Water industry braced for big one-off cut in bills

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The privatised water companies were yesterday faced with the prospect of big cuts in revenues after Ian Byatt, the industry regulator, announced plans to make a substantial one-off reduction in consumers' bills in his next price review.

Mr Byatt coupled the announcement with his strongest criticism so far of big increases in dividend payouts to shareholders, which have averaged more than 17 per cent in the current round of annual results. He said: "I think they're in an unsustainable position on dividends. Their profits are largely flat and their dividends are rising. I think that is an unwise policy and it will have to stop."

Though Mr Byatt declined to estimate the scale of the one-off cut, due in 2000, he made clear he would follow the lead set by the gas and electricity regulators in recent price regimes for British Gas and National Grid. BG last week accepted cuts of 21 per cent in its revenues this year after taking its fight with the regulator to the Monopolies & Mergers Commission.

The Ofwat consultation document said the adjustment to bills in April 2000 was likely to be "significant" though it had not decided whether it would be in the form of a flat rate across all companies. In addition, bills in the following four years would be unlikely to rise by more than inflation and could have to drop in real terms each year.

Ofwat also proposed changing the way the companies' huge investment programmes would be incorporated into prices. In future, the industry would only be able to raise revenues from consumers for schemes which raised water quality once the improvements had been delivered. "You don't pay for a new product until it's produced and available to you," Mr Byatt said.

Though Mr Byatt stopped short of attacking his last price regime, which allowed bills to rise by more than inflation, he admitted it had enabled companies make much bigger returns than he anticipated.

He also expressed frustration at the failure of some companies to meet the investment targets: "Companies have taken a rather shorter term position than I would have liked them to do in terms of investment programmes."

Mr Byatt conceded he would have to consider the windfall utility tax, to be revealed in next week's Budget, when setting the next price limits, though it was unclear whether this would reduce the scope for price reductions. "That will affect the capital position of the water companies... we shall obviously examine what consequences that has," he said.

Water companies gave a cautious response to the Ofwat proposals yesterday, which would not be translated into concrete figures until 1999.

The industry had lobbied against the idea of a one-off price cut during preliminary consultation, while consumer groups had supported it. A South West Water spokesman said: "It's early days yet, but we believe we are already working under the tightest financial regime in the industry."

Analysts speculated that the cut could be in "double figures" and some forecast a 20 per cent hit. Research by NatWest Securities suggested one-off cuts ranging from just 2 per cent in the case of Welsh Water to more than 19 per cent for Wessex, to reduce returns in the industry to the 8 per cent level originally envisaged by Ofwat.

Utility share prices increased yesterday after reports that Gordon Brown, the Chancellor, had hinted the windfall tax would be closer to pounds 3bn than pounds 5bn.