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Ofwat goes head to head with water firms over prices

WATER COMPANIES and Ofwat are on a collision course over prices which could result in hundreds of millions of pounds worth of civils work being cancelled or postponed.

The dispute has emerged following publication of the water companies' draft five-year investment plans. These show that to meet environmental and quality improvements prescribed by the Environment Agency, a steep increase in customer charges is needed.

Major water companies including Wessex Water, Welsh Water, Severn Trent, Southern Water and Northumbrian Water have told NCE that further squeezing of prices by Ofwat will wreck their investment plans.

The draft business plans, which outline nearly £20bn of investment in England and Wales between 2000 and 2005, must now include almost £10bn in improvements set out by the Environment Minister Michael Meacher in March (NCE 4 March).

In addition, Ofwat's 'Prospects for prices' review last December included cuts of up to 20% to be implemented by April 2000. Water companies insist these limits are unrealistic.

An Ofwat spokeswoman said that, although it could not comment on the business plans until 27 July: 'We are not going to set price limits that efficient companies cannot meet.'

But water firms maintain that the prices set out in their plans already include tough efficiency measures. Forcing prices down further while at the same time imposing additional quality improvements could, they say, put millions of pounds worth of crucial maintenance work at risk.

Wessex Water said the Government's programme should be spread over a longer period. It added it would only be possible to carry out the programme by 2005 and keep prices stable 'by stopping most of the investment in maintaining our existing assets, by not meeting new demands and by not reducing leakage'.

Welsh Water has seen its original £1.2bn spending programme increased to £1.7bn by the new quality obligations. It has written to Deputy Prime Minister John Prescott, Meacher and the Welsh Office asking the Government to defer £0.5bn of work, including £400M in new combined sewage outfalls, until after 2005.

Chief executive Graham Hawker said: 'We are not persuaded that this is the right balance and we have written to ministers suggesting they consider options to re-phase part of the investment programme.'

Many water companies are also threatening to have to cut so-called 'discretionary work' - work identified as meeting customer demand rather than regulatory obligations. This, they say, would also result in millions of pounds worth of work being removed from the plans which would affect the service offered to customers.

'Some of the enhanced levels of service would have to go,' said a Severn Trent spokesman. 'Things like pressure alleviation, work in some of the flooding areas, taste and discoloration. These make up about 5% of our total (£125M) programme.'

Southern Water also admitted that if prices were cut by 20% in the first year, as suggested by Ofwat, it would have to cut its discretionary spend. 'That would include spending on mains renewal,' said a spokesman.

Northumbrian Water has set out a programme to keep prices level over the five-year period in response to Ofwat's demands. It admitted that to balance its budgets it has had to cancel about £28M of 'discretionary spend'. This will affect work on water pressure improvements, sewer flooding and lead pipe replacement that was included in its 'Strategic options' report published last August.

The draft business plans will now be scrutinised by Ofwat, which will publish its proposed price limits on 27 July. The water companies will then have until September to appeal before the final limits are set in November.

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