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Sydney Lenssen Water on the cheap

Next year's household water bills will tumble on average 13.7%, the bulk of the £40 expected off the average £250 bill by 2005. Last week Ofwat chief Ian Byatt issued his draft determinations of water and sewerage charges for the next five years. Predictably the water companies groaned, but they won't get much change from the regulator.

Although all of us must be pleased by lower bills, what about construction's prospects? Is the regulator turning the screw so tightly that the companies will cut back capital and maintenance spending?

In 10 years from 1989, the water industry made capital investments of £33bn at today's prices. Costs of operating better processes and new works have also increased, and all of this has been paid for directly by customers.

When customers pay less next year, Byatt's limits still allow for further capital investment of £15bn up to 2005, equivalent to £8M a day in England and Wales - a valuable prize.

Maintenance will consume £6bn from the total, twice the amount spent before privatisation. Some water companies have been keen to outsource maintenance work, but few have succeeded so far. I forecast that water facilities management will grow significantly.

Last week's Ofwat 2000-2005 review is Byatt's third stab at fixing fair charges since privatisation in 1989. Nobody can get everything right when forecasting five years ahead but if Ofwat can set a regime that allows a smooth flow of work, then everyone will benefit.

The regulator's duty is to ensure that the water companies supply and treat to higher standards, that they earn a reasonable return and give customers value for money. As Byatt says in the 140 page detailed justification for his proposals, 'There is no answer that can please everyone'. At least the Office of Water Services deserves a pat on the back for making the regulation process pretty transparent.

Before the regulator exposed his draft charging proposals, companies were required to submit their own future business plans and their ideas on spending and charging. In contrast to Byatt's 2.9% a year average reduction over the next five years, the companies wanted a 3.8% a year increase above inflation.

That big gap is explained by the companies' modest views on the scope for further efficiencies, and a sudden inexplicable wish to boost capital investment above what has become a steady £3bn a year.

Severn Trent was least greedy of the big companies, wanting 3.4% more than the regulator. Anglian looked for 9% a year more. Severn Trent, Dee Valley, Essex & Suffolk, North Surrey and Three Valleys Water proposed reduced charges for next year. Only Dee Valley and Essex & Suffolk Water planned to keep 2005 charges lower than today.

The water industry is regulated because of its monopoly position. That shouldn't mean that the companies have to try it on, simply charging customers for easy profits. They should now be mature enough to combine commercial astuteness with a professional sense of duty.

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