Water company shareholders were bracing themselves for fresh pressure on dividends as the industry regulator prepared to issue a decisive ruling today on the water bills paid by 26 million households.

Every five years, Ofwat rules on how much water and sewerage companies are allowed to earn and today it was issuing its draft recommendation for the period from 2010 to 2015.

Britain’s 21 regulated water companies are viewed by investors as reliable dividend-payers — but with the recession undermining revenues and the credit crunch forcing up finance costs, Ofwat’s ruling could lead some to trim their payments to shareholders.

Ofwat’s so-called “draft determination” will set limits on how much they can charge consumers and on the amount they can spend repairing and upgrading water and pipe networks. It will also impose a single permitted rate of return to be applied uniformly across the industry.

Lakis Athanasiou, an Evolution Securities analyst, said if that rate conflicted with spending plans, some may be forced to cut dividend payments to make up for funding shortfalls. He said that United Utilities, with seven million customers, was at particular risk because of its relatively large debts.

Verity Smith, utilities analyst at HSBC, predicted that Severn Trent, a leading supplier in the Midlands and Wales, would be exposed to a dividend cut. “We continue to assume Severn Trent will have to cut its dividend 30 per cent at the beginning of the next five-year price period,” she said in a note to clients.

Mr Athanasiou said that other companies were less exposed. Pennon, the owner of South West Water, is better placed than most because it also owns a waste business, Viridor.

The average British household water and sewage bill is already set to increase by £13 to £342 in 2009-10. However, when the water companies published their proposed plans in April, they pressed for an extra £28 per year above inflation rise in bills by 2015. They argue that an extra £20 billion needs to be spent on the network over the next five years and have asked Ofwat to grant a higher permitted return to help them to deal with the impact of the recession and the higher cost of finance arising from the credit squeeze.

Regina Finn, Ofwat’s chief executive, said that it would do everything in its power to ensure that consumers received proper value for money for their water bills.

Thames Water, Britain’s biggest water company, wants to increase its bills by 17 per cent to £331 per household to help to fund a £5.5 billion investment programme. David Owens, its chief executive, has said that if Ofwat did not permit the company to raise bills by this level, it could face a credit rating downgrade.

Meanwhile, South West Water, the most expensive supplier in the country, is proposing a 6 per cent rise in bills to £481 per household.

After issuing its draft recommendation, Ofwat will enter detailed discussions with the companies before publishing a final, non-negotiable determination in November.

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