ofwat has been conducting a debate on the cost of meeting ever-tighter environmental and quality regulations.

The NUS survey is limited to the costs for industry and commerce. However, Ofwat has already said that household water bills could rise by more than pounds 100 by the end of the decade in parts of the country, again largely because of expenditure by water firms on quality and the environment.

Ian Byatt, the director-general of Ofwat, is concerned that water bills could soon claim an intolerable proportion of income for some people. He has suggested that some EC regulations concerning water have been agreed before they were fully costed, and has questioned whether they are always scientifically justified.

He has asked ministers to take a stand on the issue, saying that Britain could argue for more time to implement the EC urban waste water directive, which he believes will contribute to large increases in water bills in coming years.

At present, water companies must limit price increases to inflation plus a factor that varies from company to company and is known as 'K'. The formulae were set to take account of the industries' investment programme, needed to meet water regulations.

As well as the cost of quality, issues to be addressed in setting the new formula include the rate of return that the companies should be allowed on their investment. Shareholders may in future be made to bear more of the capital expenditure burden.

Should water companies fail to agree with Ofwat on price control formula, the matter is likely to end up in the hands of the Monopolies and Mergers Commission.

Andrew Johns, the director of National Utility Services, said: 'It is questionable whether the K factor pricing formula, which allows costs to rise at a much higher rate than inflation, will remain as part of the pricing structure following Ofwat's review.

'Mr Byatt understands that a situation where prices continue to escalate well above the rate of inflation is no longer acceptable and must stop.'

Ofwat predicts that the average bill in England and Wales will go up by pounds 54 per household in the five years from 1995 from a base of pounds 190. The increases would vary between 2 per cent and 10 per cent above inflation depending on the capital spending needs of the water company concerned.

The NUS survey shows that Britain is not alone in suffering spiralling water bills. The UK comes sixth in the league of 13 industrial countries surveyed. German consumers fare worst, with an increase of more than 17 per cent compared with a 4 per cent inflation rate. NUS says that unless competition is introduced in the UK there is no prospect of water companies cutting prices in the near future.