Water firms try to shed greed image inyes

If there were a public ranking for unpopularity and greed, water companies would come near the top. The fat cat image of the industry is a key factor behind yesterday's announcement by North West Water that it would pay out a special dividend every year for the next five years to reflect increased efficiency, and would also pay every customer in its area £6.50 a year.

This apparent largesse is only the beginning of a long struggle in the industry to shed the reputation for greed. Even senior executives admit privately that the label is understandable, since water customers have seen steep price increases in real terms, averaging 40 per cent since privatisation after adjusting for inflation.

In cash terms the rises have been even more spectacular. Anglian, for example, charged an average customer £137 in 1988-89 rising to £263 in the current year. South West went from £128 to £304 over the same period, numbers guaranteed to rile customers every time a new dividend rise is reported in the press.

Worse still, there has been little improvement in the service, an objective hard to achieve in any case, since water is taken for granted - only thought about by the consumer when it is poisoned by accident, or stops flowing because of a broken mains.

Shareholders, on the other hand, have done extremely well, with dividends averaging a yield of 5 to 6 per cent and capital appreciation bringing a handsome total return on their investments since privatisation.

With dividends reinvested, this return ranges up to 372 per cent in the case of Northumbrian Water, which is on the receiving end of a bid approach from Lyonnaise des Eaux.

And among the measures to pay for this, of course, is a cut in the number of jobs. In 1989, the industry employed almost 48,000. Just under 7,000 were switched to the National Rivers Authority at privatisation, but the number declined by a further 3,000 by 1994, according to the Water Services Association.

There are, however, mitigating factors. Share price performance has been much less spectacular than among the regional electricity companies. The gap has narrowed but not disappeared since Professor Stephen Littlechild, the electricity regulator, announced that he was having another look at the regional companies' price regime.

Despite the price rises, which contrast with falls in real terms for electricity, water companies have also made a more balanced distribution of their efficiency gains between customers and shareholders, at least compared with the electricity companies.

Water executives have had nearly as big a percentage increase in pay as their counterparts in the regional electricity companies, but these are generally from a low level.

Share options do, however, add to the benefits. Research by Panorama found the highest paper profit among water company chiefs was £413,000, for David Cranton, chief executive of Northumbrian Water, and the total for the top 25 executives in the industry was £4m.

The main reason water companies have made themselves unpopular by raising prices when most utilities have had to cut their charges is that they have had an enormous investment to make on sewerage and other environmental programmes. Since privatisation, the water industry has invested about £15bn, slightly ahead of the predicted spend, and there is a lot more to come.

The good news for customers is that Ian Byatt, director-general of Water Supply, last year decided that customers could no longer sustain price increases so far ahead of inflation. He has set the average price cap for the next five years at inflation plus 1.5 percentage points compared with "RPI plus five" set by the Government when the companies were privatised.

In spite of the tougher cap, City analysts still believe that companies could increase dividends by about 6 per cent in real terms to the end of the decade and beyond.

A Labour government may impose a windfall tax on the utilities, so the pressure on companies to get dividends out to shareholders now is becoming intense. So much so that Mr Byatt was yesterday moved to warn that he would look sternly at excessive increases in dividends, even though he has no direct power to stop them happening.

The issue for water companies now is how to answer the demands of shareholders without bringing the regulator down on their heads. Professor Littlechild's decision to re-open the electricity price review, even though it was agreed only last year, wiped £3.5bn from the value of electricity shares. His action was prompted by sharp increases in share prices after his price cap was announced in August but also by the sparkling financial health of the companies, and their promises of payouts to shareholders.

North West Water has just become the first water company to announce a special dividend. If others follow suit, there are bound to be fears that Ofwat just might decide that it too must re-open the price review process.

The politics of the situation are less than clear. The Labour Party is dissatisfied with the utilities and the regulators. Short of muttering darkly about windfall taxes, however, Labour has not made it clear what it would do if it came to power, when it would be faced with the harsh fact that a great deal of money still needs to be found to pay for environmental improvements.

Water companies are confident, with good reason, that they will not be renationalised. But they admit that water is the nearest thing to a true natural monopoly. The political risk from a Labour government, whatever form it takes, is definitely real.