Uncertainty over water prices upsetting industry and conservationists

Uncertainty, confusion and a 'conflict of interest' surrounding the regulation of the UK water industry has caused dismay from conservationists and industry analysts alike, this week.

Both groups are pushing the government to issue guidance over the periodic review - the process which will decide how much companies can charge for water and what engineering and environmental improvements they have to make to meet new standards.

A coalition of environmental groups have asked the government to ignore calls for cuts in investment to infrastructure, as it is needed for environmental improvement. Meanwhile, financial and industry analysts have said support for infrastructure investment could lead to some companies being financially squeezed.

The government was due to issue guidance on how the industry should be regulated in late January. However, this date has been and gone and a new deadline has not been set.

Water companies are keen to see what guidance is given, as this will determine the nature of the strategic business plans they need to submit to Ofwat, the regulator, by April 7. The tariffs that companies will be allowed to charge to customers will be set in the light of these plans.

The water industry has told the government it needs to invest £20 billion between 2005 and 2010 to repair infrastructure and meet the environmental standards required under the Water Framework Directive.

This in turn could cause a sharp rise in prices - something the government and the regulator are keen to avoid.

However, a coalition of environmental groups have sent the government an open letter, published in the Independent, saying that the investment is necessary and that the pressure to keep water bills low must not jeopardise planned improvements to water quality. If the investment programmes are cut back, the coalition says, Britain's rivers and coastal waters will continue to suffer.

They say that research shows that customers are willing to pay for the "urgently needed environmental measures".

Similarly, in a research report titled Whitehall Hiatus, investment bankers Merrill Lynch said that there was a "conflict of interest" within government between the positions of Defra and the Environment Agency. The report said the regulatory uncertainty was a "negative development" and was putting a block on takeovers within the industry, affecting share prices.

The report by Merrill Lynch calculates that if companies shrank their investment plans by a quarter, it would have a far less dramatic affect on prices, particularly in 2005/06.

Responding to these fears from analysts and conservationists alike, Norman Baker MP, Liberal Democrat Shadow Environment Secretary, said: "What the water companies should be doing, and what Ofwat should be proposing, is a serious programme of demand management. This can be achieved through the promotion of water efficiency technologies, further attempts to control leakage, and the introduction of water metering."

He added that the combined result of these measures would keep consumer costs down as well as obviate the need for expensive infrastructure works to help the environment.

By David Hopkins



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