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UK regulator cuts water utilities' shareholder returns

The sun shines as water squirts from a fountain in London

(Reuters) - Investors in British water utilities face lower payouts after the sector regulator on Monday proposed lowering its cap on shareholder returns to their lowest level since the sector was privatised three decades ago.

Top players include Severn Trent, United Utilities, Thames Water and Pennon Group

Returns on invested capital will be capped at 5.02%, down from the current 6.64%, the Water Services Regulation Authority (Ofwat) said.

Ofwat said the cut was about half of what it had signalled could be possible.

Shares in Severn Trent, United Utilities and Pennon Group were between flat and down 1% by 0830 GMT.

Pennon Group and United Utilities said in statements on Monday that they were reviewing Ofwat's proposals.

The regulator wants to encourage investment in improving or building infrastructure after British utilities faced a series of fines for broken pipes and pollution in the past year.

Water providers weathered one of Britain's hottest summers last year with a series of supply shortages and hosepipe bans.

Ofwat said new goals also include planning ahead for drier weather by providing 450 million pounds to explore new water resources such as reservoirs or moving water from where there is plenty to places with less.

It set out a spending package of 51 billion pounds ($65.43 billion) over the next five years, and reiterated a previous promise that customers will see a 50 pound reduction in average bills.

The spending is aimed at delivering "new, improved services for customers and the environment and resilience for generations to come," Ofwat Chief Executive Rachel Fletcher said.

Ahead of Britain's Dec 12 election which the Conservative Party won, Labour leader Jeremy Corbyn had pledged to renationalise utilities if elected.

Shares in Severn Trent, United Utilities and Pennon Group rose 7-9% in a relief rally on Friday following Labour's defeat.

(Reporting by Muvija M in Bengaluru; editing by Jason Neely)