Ofwat said many of the water companies in England and Wales have seen their investment costs drop because of the sharp fall in construction costs during the recession. A spokesman for Ofwat said: 'The recession can have its upside as well, and this should be passed on to the consumer.'
The ruling affects the 10 major water and sewage companies, which serve 14 million of about 19 million domestic water customers. The cut is also being imposed on nine of the 22 former statutory water-only companies.
Price increases in the water industry are limited to inflation plus a 'K' factor which varies and in the case of the 10 major suppliers averages five percentage points. Under pressure from Ofwat, the companies abated price increases voluntarily this year by an average 1 per cent but could in theory have reinstated this by adding an extra 1 per cent from 1 April 1993.
Now, however, Ofwat says the existing 1 per cent reduction must stay in place with a further 1 per cent cut. This means that bills will be 2 per cent lower than when the Government set the initial price caps.
The 'K' factors are due for formal review in 1994 and the companies had not expected any sweeping changes until then.
However, Ofwat said the formal review would involve a range of issues, including investment plans, rate of return, and profits. The change announced yesterday is prompted solely by a 15 per cent fall in construction costs induced by the recession.
The water companies saw profits increase by an average 10 per cent before tax last year while earnings per share rose by 9.8 per cent. City analysts expect profits to rise by about 6 per cent on average in the current year.
Ian Byatt, the Director-General of Ofwat, said he agreed that companies needed to raise prices to finance the large capital programmes required to improve water quality and service standards. But he added: 'It is still important to preserve the right balance between the interests of companies and their customers.'
Mr Byatt said that all companies affected were those which have benefited 'materially' from cost reductions.
Michael Hoffman, the chief executive of Thames Water, said: 'This is short-termism worse than ever. This is an industry that by its nature must take a long-term view, committed to catching up after years of underfunding under government ownership.'Reuse content