Ofwat limits may mean job cuts: Water companies say new caps cut costs to the bone South West intends to appeal to MMC

WATER companies are expected to cut thousands of jobs in the next few years to comply with the tough new pricing regime announced yesterday by Ofwat, the industry regulator.

Ian Byatt, director general, said that average price increases would be limited to about 1 per cent above inflation for the 10 years from 1995, compared with inflation plus 5 percentage points over the past five years. The limits above inflation - the 'K' factor - vary from company to company, depending on their capital spending obligations.

Analysts said that the new caps, which will force companies to increase efficiency and accept lower return on capital, will mean that workforces must be cut. Nigel Hawkins, an analyst at stockbroker Hoare Govett, said that about a tenth of the sector's estimated 40,000 employees might go. One senior industry executive said that he could envisage cutting his staff by up to 30 per cent.

The price caps were greeted with relief in the City, as analysts said the companies could still increase dividends annually by between 3 and 4 per cent in real terms. Shares in almost all the companies moved up sharply with the exception of South West Water, which has rejected the cap and intends to appeal to the Monopolies and Mergers Commission.

South West has been able to increase bills by 11 per cent above inflation for the past three years because of environmental obligations. It has now been limited to an average of inflation plus 1.1 per cent to the end of the decade with an even harsher cap for the following five years.

Keith Court, chairman, said: 'We believe that the Ofwat determination jeopardises the company's ability to meet its obligations and the reasonable expectations of its customers for quality and service.' The company's share price fell by 12p to close at 517p.

Of the 10 larger water companies, only South West is expected to take a case to the MMC, although some have yet to decide.

Sir Desmond Pitcher, chairman of North West Water, said: 'Mr Byatt has gone as low as he could have gone - he has cut us to the bone. He has really thrown down the gauntlet to management, but then that is our job.'

Welsh Water, which will be limited to 0.5 per cent above inflation over the 10 years, said that the result was reasonable and would allow it to get on with its business.

A spokesman for the Water Companies Association, which represents the statutory water-only firms, said: 'Some of our companies have come to an initial view that they are tough limits, but succeed in striking a balance between the interests of customers and shareholders.' He said that others would need time to assess the impact of the change on their businesses before deciding whether to accept the price caps.

Mr Byatt said he had set price limits to allow companies to meet their legal requirements in terms of the environment. However other improvements in standards of service and water quality will have to be met largely by the companies.

'There will be no scope for gold-plated projects whether favoured by engineers or by planning authorities,' he added.

The regulator said that companies had scope to reduce operating costs in their main business by 14 per cent in real terms by 2005, with the amount varying from 7 per cent to 20 per cent.