Water shares rally but Byatt price curbs set to prompt appeals

WATER COMPANY shares rallied yesterday as the industry regulator, Ian Byatt, unveiled a less punitive set of price curbs than had been feared.

But industry leaders said they still expected a number of suppliers to appeal to the Competition Commission in protest at the reductions in domestic bills and increased environmental spending they face.

Water UK, the industry group, described the pounds 1.2bn package of price cuts and environmental improvements announced by Mr Byatt as "a tough settlement all round", saying he had given with one hand but taken away with the other.

"Profits will fall, borrowings will spiral and the industry's cash negative position will simply get worse," said Water UK's chief executive Pamela Taylor.

"Those companies who decide it will not be possible to deliver the programmes needed to meet their obligations will have no choice other than to lodge appeals with the Competition Commission."

Companies have two months to decide whether to accept Mr Byatt's final price determinations or to opt for a six month hearing before the commission.

The price curbs will reduce average household bills by pounds 30 next year - a reduction of 12 per cent. In his draft proposals in July, Mr Byatt recommended a 14 per cent cut in charges.

The change is the result of a pounds 700m increase in the industry's bill for environmental and drinking-water quality improvements over the next five years to pounds 9.4bn. Total expenditure, including maintenance, will reach pounds 15.4bn.

Mr Byatt described the package as "fair, achievable and realistic". Other than the extra leeway on bills he has given some suppliers - particularly those with long coastlines, there are no changes from his July proposals. The industry's post-tax return on capital remains at 4.75 per cent while it will still have to achieve a 16 per cent efficiency gain over the five year period to March 2005.

Shares in Thames, United Utilities, the owner of North West Water, and Anglian and Kelda, the owner of Yorkshire Water, rose by 4-6 per cent.

But Severn Trent shares fell as did shares in Hyder, the owner of Welsh Water, despite a reduction in the amount by which it will have to cut bills from 14 per cent to 10.5 per cent. Hyder is seen as the company most likely to appeal.

The average annual reduction in bills over the five-year period will be 2 per cent compared with a figure of 2.7 per cent proposed in July. This reflects the decision by Mr Byatt to allow some companies such as North West to raise prices by a greater amount in the past two years of the period to fund their environmental obligations.