To cut or not to cut prices: Ian Byatt and Brian Duckworth argue the issue on BBC Radio 4's Today programme

An Ofwat consultation paper has called on the privatised water companies to cut their bills by 20% from April 2000.

However, the industry has criticised the proposals saying they are too tough on water companies and would reduce service levels and threaten investment in environmental projects.

The watchdog, which reviews water prices every five years, is getting tough on water companies because ministers believe they have failed to pass on profits made through higher-than-expected efficiency savings.

Ian Byatt: Demanding lower profits

"I believe it's time prices started to fall and I believe that's what customers want," Ofwat chief Ian Byatt told BBC Radio 4's Today programme.

But he said environmental improvements demanded by the government could mean higher bills for some people.

He said that due to the regional impact of the environmental programme announced by the government last month, some customers, particularly in coastal areas, could end up paying more for their water in 2005 than they are now.

It is estimated that cleaning up UK beaches, rivers and ponds could cost £8.5bn.

Proposals 'very tough'

The managing director and spokesman for the Water Utilities Association, Brian Duckworth, said: "I find it very difficult to hide my disappointment at Ian Byatt's proposals. I think it is very tough."

Fighting pollution could cost about £8.5bn

"The industry is just on the verge of having created something that is a world leader and here we are talking about cutting back investment, cutting back customer services.

"If you expect us to invest in new assets to meet new environmental obligations and at the same time reduce prices by 15% to 20% something has to give and something will give."

Mr Byatt replied: "Of course things will give. Profits will lower, dividends may have to be lower. That's the way a capitalist economy works."

The news saw the share prices of listed water utilities tumble on opening although they have recovered some ground.

At midday GMT Hyder was down 39 pence at 829p, Severn Trent was down 20p to £10, United Utilities fell 18p to 862p and Yorkshire Water was down 11p to 496.5p.

'Strong customer dissatisfaction'

Consumer groups say the industry can afford to cut bills and invest in better water quality.

Ofwat's consumer representative arm, the Ofwat National Customer Council, welcomed the proposals.

"This is the news that customers - both household and business - have been waiting for after facing rising bills for the last 10 years," said its Chairman Sheila Reiter.

"Since privatisation there has consistently been strong customer dissatisfaction with increases in water bills above the rate of inflation, the level of profits made by the water companies and the increases in dividends paid out to shareholders.

"Unless past efficiency gains are passed back to customers in the form of lower bills, the credibility of the regulatory regime for the water industry risks being damaged in the eyes of customers."

In July 1994, Mr Byatt ordered water companies to cap their prices after average bills rose by 77% in the five years since privatisation.