Northumbrian Water leads Ofwat price cut protest

A proposal by the Office of Water Services (Ofwat) to introduce major water bill cuts has resulted in warnings from water companies in England and Wales. The water companies argue that the reductions to water bills willl act as a brake on their environmental and service improvement programmes.

Northumbrian Water was the worst hit by Ofwat’s proposal to cut bills by an average of 14%, with a cut of 25.5% (£61 off an average water bill of £239).

The company’s parent company, the French-based Suez Lyonnaise des Eaux, warned: “If these prices are confirmed, Northumbrian will have to slow down its investment programmes, and will be unable to implement, within prescribed time limits, the facilities necessary to meet European environmental standards.”

Southern Water and Welsh Water have also been hit hard by the proposals, which will cost them both £51 off an average bill.

Welsh Water has complained that Ofwat’s proposals will result in the company limiting its capital expenditure to £1Bn/yr, 25% less than current levels of spending, for the next five years.

Anglian Water, presented with a relatively moderate cut of 11.1%, is also likely to curb investment. Anglian spokeswoman Sara Roland said: “The cuts will mean a reduction in capital expenditure of about a third next year; around £100M off a planned £300M.”

Essex and Suffolk Water’s managing director John Cuthbert, facing a 19% cut in bills, said: “We have been set what appears to be unjustifiably high targets for further improvement. We submitted a long-term water resource plan based on the efficient use of water and on innovative ideas for new resources such as wastewater recycling. The regulator has severely challenged this plan.”

Cuthbert added: “We are committed to achieving a secure water supply. These proposals do not give us confidence that this can be achieved in the driest part of the country.”

In the Ofwat price report, Draft Determinations, the director general Ian Byatt has argued that major cuts will provide customers with better value for money while forcing water companies to improve their efficiency. Mr Byatt is particularly keen to see reductions in spending on maintenance.

The water companies business plans for the last periodic review in 1994 suggested that capital maintenance expenditure in England and Wales would reach around £2Bn/yr by 2001, whereas Mr Byatt plans for the price cuts to result in a slight reduction, from £1.4Bn/yr at present to £1.3Bn/yr.

However, Gordon Simmons of the water industry body Water UK, has since claimed: “The introduction of new treatment processes will actually drive operating costs up. In fact, 50% of all operating costs are fixed and cannot easily be reduced in the short-term.”

Lord de Ramsey, the out-going chairman of the Environment Agency (EA), questioned the water companies’ insistence that progress will suffer: “It is worrying to hear indications from some water companies that maintenance work may suffer…that argument just won’t wash.”

According to the EA, the prices will allow for enough capital to be raised by the industry for an Ofwat-regulated spend over the next five years of around £15Bn. The government has demanded that £8Bn should be spent on environmental improvements, leaving £7Bn for maintenance.

Suez Lyonnaise, anxious to protect the interests of its shareholders, emphasised in its statement that: “The 1999 financial year is unaffected by this decision.” Nevertheless, investor confidence in water has certainly been shaken by the event.

Water companies will still have time to discuss their case with Ofwat before final prices for 2000-2005 are set on 30 November.

Before the announcement, Deputy Prime Minister John Prescott and Environment Minister Michael Meacher were reported to favour an initial price cut of around 10%, followed by stable prices for the remaining four years. The 14% cut followed by a slight rise in prices during the fifth year may therefore represent a compromise between Mr Prescott and the determined Mr Byatt.

After 30 November, companies will have to appeal to the Competition Commission (formerly the Monopolies & Mergers Commission), if they are to launch a last-ditch bid for a reduction in the severity of the cuts.

Suez Lyonnaise concluded: “If Ofwat’s limits are maintained, we will consider asking Northumbrian to appeal.”

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie