Ofwat has confirmed that, following consultation, it will allow two small water supply companies to increase the limits on the prices they can charge their customers – but by less than the companies wanted.

In reaching its decision Ofwat strongly challenged the evidence put forward by Bristol Water and Dee Valley Water, and excluded costs that were not justified.

Ofwat Chief Executive Regina Finn said:

"We will continue to protect the interests of customers by providing a rigorous challenge to monopoly water companies. Customers of Bristol Water and Dee Valley Water will only pay for the costs facing their companies that are both substantial and meet the strict qualifying criteria."

Ofwat has decided that Bristol Water should be allowed to increase prices in line with the regulator's draft proposal which it published last month. Overall, the average water bill for Bristol Water customers will increase in real terms by up to £5 more than previously set in 2004. By 2009-10 the average household bill will be around £144.

Customers of Dee Valley Water will see their average water bill increase in real terms by up to £4 more than previously set in 2004. By 2009-10 the average household bill will be around £122.

Ms Finn said:

"Before companies apply for an increase in their price limits they should consider their wider performance against their regulatory targets and the impact of their application on their customers. We will expect companies to apply only after they have offset new eligible costs against any savings made in areas such as the financing and delivery of their capital programmes."