View from City Road: Danger of leaks in the new world of water

Much has been written and said about the secretive way in which Ian Byatt, director-general of Ofwat, has chosen to conduct negotiations with the water companies over 'K' factors for the next five years. The water companies have already had their say - in secret. Now it is the industry regulator's turn - again in secret.

There will follow two months of (secret) negotiations at the end of which the new price caps will be published. If water companies think the outcome unfair, they can take their case to the Monopolies and Mergers Commission, a course fraught with dangers as they could as easily end up with a worse formula as with a better one. The inquiry would again be held 'in camera'.

Behind closed doors decision-making of this type is very much the British way, but is it the right one? So far the debate has tended to concentrate on a comparatively minor, though still important aspect of the issue - the risk of the new 'K' factors being leaked.

The suggested figures are being sent in confidence to water company chiefs over the weekend. Within days a quite substantial number of people will be aware of them, including heads of the regional customer services committees.

Everyone involved has been made to sign confidentiality agreements, but whether the ship will remain watertight is anyone's guess. The new price caps are plainly highly price-sensitive. There is a real possibility of a false market developing as well as the potential for a hotbed of insider dealing.

All no doubt jolly interesting stuff, but actually subsidiary to the main issue; whether a correct balance is being struck in the new pricing formula between the interests of customers and shareholders.

Mr Byatt is nobody's puppet, so there is not much danger of the water companies rolling him over. Looked at from the other end of the telescope, the greater risk seems that Mr Byatt will be unduly harsh, or that environmental programmes will be cut so that prices can be restrained.

If what we already know about the price review is adhered to - last November Mr Byatt published a discussion document which suggested that the rate of return be slashed from its privatisation level - then water companies can expect a great deal of pain. None of them will be allowed to raise prices by more than 2 per cent a year above the rate of inflation (the present average is 4.5 per cent) and some of the smaller ones might be forced into real price reductions.

The point is that we just don't know. Without access to the figures, there is no chance of an informed public debate. By the time they are published they will be a fait accompli, decided and dictated by a regulator who, though nominally accountable to Parliament, can within certain boundaries do pretty much what he likes.

There are no easy solutions. In the US, price reviews are subject to public inquiry and take an average of nearly two years as a result. Clearly, this is not the way forward. Nevertheless it is plainly right that Mr Byatt's actions be made subject to some form of independent assessment and judgement, in the interests not just of City investors, but of customers and environmentalists too.