Byatt warns on lack of investment

Ian Byatt, the water regulator, yesterday stepped up his onslaught on the privatised water companies, warning that they could face tougher price controls next year if their investment continued to fall behind agreed targets.

The annual financial review of the industry by the watchdog, Ofwat, revealed dividends paid out by regulated water businesses last year soared by 22 per cent to pounds 1.6bn. Yet during the same period investment spending fell by pounds 35m to pounds 2.57bn.

Mr Byatt said if the companies continued to fall below their quality and environmental objectives he would ask them not to raise bills next year by as much as the current price controls allowed. However a spokeswoman for Ofwat admitted that Mr Byatt had no official power to force the companies to comply.

Ofwat has already brought forward its review of the price cap from 2004 to 1999, reflecting increased concern that the industry is generating excessive cash at the expense of consumers.

"If, in due course, quality and service objectives are not met, there will be no question of customers paying again for these objectives through higher prices," Mr Byatt warned.

Four water companies had paid out special dividends to their parent companies, reflecting what they claimed were "windfall" efficiency gains achieved during the first price control period set by the regulator, from privatisation until 1994. Ofwat's figures showed dividend payments have doubled in real terms over the past five years while pre-tax profits measured on the same basis have risen by a third.

The cash paid out in dividends was far greater than any customer rebates so far promised. Six water companies, Anglian, North West, Severn Trent, South West, Welsh Water and Yorkshire have pledged to hand back pounds 218.4m to consumers.

On investment spending, Ofwat found cash spent on improvements last year was pounds 1bn less than the total invested in 1991-92. Yet the Environment Agency, which measures sewerage quality, had warned that progress in improving waste water standards "could have been better and quicker in many regions."

The pounds 2.57bn invested in last year was also below the pounds 2.9bn specified in Ofwat's current five-year performance targets, though the report admitted that spending can vary dramatically from year to year.

The figures were seized on by Labour's environment spokesman, Frank Dobson. "It really beggars belief that these monopolies have been allowed to make record profits, pay out record dividends and make record low investments during the year which was undoubtedly their record worst performance for the customers," he said.

Thames Water, however, defended its investment record, arguing that through efficiency gains it had managed to achieve the same improvements in standards required with less investment in cash terms.

"We set ourselves internal targets of meeting the outputs for Ofwat with 20 per cent less investment," finance director David Luffrum said. He said yesterday's announcement of additional investment of pounds 150m by the company was a way of returning some of these gains to consumers.

Analysts suggested Mr Byatt has taken a much tougher approach over the industry in recent months, which could reflect the possibility of an incoming Labour government attempting to reform utility regulation.

Bill Alexander, Thames managing director, said: "He's positioned himself for political changes next year."

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