UK water regulator cuts suppliers' returns, lowers bills

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By Karolin Schaps

LONDON, Dec (Shanghai: 600875.SS - news) 12 (Reuters) - Britain's water regulator has cut the return it will allow the country's water suppliers to make over the coming five years and forced them to reduce prices for consumers until 2020.

Ofwat, which regulates suppliers' tariffs over five-year periods, has cut the return water firms can make on their assets -- the so-called weighted average cost of capital (WACC) -- to 3.74 percent from the 3.85 percent it initially proposed.

The tariffs set for each utility on Friday will result in an average 5 percent drop in consumer bills, with the steepest reduction imposed on Anglian Water, whose bills will fall 10 percent.

The price review setting tariffs until 2020 also introduces a system whereby companies outperforming their peers will receive additional incentives, making some of the biggest changes to the water sector since privatisation 25 years ago.

Ofwat has also ordered water suppliers to invest 44.3 billion pounds ($69.6 billion) over the period, around 700 million pounds higher than its initial proposal due to several companies committing to spending more money on certain projects.

"Companies will need to stretch themselves to deliver much more with the same level of funding as in previous years," said Ofwat Chairman Jonson Cox in a statement.

Whitman Howard utilities analyst Angelos Anastasiou said the reduction in returns was not a surprise for the industry, and reflected the low cost of debt.

Shares (Berlin: DI6.BE - news) in London-listed water companies Severn Trent (Other OTC: STRNY - news) and United Utilities (LSE: UU.L - news) were up 3 percent and 2.7 percent respectively in early trading. Shares in Pennon were down 0.8 percent.

Britain's water and waste water companies now have two months to assess the regulator's decisions and can either accept them or seek a referral to the Competition and Markets Authority.

United Utilities said it was now considering whether to accept Ofwat's final decisions.

($1 = 0.6367 pounds) (Reporting by Karolin Schaps; Editing by Paul Sandle and Mark Potter)