Environmental clean-up costs force Byatt to go easier over water bills

Water bills are to fall by 12 per cent next April wiping almost £1bn from water company profits and threatening shareholder dividend payments.

Water bills are to fall by 12 per cent next April wiping almost £1bn from water company profits and threatening shareholder dividend payments.

But the industry regulator, Ian Byatt, is aiming to stave off a series of challenges in front of the Competition Commission by agreeing to smaller reductions in charges than initially planned for companies with the biggest environmental clean-up programmes.

The compromise could lift shares of companies such as Hyder, owner of Welsh Water, and ScottishPower, owner of Southern, which will escape from the price controls in better shape than expected.

The regulator's final price controls covering the period 2000-2005, to be unveiled this morning, will mean an average 12.3 per cent cut in bills for customers of the 10 big water and sewage companies next year. The reduction compares with a 13.4 per cent cut Mr Byatt proposed in July. The average reduction in bills next year for the smaller water-only companies has been fixed at 12.4 per cent compared with the initial proposal of 16.2 per cent in July.

In subsequent years, Mr Byatt is understood to have allowed the industry to raise slightly more in charges than originally planned to finance an expanded quality improvement programme. The Environment Minister, Michael Meacher, gave an indication of this yesterday by telling Parliament that he had asked Mr Byatt to phase the investment programmes sensibly in making his final price proposals. In particular, the investment programme will give priority to large coastal clean-up projects.

The partial climbdown by the regulator will come as a relief to the industry and its shareholders. But water companies still face a sharp reduction in profits next year which is likely to result in substantial reductions in dividends. Some City analysts have estimated that payouts to investors could fall by as much as 60 per cent.

According to the industry, total capital investment will reach £20bn over the next five years. It estimates that £8bn will need to be spent on environmental programmes and improving drinking water quality and a further £7bn on maintenance.

Water companies had warned that if the price curbs were too draconian then much of this maintenance expenditure - in areas like leakage detection and sewer renewals - would have to be put on hold.

The industry has also claimed that up to 9,000 jobs - a quarter of the workforce - could be put at risk from the new price curbs. Hyder has already announced, for instance, that it may need to axe up to 600 jobs. However, unions argue that the profit margins of the water companies are such that they can easily fund lower bills by taking a cut in earnings rather than shedding more jobs.

Despite the easing of the price cuts, there is still a possibility of Mr Byatt being taken to the Competition Commission by some of the water companies. He will make it clear today that these are his final set of proposals and that if any company wants to dispute them then there is no alternative but to make a formal appeal.