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UK regulator wants regional water companies to do more trading

The sun shines as water squirts from a fountain in central London February 5, 2013. REUTERS/Toby Melville

LONDON (Reuters) - British water utilities regulator Ofwat has suggested that the regional companies can make their operations more efficient by trading water supplies and extracting useful energy from sewage, measures that it said could save more than 1 billion pounds.

Ofwat wants suppliers to increase water trading across regions to make sure resources are deployed more efficiently in view of an expected 20 percent rise in the population in the coming 20 years, most of it in drier areas of the country.

"If we can encourage companies to innovate, and to truly understand what customers want now and in the future, we will be in a strong position to maintain trust and confidence in this vital public service," Ofwat Chief Executive Cathryn Ross said in a statement.

Companies should also explore ways to produce natural gas from wastewater sludge to be used either for their own needs to generate electricity or to be fed into the gas network.

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The regulator, which limits the tariffs water suppliers are allowed to charge customers under pricing formulas which are set every five years, also plans to start using the consumer price index (CPI) as its measure of inflation rather than the retail price index (RPI) which it currently uses in its calculations.

Shares in British water companies fell on the back of the announcement as the measures, if implemented, are expected to lower the tariffs they will be allowed to charge from 2020.

Shares in Pennon (PNN.L) were trading down 1 percent at 830 pence, while Severn Trent's (SVT.L) stock was 0.5 percent lower at 2,144 pence and United Utilities' (UU.L) shares were down 0.8 percent at 0909 GMT.

"These proposals are not particularly positive for the sector in terms of potential returns," said Whitman Howard analyst Angelos Anastasiou.

"However, it is early days, and the actual outcomes will doubtless evolve before the final positions are formulated."

The consultation on Ofwat's proposals closes in February and it will set out by the end of 2017 how it will set price limits between 2020-2025.

(Reporting By Karolin Schaps in London and Mamidipudi Soumithri in Bengaluru; Editing by Greg Mahlich)