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Inflation to scupper water bill cut

Annual water bills must be cut by 5% in real terms over the next five years, industry regulator Ofwat ruled today - but inflation means they are likely to be around £30 higher in 2020 than they are now.

The decision means average annual charges for water and sewerage services for England and Wales seeing a real-terms fall - from £396 to £376 in current prices.

But actual bills dropping through customers' letterboxes in five years' time will be higher, because they will add in the rate of Retail Price Index (RPI) inflation.

This currently stands at 2.3%, higher than the benchmark Consumer Price Index (CPI) measure and well above pay growth at 1% - fuelling fears that, despite being held back, water bill rises could still see customers struggling to pay.

Industry experts calculate that based on the current rate of RPI over five years, a typical bill would rise by 8% or £32 over the 2015-2020 period.

Ofwat's 5% real-terms cut means water companies are having to hold back bill rises by more than they had initially wanted, after their initial submissions a year ago which would have seen a 2% real-terms fall.

The watchdog also said utility firms must spend £44 billion on improvements, including tackling water leakage, supply interruptions, and sewerage water flooding of properties and cleaning up water at beaches.

Ofwat chief executive Cathryn Ross said: "With bills held down by 5% and service driven up over the next five years, customers will get more and pay less."

But shares in some water firms rose as the decision ended uncertainty. Investec analyst Roshan Patel said the final determination by Ofwat gave a "balanced outcome" for shareholders.

The regulator rejected a request by Britain's biggest water company, Thames Water, to increase household charges by 3% in real terms over 2015-2020 to help pay for the £4.2 billion Thames Tideway Tunnel.

It was instead provisionally told to make a 5% cut before inflation. However, Thames has been given leeway to add to bills for its 14 million customers in and around London once more is known about the tunnel's construction costs next year.

Thames was one of three water companies told in August that its plans for bills over the period fell well short of Ofwat's provisional expectations. The others were Bristol Water and United Utilities.

United, which had asked last December to keep bills flat in real terms, was told to cut them by 3%. Bristol Water - which is a water supplier only and not a sewerage firm - had asked to put bills up by 1% but was instead told to cut them by 21%.

All 18 companies were told to cut bills in real terms. They include 10, such as Thames and United, which supply both water and sewerage services.

Anglian was told to cut bills by 10%, Welsh Water Dwr Cymru by 5%, Northumbrian (including Essex and Suffolk) by 1%, Severn Trent by 5%, Southern by 8%, South West by 7%, Wessex by 9% and Yorkshire by 3%.

New charges will come into effect in April 2015. Ofwat said companies have two months in which to accept its final determination or seek a referral to the Competition and Markets Authority.

Shares in United rose nearly 3% with Investec saying the regulator's ruling was "unlikely to result in financial strain".

Severn Trent was up 1%, as the group said it welcomed "the progress that has been made" since a draft ruling by Ofwat earlier this year though it was disappointed with some aspects of the decision.

The stocks provided a safe haven for investors on a day when the wider FTSE 100 Index was down sharply. However Pennon, owner of South West Water, saw shares fall nearly 1%.

Tony Smith, chief executive of the Consumer Council for Water, said of Ofwat's ruling: "This is good news and a victory for most water customers whose views have shaped water pricing more than ever before.

"Most water companies and the regulator have listened to customers and delivered a deal which reflects the services they want, at a price most find acceptable."

"But customers need to be aware that water companies are allowed to add inflation to bills each year which means charges are still likely to rise from what they are now. That will hurt some households."

Environment Secretary Elizabeth Truss said: "We are committed to seeing a fair deal for customers. This decision will see people's average water bills fall by around 5% in today's money over the next five years, helping to keep bills affordable."

But Labour's Maria Eagle said: "For many people prices are still going to be rising faster than wages and that's why one in five people are struggling with their water bills."

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