Water firms propose above-inflation price hikes

The business case for investing in water conservation measures looks set to strengthen significantly after several of the UK's leading suppliers outlined plans for above-inflation increases in water bills over the coming years.

Draft spending and pricing plans submitted to industry regulator OFWAT late last week confirm that Thames Water, Northumbrian Water and United Utilities all plan to raise prices at above inflation rates for both business and domestic customers from 2010 as they attempt to fund new infrastructure and flood-protection programmes.

Thames Water, the UK's largest water company, said it expected bills to rise by about three per cent per year above inflation between 2010 and 2015 as it embarks on a £6.5bn investment programme.

Similarly, Northumbrian Water predicted bills would rise by 1.3 per cent a year and United Utilities confirmed it was planning for above-inflation rises of 2.7 per cent a year over the period. Of the major utilities only Welsh Water said average bills would remain in line with inflation.

Water companies insist that the increase in bills is necessary to pay for a major overhaul of the UK's water infrastructure, designed to cope with a rising population in the south east and increased risk of both drought and flooding as a result of climate change.

They are also bracing themselves for an estimated £450m increase in costs because of an expected overhaul of the licences issued by the Environment Agency to firms pumping water from reservoirs, lakes and rivers.

The Agency is reviewing the so-called abstraction licences under the EU's new Habitats Directive and expects to find that up to 10 per cent of issued licences may present a problem in terms of damage to water levels and wetland habitats. Water companies are expecting many of these problematic licences to be revoked or have their terms changed, requiring them to increase investment in drawing water from more sustainable sources.

OFWAT is now expected to offer its initial response to the draft business plans by the end of next month and will reach a final decision on whether to approve the above-inflation price rises in November next year.

However, a spokeswoman for the watchdog said that it was clear that for some companies greater investment in water resource management measures would be " necessary" as the UK adapts to climate change.