City fears market leak at water companies: Doubts grow over Ofwat's ability to keep new K factors secret

THERE are growing fears in the City that an unfair market may shortly develop in water company shares as the industry regulator privately communicates crucial pricing formulae to individual companies.

On Friday Ian Byatt, director-general of Ofwat, will tell the water companies the new K factors he has provisionally allocated to them to determine how much they are allowed to raise prices over the next 10 years. The new regime will take effect from April 1995.

K factors, which are normally related to the retail price index, differ between the water companies, depending on their efficiency.

The latest draft determinations are supposed to remain confidential until July, allowing time for the companies to haggle with Mr Byatt behind the scenes. But many industry experts believe it is highly unlikely that Ofwat will be able to maintain secrecy for two months.

'We're worried about the potential for leaks, and hence of unfair trading in the shares. Byatt isn't particularly au fait with markets,' one City commentator said last week.

With heavy sarcasm, he added: 'If the information remains as confidential as Stephen Littlechild's (of Offer) letter to the regional electricity companies (RECs) in April, then it will be known by 8.45am the same day it goes out to the water companies.'

Last month, the director-general of Offer sent details of a tough new pricing regime to the heads of the 12 RECs and the two Scottish power companies. The letter was leaked, wiping pounds 400m off the market capitalisation of the RECs within a matter of hours.

Ofwat has taken unprecedented measures to prevent a similar embarrassing breach of confidentiality.

The heads of all the water companies have been asked to sign confidentiality undertakings and 'put in place systems to preserve the confidentiality' of the information, according to Ofwat. They have also been asked to provide a list of staff authorised to receive details of the draft determinations.

But with 30 water companies and 10 customer service associations with chairmen to be notified of their appropriate K factor, industry experts calculate that as many as 150 people may be informed.

For these reasons, said one industry expert, 'there is huge scope for speculation, some of it guesswork, but some of it pretty well informed'. He said speculation alone was enough to spark an unfair market.