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Ofwat piles on pressure over water industry costs

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CONTRACTORS AND consultants working in the water industry are to come under intense pressure to drive down costs through greater efficiency and innovation, industry body Water UK has warned.

The warning came after industry regulator Ofwat announced its final ruling on water industry prices for the next five years.

Figures set by the regulator for the 2005 to 2010 period allow more investment by the industry than the draft limits published in August, but impose tight demands for more efficiency savings (see below).

'This challenges all water companies to improve further and faster than the economy as a whole, ' said Ofwat director general Philip Fletcher last week.

Less efficient companies are asked to catch up with 'benchmark' operators.

'The targets are demanding, but they need to be. These are monopoly companies, ' added Fletcher. 'But they are not so tight that there is no scope for companies to outperform our assumptions.'

The battle to meet the targets will affect both water companies and the contractors to which they outsource much of their work, said Water UK's economic regulation adviser Robert Wheedon 'The message to the supply chain is that those who can work smarter and with lower costs will find their services at a premium, ' he said.

Water companies were neutral in their response to what Water UK chief executive Pamela Taylor branded 'a tough settlement'.

Draft figures set levels for water charges at around 50% of that asked for by the water companies, but that has been increased to just under twothirds. Consumer prices will rise annually by 4.2% above inflation.

The increases will allow a £16.8bn capital expenditure programme, up by over £1bn on the draft determination.

There is also more cash for maintenance and operating costs.

This compares to £16.5bn capital investment permitted by Ofwat during the current five year work period. Current forecasts predict that companies will only spend £16bn of this.

Companies spoken to by NCE this week said they must examine the settlement in detail before deciding to challenge the figures.

They have until early February to lodge a complaint with the Competition Commission.

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