Water industry warns price restrictions will affect climate change investment

Water companies have hit back at regulator Ofwat's decision to reject proposed above-inflation price hikes, arguing that its strict price restrictions will prevent them making necessary investments to reduce leaks and adapt the UK's infrastructure to cope with climate change-related water shortages.

Yesterday, Ofwat released a draft consultation that proposed average domestic water bills should fall by £14 in real terms over the next five years. The watchdog argued that in an industry where many customers face monopoly suppliers, it had an obligation to restrict price rises.

The regulator said that even under its proposed price settlement, water companies will still be able to invest £21bn in improving service and infrastructure over the period.

However, the water companies had proposed price increases of up to 17 per cent by 2015 and Pamela Taylor, chief executive of industry body Water UK, said that Ofwat's restrictions could undermine suppliers' ability to provide reliable and sustainable water services.

"This price review will have a big influence on the industry's ability to meet its customers' expectations and tough environmental standards by continuing to invest at the necessary level," she said. "To ensure reliable water services for the present and next generations as the climate becomes less predictable, it is vital to work to a long-time horizon. In the interests of customers, the economy and the natural environment, we should be investing at a steady pace rather than storing up problems for the future."

David Owens, chief executive of Thames Water, which had sought and was denied a 17 per cent increase in prices, said decades of under-investment mean the company's bills are already among the UK's cheapest and are unsustainably low.

"Ofwat has almost halved Thames Water's proposed water mains replacement programme," he said. "This means no reduction in leakage will be made over the next five years, raising concerns that bursts may increase."

He added that the draft proposals would also compromise plans to reduce flood risks, cutting by almost a third funds available to tackle sewer flooding.

However, Ofwat hit back at the criticism, suggesting that some water companies had in the past been guilty of overstating maintenance costs.

The final decision on prices will not be taken until November, and any plans will come into effect from April 2010.