Ofwat under fire over limit decision

OFWAT'S SURPRISE decision to limit future capital returns for water companies until 2015 at 4.5% will put contractors under pressure as water companies seek efficiency and cost savings in the order of 12%.

Paul Mullord, UK director at British Water, said: "The underlying issue is that to deliver something like 12% more efficiency you have got to be doing something different to what you did before: you are not going to get a different result by doing the same thing."

He expects water companies to put contractors under pressure to deliver on costs and efficiency savings. Frameworks and partnership working will come under stress as some water companies revert to type and adopt a more adversarial approach towards contractors, Mullord said. "I expect that we will see every reaction between the two extremes," he said.

Pamela Taylor, chief executive at Water UK, said: "These draft determinations make us wonder if Ofwat has lost sight of the longer term imperative. In the interests of customers, the economy and the natural environment, we should be investing at a steady pace rather than storing up problems for the future."

David Owens, chief executive for Thames Water, said that while it is early days initial indications suggest the draft determination "may not allow us to deliver what our customers want in the future. For example, this means we won't be able to reduce leakage at all over the next five years".

Ofwat's announcement triggered a steep share sell-off in the sector with shares down 5% the day of the statement as shareholders feared water companies, which for years have offered a steady flow of payouts well above the market average, would have to
limit dividends.

Water companies have until September to challenge Ofwat's ruling, and the final settlement may prove less onerous for water companies. The regulator makes its final decision on prices in November for the new regime that comes into force next April.

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