Byatt questions regulation plans

Ian Byatt, the water industry regulator, set himself on a collision course with the Government yesterday over Labour's long-term plans to shake up utility regulation. He also said his next price review could not be conducted independently of the windfall tax on the privatised utilities, to be introduced in the next Budget.

Speaking after the Water Summit in London, which brought together water company chiefs and environmentalists to hear a 10-point plan on leakage and resource management, Mr Byatt questioned whether Labour's plans to cream off any excess profits from privatised utilities each year could be made to work.

The final proposals for utility price regulation outlined before the election envisaged retaining the so-called RPIX formula based on inflation, but sharing excess profits between customers and shareholders.

"My approach has been a flexible response within certain principles. I'm quite doubtful about whether a rule could be made to work. The present system works quite well," he said.

Questioning how quickly what he described as "formulaic rules" could be implemented retrospectively each year, Mr Byatt said he preferred his own voluntary system for companies which failed to meet investment targets implied in their price controls.

Several water companies were this year asked by Ofwat, the water watchdog, not to raise prices by as much as allowed in their price regimes from last month. Most, including Severn Trent, North West Water and Yorkshire Water, agreed to comply although Thames Water refused to accept the voluntary arrangement.

Since privatisation the 10 water and sewerage groups have been allowed to raise bills to cover the massive investment backlog, but have frequently been attacked for failing to spend enough.

Mr Byatt also said his next price review, brought forward from 2000 to 1999, could not be carried out in isolation from the windfall tax, which he said was one of several issues which needed consideration. "They've said they want to consider profit sharing. In the meantime Gordon Brown wants to have a windfall tax. There are a lot of big issues to talk through," he explained, emphasising his statutory duty to ensure water companies were properly financed.

Mr Brown, Chancellor of the Exchequer, has pledged to consult industry regulators before levying the tax. However Mr Byatt said he had received no request from the Treasury, despite the possibility of a June Budget.

Mr Byatt is not the first regulator to question Labour's utility proposals. Clare Spottiswoode, the gas regulator, has criticised the principle of the windfall tax, arguing her latest price proposals for British Gas were designed to wipe out any excess profits from the past.