Ofwat Ruling: Steep rise in charges helped fund directors' pay rises

AVERAGE water bills have risen by at least two-thirds since privatisation, with much of the extra money helping to fund a substantial increase in company profits and dividends and their directors' pay.

Ofwat's announcement yesterday of a new pricing structure for the industry follows rising hostility to the apparently remorseless increase in bills and the perception that price caps set after privatisation in 1990 were generous.

The perception of an industry awash with profits has been strengthened both by the rapid hike in salaries - company chairman are now paid between pounds 136,000 and pounds 338,000, compared with pounds 40,000 to pounds 58,000 five years ago - and six-figure pay-offs to departing executives.

John Bellak, chairman and chief executive of Severn Trent, received pounds 512,000 in compensation and pension contributions when his contract was terminated this year. Bob Thian, chief executive of North West Water, received pounds 674,000 when he left the company recently.

The price and profit increases have been strongly criticised in recent weeks by the Consumers' Association and the National Consumer Council (NCC). According to the NCC, domestic customers of the 10 major water companies have paid an extra pounds 2.9bn in higher bills, pounds 2bn more than if the bills had increased in line with inflation.

Lady Wilcox, the council's chairman, said the price controls put in place at privatisation were flawed. She added: 'We have been forced to conclude that consumers have paid too much towards the cost of investment in the industry, and the companies have received the lion's share of the benefits of privatisation.'

Average bills, according to the NCC, have gone up by 67 per cent but in some areas have doubled. Yet profits and dividends have gone up faster - profits by an average of 20 per cent a year and dividends to shareholders by 63 per cent a year.

Bills were expected to rise above the rate of inflation after privatisation because of a backlog of under- investment. The water industry claims high levels of investment since 1990 and says customers were not sufficiently prepared for necessary increases.

However, an analysis by the Consumers' Association found that bills had risen by three times the rate of inflation while water company profits had increased much faster than other utilities and had easily surpassed average Stock Exchange share increases.