Water firms face shareholder wrath: Ofwat review expected to approve price increase of 1.3% above inflation

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WATER companies face a rough ride at shareholders' meetings this week in the run-up to publication of new price controls by Ofwat, the regulator.

South West Water, whose annual meeting is on Tuesday, and Severn Trent, meeting on Friday, are likely to face severe criticism from investors over directors' pay and performance.

Despite shareholder disquiet, the City's confidence in water companies remains, and their shares edged up on Friday in the expectation that Ofwat's review would not be as onerous as originally feared.

Some companies, however, are likely to see price increases capped to less than inflation for the first time under the so-called K factors.

On Friday, directors of North West Water were attacked for high salary packages. Severn Trent, which caused outrage this month when it revealed paying its former chairman, John Bellak, pounds 512,000 compensation for early retirement, is due to receive similar treatment. 'I cannot think of any justification for such payments,' said an investor. 'But we will want some sort of explanation.'

There was speculation that Unison, the public services union, bought shares in water companies so it could raise complaints. A national union official said he did not know of such a plan, but added: 'Such a strategy would be up to individual regional offices.'

The National Campaign for Water Justice is planning to picket South West Water's annual meeting over its annual pounds 304 domestic water bill, the highest in England and Wales. And shareholders have said they will be asking questions on Tuesday about Thames Water's chief executive, whose salary package rose 43 per cent. Welsh Water has an AGM on Wednesday.

Ofwat's price review, due out on Friday, is expected to say that from April the companies will be able to increase prices by an average of 1.3 per cent above inflation. This compares with an average limit of inflation plus 5 per cent now.

Nigel Hawkins, an analyst at Hoare Govett, said a review of many companies was likely to be less aggressive than if the regulator had just one company to deal with. There are about 30 companies, including statutory water firms, involved in the review.

'There is safety in numbers and we do not believe that the outcome will force any of the companies to go to the MMC,' Mr Hawkins said. He expects average real dividend increases of 4 per cent annually for shareholders in the big 10 companies in the five years from 1995/96.

The price review comes amid complaints by consumer groups over soaring water bills. The National Consumer Council says domestic water bills have risen by 67 per cent since privatisation in 1989. There is a widespread view that the Government was over-generous when it set the original price controls.

Ian Byatt, director-general of water services, has made it clear he will not tolerate massive price increases. Although he acknowledges that water and sewerage companies must spend billions of pounds to meet quality and environmental standards, he says shareholders, and not just customers, must help to foot the bill.

----------------------------------------------------------------- SIZING UP THE K FACTOR ----------------------------------------------------------------- Analysts estimate the new limits, above or below the retail price index, by which companies can change their prices each year ----------------------------------------------------------------- 1995/96* NatWest Hoare Credit Securities Govett Lyonnais Anglian 5.5 2 2 2.1 Northumbrian 3 2.5 2.6 3.2 North West 5 2 2.5 1.4 Severn Trent 2 -2 0 0.3 Southern 0 2.5 3 1.5 South West 5.5 5 3.5 3.5 Thames 4.5 -1 1 0 Welsh 5.5 -4 -0.5 0 Wessex 4.5 1 1 0 Yorkshire 3 2 2 2.7 ----------------------------------------------------------------- *The K factors set by the Environment Department at privatisation in 1989 for the 5 years from 1995/96 -----------------------------------------------------------------