BRITAIN’s water companies are heading for a showdown with Ofwat, the industry regulator, over its ruling to be announced this week on how much profit it will allow them to make for the next five years.

The 22 groups have plans to invest £19 billion to upgrade the country’s sewerage and water networks from 2010 to 2015. To pay for the work, many have demanded inflation-busting rises to household bills. Bristol Water came in with the highest – 29% above inflation.

Ofwat is expected to take a hard line after it was pilloried for the generous terms it granted in the last review. Hefty returns and cheap credit led to a takeover boom that has left several companies with mountains of debt.

Thames Water has threatened to haul the regulator before the Competition Commission if it does not allow it to make sufficient returns. It is planning to spend £5.5 billion and says it needs to increase bills by 17% above inflation to pay for it.

Ofwat’s key figure is the weighted adjusted cost of capital (WACC), which is the annual return made on assets. Though companies have widely varying investment plans, a single WACC figure will be applied across the industry. Company demands range from 4.7% from Northumbrian to 5.25% for Thames. Analysts expect Ofwat to offer about 4.5%.

Next week’s decision is provisional, with companies having until November to respond.

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