Credit: Steve Johnson

Water companies accused of withholding £800m 'windfall' from customers

Regulating natural monopolies is a leaky old business.

by Rachel Savage
Last Updated: 18 Dec 2015

With the government backpedalling on banker bashing and energy companies cutting bills thanks to lower oil prices, it was about time for a new business bogeyman. Enter water companies, which have been accused of withholding an £800m ‘windfall’ (or should that be waterfall?) from customers.

The National Audit Office found the 18 regional monopolies are positively flush with cash, having netted an ‘unexpected’ £1.25bn from lower taxes and interest rates. However they only passed £435m of that onto customers via cuts to water bills.

‘Customers… have not seen enough of the benefits of companies’ unexpected financial gain,’ NAO boss Amyas Morse (what a name) said. Ofwat’s ‘price cap regime is not yet achieving the value for money that it should.’

Water bills have risen by around 40% in real terms since the sector was privatised in 1989, with the average household now paying £396 a year. But most of that happened in the five years after privatisation. Bills have fallen 2.6% since 2010 and Ofwat has mandated they should drop 5% by 2020.

In the NAO’s eyes that doesn’t go far enough. It argued that prices should be linked to interest rates, as under the regime of energy regulator Ofgem. Secondly, it said water companies should be made to pass on the £410m they saved from the cut in corporation tax from 28% to 21%.

Ofwat didn’t stand for the deluge of criticism, though, with boss Cathryn Ross pointing out that its approach meant companies would have lost money had interest rates or taxes gone up.

‘The way Ofwat balanced risk… shielded customers from increased financial risk which could have led to significant bill increases had rates increased,’ she said. ‘I stand by this approach, because it protected customers from a risk that we did not think they should bear and provided certainty about the cost of their water bills.’

It’s not the first time in recent years that water companies have been soaked in the court of public opinion. Last year, it was revealed seven of the 18 hadn’t paid any corporation tax in 2013. The industry argued that was because they had been able to defer taxes due to capital allowances for investment, something utilities always need.

Regulating a natural monopoly (railways, utilities, etc) is inevitably tricky. There’s a fine line between stopping companies ripping customers off and deterring necessary investment. And it's not clear from the NAO's report how much of the waterfall the largely privately-owned water companies reinvested or passed onto their private equity and pension fund shareholders.

On the other hand, many of the foreign investors in the water sector will have been encouraged by being allowed to keep the proceeds of unpredictable market and government largesse. MT hopes there is a sensible conversation around regulation this time, rather than the industry being used as a soggy political football.

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