U.K.’s Ofwat Urges Water Sector to Cut Spending Plans

Ofwat, the water industry regulator in England and Wales, urged companies to reduce capital spending plans as the next price review approaches.

The regulator views 19 billion pounds ($28 billion) as a reasonable spending level in the five years from 2010, it said in a report today. That’s less than the 24 billion pounds included in plans submitted by the companies to Ofwat in August.

The water industry is preparing for the 2009 price review, which will set rates from 2010. Capital spending is one of the elements Ofwat looks at in reviewing price levels as it seeks to allow the companies a return on future investment while limiting price increases for consumers.

The report “could be seen as a negative signal for the sector,” Darren Greenfield, a water analyst at brokerage Collins Stewart in London said by phone today. “Lower capex means lower future profits.”

The 19 billion-pound figure marks a so-called draft baseline against which companies are measured. The system allows Ofwat to reward companies when they spend less than this level, and penalize them when they spend more. Companies have been scored against Ofwat’s baseline in today’s report.

Severn Trent Plc, United Utilities Group Plc, and Pennon Group Plc all need to cut spending by over 20 percent, according to Collins Stewart estimates. A reduction of about 11 percent is required at Northumbrian Water Group Plc.

Ofwat’s investment figures exclude the 1.1 billion-pound Thames Tideway project, which will stop sewage from going into the river Thames during heavy rainfall, Ofwat said. Thames Tideway is a project of Thames Water Utilities Ltd.

Final business plans are to be submitted to Ofwat in April.

Severn Trent shares closed down 3.3 percent at 1,109 pence in London. United Utilities fell 1.9 percent at 592.5 pence, Pennon slid 2.2 percent to 471 pence and Northumbrian closed down 0.6 percent at 247.25 pence.

To contact the reporters on this story: Rachel Graham in London at rgraham13@bloomberg.net; Amanda Jordan in London at ajordan11@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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