Both Pennon Group and Yorkshire Water said they expected to avoid cutting dividends in the face of Ofwat's proposals last month for water bills to be cut by 15 to 20 per cent from 2000.
The proposals, which are under consultation, are part of the periodic review of water company regulation by Ofwat unveiled last month. Final proposals will be published next July.
Pennon Group, formerly South West Water, said it would fight the effect of the cuts by stepping up activity in non-regulated businesses such as its Viridor waste management subsidiary. It said it was planning to maintain dividend growth of 8 per cent in real terms.
Ken Harvey, chairman of Pennon, said: "The review is going to hit turnover and profits of our regulated businesses. Our strategy will be to improve operating costs and to prepare for the review.
"The key to our growth will be the development of Viridor. In waste management, the margins are there."
He said non-regulated business should make up half of group turnover within three years.
Half-year profits were up 5 per cent to pounds 71.5m and the interim dividend rose 11.4 per cent to 14.7p. The company also cut costs by 6 per cent in real terms at its main water business.
Operating profits at Viridor jumped by 63 per cent, excluding exceptionals, following the purchase in December 1997 of Terry Adams, a landfill operator. The company has bought three new landfill sites in the last three months and is planning further purchases.
The group said it would challenge Ian Byatt, the head of Ofwat, over the proposed price cuts.
"We will have a vigorous debate with Mr Byatt. You should not take it that we will roll over and accept what he has proposed. But we don't want to debate this issue through the media," Mr Harvey said.
Reporting a 2 per cent upturn in profits to pounds 118m, Yorkshire said dividends would be hit by the review, but a dividend cut was unlikely.
Howard Cressy, group financial controller, said: "It is all to play for in terms of the price settlement. But it would be premature to anticipate the outcome of the review."
Analysts said Ofwat was unlikely to give much ground on price cuts. "What you are playing for is for the cuts to be nearer 15 than 20 per cent," said Geraint Anderson of SG Securities.
Shares in Pennon rose 7.5p to 1131.5p yesterday, while shares in Yorkshire were up 3.5p to 551p.