Household water bills to be slashed by pounds 1bn

HOUSEHOLD WATER bills are to be slashed by pounds 1bn next week, a saving of around pounds 35 a year for the average domestic customer.

The water regulator, Ian Byatt, is understood to have largely ignored the pleas of the industry and decided to go ahead with one-off price cuts of around 15 per cent in April 2000.

The size of the reduction could force a number of water companies to go to the Competition Commission arguing that the industry will not be able to afford its pounds 8.5bn programme of environmental improvements.

City analysts expect the one-off cut to be followed by tough price curbs in the next four years, which will only allow companies to raise prices by between 1 and 2.5 per cent in real terms.

Mr Byatt, the head of Ofwat, is understood to have concluded that falling interest rates and increased efficiencies mean that the water companies can still deliver environmental improvements at the same time as cutting bills significantly.

In his Prospects for Prices consultation paper last October, he proposed cutting the average pounds 245 household bill by 15-20 per cent and set a cost of capital for the industry in the range of 4 per cent to 5.5 per cent.

Although the size of the environmental programme - mainly improvements to drinking water quality and cleaning up coastal discharges - has grown since then, Mr Byatt believes it can be met at no extra cost.

Robert Miller Bakewell, utilities analyst at Merrill Lynch, said: "If you look at how Byatt has behaved in the past then he is very reluctant to give ground once he has laid out his position."

Merrill Lynch believes the most likely outcome is a one-off cut of 15 per cent or more next April, reducing revenues by pounds 1bn. Its alternative scenario is for a one-off cut averaging 9 per cent, followed by a reduction in bills of 1 per cent in real terms in the subsequent four years.

In recent days, the industry itself has become increasingly resigned to a harsh price review. One senior industry figure said: "Byatt's decisions are set in stone and it looks like he is going to be tough. A one-off reduction of 15 per cent means we will have to cut either customer service levels, investment programmes or the dividend."

Mr Byatt is thought to have briefed ministers in the last few days on his decision. The water companies will receive details of his draft determinations next Monday evening. The new price limits will be published the following day. The companies will then have until October to make representations following which the final price determinations will by published in November.

Ministers had been concerned that consumers would be confused by a big one-off cut in water charges followed by steadily rising bills. The industry and the Environment Agency have also argued that, given the choice, consumers would be happy to see bills staying more or less constant or rising slightly, provided the money was spent on improved services.

But Mr Byatt, who retires next summer, has decided to stick to his guns and deliver a price review which both cuts bills and improves water quality.

Outlook, page 17