Final UK water prices designed to appease environmental lobby

Cuts in domestic water prices of 12% for 2000-2005 have been announced by the Director of Water Services. Draft cuts averaged at 14%, but the final compromise of 12% has followed pressure from the UK environment minister and the deputy prime minister.

John Prescott, Deputy Prime Minister, Michael Meacher, Environment Minister, both argued that the National Environment Programme (NEP) would suffer during Asset Management Programme 3 (governing the years 2000 to 2005) if water company profits were reduced.

Environmental groups were optimistic following the announcement, as it appears that Mr Byatt has changed his draft plans to allow for more environmental improvements. Around £400M of the capital expenditure (CAPEX) scheduled for Asset Management Programme (AMP) 4 may now take place in the last year of AMP3, a move carefully calculated to appease the environmental lobby.

Chris Hines, director of Surfers Against Sewage, said: “It appears there will now be an extra £1Bn to spend following the change from 14% to 12%.” Mr Hines had protested against the omission of 63 wastewater treatment improvement schemes from Mr Byatt’s draft determinations, some of which may now be completed in AMP3.

Pamela Taylor, chief executive of water industry body Water UK, said other areas of the business would now have to bear the brunt of the cuts: “I should imagine water companies are looking very hard at the document to try and see which areas of the business will be most affected. Where cutbacks will take place will depend on each company, but it is inevitable that spending on infrastructure and maintenance will slow down, and possibly even health and safety. This kind of short-term approach also puts at risk the high level of customer service that water companies deliver.”

The cuts will be scheduled to provide the largest cut in the first year of AMP3 followed by steady prices until the start of AMP4 (2005). One of the worst hit companies was Welsh Water, which will be forced to make a large reduction in customer bills, £38 off an average water and sewerage bill of £302. Welsh Water has also had the equivalent of £158M cut out of its business plan for investment, compared with around £40-£50M for most companies.

The largest price reduction will be £47 off Northumbrian Water’s average bill of £144.

In contrast, North West Water was told to reduce its average bill of £147 by just £9. The share price of NWW’s parent group United Utilities rose by £39 to £604 in the day following the announcement, whereas shares in Welsh Water’s parent Hyder plc fell by £11 to £454. Only one company, Folkestone & Dover, was allowed to increase bills, by £9 from £143 to £152, which Mr Byatt said was due to an unfavourable supply situation “caused by a groundwater salinisation problem and the need to bulk purchase supplies from neighbouring Mid-Kent Water.”

Overall, Mr Byatt’s last minute ‘environmental tactic’ appears to have resulted in an element of resignation on the part of the water companies, as their central argument has suffered a major blow. Denis Boulet of Northumbrian Water’s parent Suez Lyonnaise des Eaux said: “Ofwat has accepted some of the economic arguments put forward by Suez. This will impact Suez’s earnings more favourably, by Euro 10.7M for the year 2000 compared with the forecasts made in July.” Northumbrian, one of the first water companies to lodge an environmental protest against the draft determinations, now has only two months to decide whether or not to appeal to the competition commission.

Asked if the final changes were a political decision, Pamela Taylor of Water UK said: “Yes – there’s no doubt he [Mr Byatt] will have been leant upon by ministers.” The water companies will now have to change their argument if they are to successfully resist the cuts. The focus of protest is now likely to shift to job security and other investment programmes which are not related to the environment. Following the draft determinations, the water companies claimed that job losses in AMP3 would reach 9,000.

Mr Byatt denied that the cuts would have an adverse effect on other investment programmes: “There are mechanisms in place that will allow water companies to bid for more spending in exceptional circumstances, such as the provision of funds to stop disconnection for non-payment of bills. Similar provisions will be available for companies providing free meters for customers on demand.” Ofwat has now classed water companies into three bands according to their expected success of encouraging customers to opt for household metering, which Mr Byatt believes will help to improve the efficiency of water use. Thames Water will be permitted to remain in a 5% band, whereas Severn Trent is expected to achieve 10% metering and South West Water 15%. If the water companies achieve these targets, around 1.6M more households will adopt metering by 2005.

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