Ofwat is expected to throw down the gauntlet to Britain’s water companies this month by ordering tough new price controls that could trigger a round of rights issues and a challenge from the Competition Commission, industry experts have warned.

The regulator is set to publish a final ruling this month that will dictate the amount the companies can spend on upgrades to Britain’s water and sewerage network from 2010 to 2015 and how much they are allowed to charge the country’s 26 million households.

Duncan Michie, utilities director at PricewaterhouseCoopers, the consultancy, said that the regulator appeared to be on collision course with the industry and was unlikely to retreat from stringent draft proposals it set out in July. He said: “There will be a very strong message coming out of Ofwat. I would be very surprised if there are not some companies that will go to the Competition Commission.” He said that listed companies were likely to be forced to pursue dividend cuts and rights issues to cope with the more austere spending regime.

While Mr Michie declined to comment on which companies might do so, industry insiders told The Times that Severn Trent and United Utilities were already considering different options for strengthening their balance sheets in the event of a harsh settlement.

Every five years, Ofwat sets limits on prices that water companies in England and Wales can charge. For 2010-15, it has proposed that, before taking inflation into account, bills should be reduced for many customers, bringing the average annual water and sewerage bill down by 4 per cent from £344 to £330 by 2015. The water companies had wanted a £28 rise to fund their business plans.

Ofwat was heavily criticised in 2004 for setting an overly generous return of 5.1 per cent for the 2005-10 period. The ruling led to a string of takeovers in the water sector.

While the regulator may offer some concessions to individual companies when it issues its final determination on November 26, Richard Laikin, director in Ernst & Young’s water practice, said that the industry as a whole was entering a challenging phase: “It’s going to be much more difficult over the next few years. I would expect that we will see some recapitalisation and balance sheet restructuring. The markets are betting that the listed companies will have to cut their dividends or pursue rights issues.”

A spokeswoman for Ofwat declined to comment but she said that the regulator had finished its consultation process with the companies and was drawing up a final ruling.

One water executive said: “We are heading into a period where we are looking at tough settlements, espec- ially in recognition of the economic cycle and affordiability for customers.”

Severn Trent and Northumbria Water, two of Britain’s biggest water companies, declined to comment.

Ofwat said in its draft ruling in July that more than £4 billion should be invested in improving drinking water and protecting the environment. It also wants to cut leakage levels and raise the number of metered households from 36 per cent to 50 per cent.

The water regulator’s ruling will set limits on how much companies can spend and charge consumers and will also impose a single permitted rate of return to be applied uniformly across the industry.

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