Water firms to slash dividends as Byatt unveils price controls

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THE CITY is bracing itself for a round of swingeing dividend cuts among the water companies when the industry regulator, Ian Byatt, unveils his final price controls later this week.

Analysts believe the head of Ofwat will stick closely to the draft price reductions he announced in July, which would see domestic bills fall next year by an average of 14 per cent, or pounds 35.

The industry has mounted an unprecedented lobbying campaign in an attempt to persuade the regulator to water down his price controls, claiming that 9,000 jobs and a pounds 3bn-a-year capital investment programme could be put at risk. However, Mr Byatt has remained largely unmoved, concluding that on the "fundamentals" he has heard nothing from the industry to make him change his mind.

The price curbs, to be announced on Thursday, are expected to knock pounds 1bn off operating profits across the sector next year and result in a near doubling in borrowings to pounds 20bn by 2005 to fund a massive programme of environmental improvements.

Nigel Hawkins, utilities analyst at Williams de Broe, said he expected a rash of dividend cuts across the sector led by Hyder, the owner of Welsh Water, which he forecasts will reduce the payout by 60 per cent.

"I think Mr Byatt is not the man for turning. In fact, over the last three months he probably feels even more vindicated in his stance," added Mr Hawkins.

Other analysts expect at least two, and possibly more, of Britain's 26 water companies to appeal to the Competition Commission over the new regulatory formula.

The price controls are expected to limit companies' return on capital to 4.75 per cent and also require them to cut operating costs by a further 16 per cent between 2000 and 2005. Mr Byatt has pledged that prices will not only fall in year one but will also stay down throughout the five- year period of the new controls. This means that by 2004-2005, prices could be pounds 40 lower in real terms than they are today.

Although Mr Byatt may announce a slight reduction in the amount by which average bills will fall next year, analysts doubt whether this will be by more than 1 or 2 percentage points.

The suppliers hardest hit by the draft price curbs announced in July were Northumbrian, part of Lyonnais des Eaux, where bills are planned to fall by 25.5 per cent; Yorkshire, which is facing a 15 per cent cut; and Hyder, where the reduction is 14 per cent.

The National Consumer Council yesterday called for even steeper price cuts, estimating that bills for Britain's 20 million households could come down next year by between 19 and 26 per cent. It said that, contrary to the industry's claims, price cuts of this magnitude would jeopardise neither service quality nor environmental programmes. Anna Bradley, NCC director, said: "Welcome though this week's announcement will be in turning the tide of inexorably rising water charges for consumers, it is unlikely to go far enough."

She also expressed concern about the lack of transparency in the regulator's calculations.

However, the public service union, Unison, said that even steeper reductions in bills would be "a cut too far". Alex Thompson, head of water for the union, said he was sceptical about the amount of slack left in the industry, saying: "It seems obvious that you cannot expect continued improvements while demanding bigger and bigger price cuts."

Meanwhile, a senior economist will today call an overhaul of the way the water industry is regulated, including an end to the system of controlling bills through the RPI-X formula, which price caps increases at a certain rate below inflation.

Professor Colin Mayer of the Said Business School recommends giving clearer incentives to individual firms rather than persisting with the current "one-size fits-all" approach.