Leading Article: Water price rises just won't wash

EMOTIONALLY, consumer groups could be forgiven for reacting warmly to yesterday's news that water prices are to rise by 1 per cent above the rate of inflation every year for the next 10 years. When prices have been rising as fast as they have since privatisation, a slower increase inevitably wins applause.

But the meek acceptance of the regulator's decision by all the water companies but one should encourage outsiders to smell a rat. Just as the Government was too lenient over the past five years, Ofwat's approach on prices over the next 10 is little better. If the water industry were properly regulated, prices would fall over the coming decade, not continue to rise.

The debate has been muddied by the European Union's requirement that the quality of British water and sewage, and the cleanliness of British beaches, should all improve sharply. Whether these requirements are justified is controversial. But part of the sharp rise in water prices since 1990 is due to the heavy investments required to meet new standards - and the water companies can hardly be blamed for

that.

Yet the investments that they have made in renovating the creaking system that passed for a water network five years ago cannot by themselves explain why consumers should have been treated so roughly, and the companies' shareholders so indulgently. While customers have suffered, shareholders have tripled their money, dividends have risen sharply and the companies have produced returns on capital inappropriately high for low-risk utilities.

There is nothing wrong with making profits; without them, shareholders would refuse to invest. Nor is there anything wrong with paying handsome increases to top executives; in a free market, money will help to attract and to keep the best talent. But when the company in question is a monopoly, high dividends for shareholders and high salaries for directors can be justified only if accompanied by rising standards of service and falling prices.

British Gas and BT have both cut costs sharply since they were privatised. The former has reduced its head count by 22 per cent, and the latter by 43 per cent, all the more impressive since the number of telephone lines in Britain has risen by a third since privatisation. The water companies can make no such boast. Head counts in their regulated business are largely unchanged, and they have made only modest progress in squeezing costs.

One reason for this dismal performance is that water companies are more insulated against competition than other utilities. The other is that as a temporary substitute for competitive pressure from the market, BT and British Gas were given tight price caps that forced cost-cutting to maintain profitability. The water industry has been subject to no such discipline. Until it becomes so, shareholders and directors will keep their snouts in the trough, and consumers will continue to suffer.