UK households overpaying for water supply due to regulator miscalculation

UK households have been paying too much for their water supply because the industry’s regulator which was set up to protect consumers has consistently miscalculated price limits, according to a highly critical report from MPs.

Ofwat, the body set up to regulate the privatised industry, has overestimated the costs and financing of water companies when carrying out its statutory duties, the public accounts committee has concluded.

As a result, the committee said water firms have gained at least £1.2bn over five years to 2015 from bills being higher than necessary, while domestic bills have climbed to £396 a year.

Related: UK households owe record £2.1bn in water bills

Meg Hillier, the committee’s chair, said the idea that the very body responsible for protecting the rights of customers making such basic mistakes will outrage the public. “Ofwat was set up to protect the interests of customers, most of whom have no choice over who supplies their water yet must pay bills typically running to hundreds of pounds. Many householders will therefore be appalled to learn these bills could have been smaller had Ofwat adopted a different approach to setting price limits for water companies,” she said.

“This approach must be reviewed as a priority. We are also calling for greater transparency over windfall gains made by water suppliers, and more effective action to see these gains passed on to customers. These and other concerns set out in our report represent significant and pressing challenges for Ofwat. It must move swiftly to develop and present clear plans to achieve a better deal for customers, both now and in the years ahead.”

The committee of MPs said Ofwat, set up to protect the interests of consumers, had consistently overestimated companies’ financing and tax costs when setting price limits.

The National Audit Office examined the profits of water companies last year and found that they had benefited from lower than expected tax and borrowing costs after a cap on tariffs had been fixed by Ofwat. As a result, companies made windfall gains of at least £1.2bn between 2010 and 2015 from bills being higher than necessary, the report said.

Related: Water companies' £800m windfall not passed on to consumers, says watchdog

The committee found that Ofwat’s efforts to ensure these gains were shared with customers “secured limited results that varied significantly” from company to company.

Financial support for struggling customers also varied substantially, according to the report. The committee said it was also concerned that customers in areas of water scarcity were paying to develop expensive new capacity despite the possibility of water trading with other companies being more cost-effective.

It has urged Ofwat to review how it sets allowances for companies’ cost of debt and corporation tax, and report publicly on how it intends to improve its performance.
The water industry in England and Wales was privatised in 1989 and currently includes 18 large independent, privately owned companies who are monopoly suppliers to 22m households.

The average household bill for water and sewerage was £396 in 2014-15. This represents a 40% increase in real terms since privatisation, though most of this rise took place in the first five-year period 1990-1995.

Ofwat’s chief executive, Cathryn Ross, said she would consider the points made by the committee’s report. “PAC’s comments on gains relate to decisions Ofwat made six years ago. Since 2012 we’ve stressed that customers are having a really tough time, and stepped in to claw back £435m from companies. We then challenged companies to reduce bills further, resulting in £3bn of savings, which will mean bills fall 5% in real terms over the next five years. Service will continue to improve and we will have kept bills below inflation over two decades.

“Yet it’s no time for complacency. We’ve made changes so that companies become more transparent and resilient. And plan more changes to help create a sector customers can trust. That means making companies more efficient, more accountable and much better at responding to what customers want. In the last decade we have clawed back 800 million from companies’ shareholders, where they have let customers down. If companies don’t step up, we’ll step in.”

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