Ofwat final price limits allow average 18 per cent increase

Ofwat has surprised many in the water industry by allowing for far greater than expected price rises in water and sewage charges between 2005 and 2010.

Average annual household bills will rise by £46 (18%) from £249 this year to £295 by 2009 (before inflation)  an increase on Ofwats signalled draft increase of £34 (13%) in August (see related story).

These figures mask the fact that seven of the 10 water companies in England and Wales will be allowed price rises in excess of the 18%. Wessex, Southern, and South-West will all see a 25% price hike, Thames 24%, and Dwr Cymru 23%. Only Anglian Water, with a 7% increase, and Northumbrian Water with a 12% rise, will actually fall below the 18% average.

Maurice Terry, Chairman of consumer group WaterVoice, said: "This is bad news for the millions of water customers who will find these increases neither affordable nor acceptable. The Government must act immediately to ensure that customers on low and fixed incomes receive effective help to pay their water bills, through the mainstream tax credits and benefits system. Some customers have difficulty paying water bills as it is: the latest figures on debt show £893 million of outstanding revenue from household bills across England and Wales at the end of 2003-04, £527 million of it more than 12 months old. Next year could see thousands of customers dragged into debt for the first time."

Water companies originally asked for an average of 29% increase in prices, which they said was necessary to finance substantial infrastructure investment programmes to maintain pipes, sewers and treatment works. In addition the companies will be investing in major programmes to improve rivers and coastal waters and looking to resolve or alleviate internal flooding from overloaded sewers.

"These decisions strike the right balance. They will enable water companies to meet the needs of customers and the environment whilst continuing to deliver a safe and reliable service. The price limits are as high as they need to be but no higher," said Philip Fletcher, Director General of Water Services at Ofwat.

He added that the increases may well be unwelcome to those on low incomes, but: "We have challenged the companies' costs to ensure customers continue to receive value for money from their water and sewerage services. This means that by 2009 customers will be paying on average only around 7% more, before inflation, than they were in 1999."

Almost all of the water quality, environmental schemes and investigations sought by Ministers have been included, Mr Fletcher continued. "But in the small number of cases where the company proposals appear poor value for money we have asked for these to be reappraised. Our price setting regime can deal with the costs of any extra work confirmed during the 2005-10 period."

Water companies themselves said they would take their time to examine the implications of the decision before responding. Pamela Taylor, Chief Executive of industry body Water UK, said: "Ofwat has made some changes to the tough challenges laid down in the draft determinations especially on savings. They had gone too far and they've recognised that, but this is still a tough settlement. Companies will be looking carefully at whether Ofwat has found the right balance between risk and return for them."

She added that companies' main concern would be whether the price increases will allow them to supply the services people want and meet their environmental obligations.

"If they believe that they wont be able to meet these obligations within the limit set, they can ask for the review outcome to be referred to the Competition Commission. They have until the beginning of February to consider whether to take this step and some companies may well not announce their decision until then."

In addition to the rises for expenditure, Ofwat has allowed companies to raise more revenue to offset higher tax and pension costs. As regulated monopolies water utilities are also allowed to pass a large proportion of their pension deficits on to customers bills.

Shares in the water companies rose sharply as soon as soon as the announcement was made, with United Utilities share price rising to its highest level since December 2000.

By David Hopkins



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