Severn accepts Ofwat price ruling

The utility giant, which serves more than eight million customers across the heart of the UK, said it would be necessary to impose a one-off 10 per cent cut in its dividend payment to shareholders in order to meet the determination.

Severn had the option to refer Ofwat's decision to the Competition Commission but joined South West Water owner Pennon in accepting the settlement.

Chief executive Tony Wray said the ruling by Ofwat represented a "tough outcome".

He added: "Through ongoing process and efficiency improvements we believe we can meet our operational obligations for the next five years, delivering the service level improvements customers have told us they value."

Ofwat's determination for the 2010-15 period allows for capital investment of 2.5bn, compared with 2.6bn in Severn's own business plan.

The 4 per cent fall in household bills - representing an annual average fall of 0.9 per cent - compared with Severn's hopes for a 4 per cent increase and means the company will have the lowest average bills in England and Wales.

The adjustment to the dividend will be made in the first year of the price determination period.

Severn added: "The policy for subsequent years is for growth in the dividend from that new base, as performance improves, to deliver both progressive and sustainable returns to shareholders."

Privatised utilities have to raise the billions needed to invest in the network from the City as well as from customer bills, but a stricter settlement from Ofwat means smaller returns for investors and makes the sector less attractive.

Since the credit crunch struck, investors have also been more sensitive to risk and want bigger returns on their investment, putting even more pressure on utilities to find savings elsewhere.