Water regulator slammed over water companies' GBP800m windfall

The National Audit Office (NAO) has criticised water regulator Ofwat over estimates that water companies made net windfall gains of at least £800m over the last five years.

The NAO’s paper on the economic regulation of the water sector on Wednesday noted that the regulatory framework for the industry has contributed to major improvements in water quality, but customers have not always benefited enough from factors outside the industry’s control.

It estimated that water companies gained around £410m from lower than expected corporation tax rates and £840m from lower than expected interest rates, but only passed on water bill discounts worth up to £435m in the same period.

“Customers would have benefitted if they rather than the companies had borne these risks, though they could have lost out if borrowing costs or tax rates had risen,” the full report noted.

“We consider that the price cap regime does not balance risks appropriately between companies and consumers, and so does not yet achieve the value for money that it should.”

Amyas Morse, head of the National Audit Office, said Ofwat’s 2014 price review committed companies to improve services even more while cutting customer bills to increase value for money for consumers.

“Customers, however, have not seen enough of the benefits of companies’ unexpected financial gains from factors such as falls in corporation tax rates.

“Ofwat made significant improvements in 2014, but its price cap regime is not yet achieving the value for money that it should.”

The report also noted that the industry’s service quality, including the quality of water, has improved markedly since it was privatised in 1989.

However customers have had to fork out for these improvements.

“The average household bill for water and sewerage was £396 in 2014-15 – a 40% increase in real terms since privatisation, with most of the rise happening between 1990 and 1995 under the government’s initial price control,” the NAO said.