Byatt fails to turn off the taps

Ian Byatt seems rather to have shot himself in the foot with his report yesterday on the financial performance of the water companies - it reads a bit like an exercise in self-flagellation. The water regulator is to be congratulated for publishing such a full and frank analysis of what has been going on in his industry since privatisation. The unfortunate thing about it, from his perspective, is that it leaves his own economic regulation of the industry looking somewhat wanting. In a sense, what he has done is to expose the regulatory system's own failings by demonstrating in page after page of detailed analysis and statistics that the water companies have been getting away with day-light robbery.

Take the issue of dividends. Since 1991/2, dividends have risen 75 per cent in real terms across the industry. This is hugely in excess of even the most optimistic predictions at the time of privatisation. Worse, dividends have continued to rise at a quite staggering rate even since Mr Byatt's 1994 price review, an exercise meant to realise on behalf of customers all the efficiency gains achieved in the previous five years. In the year to March this year, dividends rose by 22 per cent in real terms.

This despite the fact that in setting the new price limits in July 1994, Mr Byatt assumed only modest growth in dividends in line with his 5 to 7 per cent return on capital assumptions. Plainly Mr Byatt could have been a lot tougher.

The water companies' ability to sustain this rate of dividend growth is in part explained by the fact that they have not been investing as heavily in the water and sewage infrastructure as it was thought they would need to when the pricing formulae were established. In turn, this is partly because they have been more efficient in achieving required standards than anticipated. Nothing wrong with that, though you have to wonder whether the expenditure planned was ever anything other than a huge, self-interested over-estimate. However, here again there is worse. The report accuses some companies of plain and simple under-investment. In other cases the phasing of capital investment has been changed in a way that allows companies to achieve savings not originally foreseen in the strategic business plans submitted to the regulator.

So great has the industry's embarrassment of riches become that in some cases companies are voluntarily giving rebates to customers or foregoing price increases allowed by the regulator. What all this tells you is that the next time the regulator reviews prices, water companies can look forward to a Spottiswoode-type assault. Water shareholders should drink long and hard while they can, for the party must be drawing to a close.