Scottish Water has been told to cut capital costs

The Water Industry Commission for Scotland said Scottish Water could achieve ministerial objectives without a predicted 88% increase in prices.

Household water customers should see price rises of 0.5% below inflation between April 2006 and March 2010.

Businesses would see even smaller rises - 1.5% less than the rate of inflation.

According to the commission, this would mean average household bills would be the third lowest in the UK by the end of the decade.

The Scottish Executive has set a number of objectives for the publicly-owned water utility.

Water quality

These include improved drinking water for 1.5 million Scots, the cleaning up of 330 miles of rivers and coastal waters and the removal of development constraints to enable 15,000 new homes to be built annually.

Scottish Water had put the cost of delivering these objectives at �3.3bn. The regulator said they could be delivered for �2.15bn.

Chairman Sir Ian Byatt said: "The pricing of its capital programme just not acceptable.

"The costings of its programme for the next four years, 2006-10, include high unit costs, excessive scope for undertaking work that is not necessary to meet ministerial objectives.

Our price limits will finance a very large capital programme Sir Ian Byatt Water Industry Commission Scotland

"We also have growing concerns about the procurement arrangement."

He added: "Our price limits will finance a very large capital programme and will enable Scottish Water to carry out one of the largest programmes per customer, and per head of population, ever undertaken in the water industry in Britain."

Scottish Water, which replaced the three regional authorities in 2002, said it was now running the industry for more than �2m a week less than its predecessors.

Chief executive Jon Hargreaves insisted Scottish Water had always intended to deliver ministerial objectives at the lowest cost to customers.

Important milestone

He said Scottish Water would study the implications of the commission's financial targets.

Deputy Environment Minister Rhona Brankin said the announcement was "an important milestone in the executive's drive to create a modern and efficient public water service in Scotland".

The Tories' environment spokesman Alex Johnstone said Scottish Water should be moved to the private sector "to deliver the benefits of retail competition to the domestic sector".

SNP water spokesman Rob Gibson demanded an explanation of the difference in estimated costs between the commission and Scottish Water.

He said the SNP wanted to see Scottish Water remain in the public sector but the current model saw Scottish Water customers continuing to pay "over the odds".