Water industry says it will fight price cuts
Water companies have threatened to appeal to the Monopolies and Mergers Commission following Ofwat's proposals to cut water bills in the first industry-wide price cuts since privatisation.
In the consultative paper ‘Prospects for prices,’ Mr Byatt, director general of Water Services, sets out his intentions for new price limits to run from 2000-2005.
The proposals, which received a very less than enthusiastic response from the industry, include a 15-20 per cent reduction in water bills, relating to a saving of £40-£50 on the average household bill, and an assessment of the cost of capital between 4.0-5.5 per cent in real terms after business taxes.
While confirming that he was looking at a large reduction in household bills, he also warned that government demands for an £8.5 billion investment in quality and environmental measures could push bills back up again. “While many customers could continue to benefit from lower bills, some, particularly in coastal areas, could be paying higher bills in 2005 than now.”
As soon the proposals were announced they were criticised as unrealistic. Brian Duckworth, chairman of Water UK, is disappointed that Ofwat is still pursing price reductions when he believes the sums don’t add up.
“Common sense tells you that you can’t have more for less. Regardless of the position of individual companies, the plain fact is less cash means they’ll have less ability to invest.”
“We are very disappointed with both the tone and contents of this consultative paper,” said Vic Cocker, chief executive of Severn Trent plc, where a 15-20 per cent cut could represent an income reduction of £150-200 million. “We intend to challenge the key assumptions and the consequences to ensure that our customers’, employees’, and shareholders’ interests are protected.”
The warning over reduced spending was also mentioned by Kevin Bond, chief executive of Yorkshire Water. Speaking at the Economist Water Conference, he said that the proposals could reduce spending in the industry, and decrease the number of jobs, for example in construction companies.
While the proposals received a negative response from the water companies, regulators and consumer groups welcomed the news, one comment from the National Consumer Council (NCC) was not before time.’
Also speaking at the Economist conference, Ruth Evans, director of the NCC asked: “As a consumer body, should we seriously ignore the fact that, according to Ofwat’s latest report on companies’ finances total dividends declared in the year to March 1998 stood at over £2 billion – an increase of 57 per cent in real terms over the previous year? And that dividends accounted for 33 per cent of turnover in 1997/98, compared with 15 per cent in 1993/94?”
Share prices initially fell after the announcement, but then rose. The majority of companies’ share prices dropped at the end of the day, but South Staffordshire and Thames Water shares increased 25p to 3700p and 30p to 1085p respectively. Hyder fell the most, 43.5p to 824.5p, which could be a result of its gearing – currently it is at 250 per cent.
The potential for an initial price reduction varies from company to company. Customers of Thames, Tendring Hundred and Bournemouth and West Hants could expect a reduction of 10-15 per cent while other customers, such as those of Anglian, Northumbrian, Southern and Wessex may receive a saving of over 17.5 per cent.
In order to promote good service to customers and discourage cost cutting at the expense of service quality, Mr Byatt intends to adjust price limits to reflect companies’ relative overall performance on delivering service to customers and the environment. His initial view was that such an adjustment might be in the range of +/-0.5 per cent on bills, however in the light of consultation he considers that this adjustment should be larger for poor performing companies, perhaps -1 per cent.
Mr Byatt will be having formal consultations with individual water companies next January and February, with the final determinations due to be announced in November 1999.
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