13th Jan 2016 11:42
LONDON (Alliance News) - UK water regulator Ofwat was accused Wednesday of allowing water companies to charge customers more than necessary, leading to huge windfall gains of around GBP1.20 billion.
The claims were made by the Public Accounts Committee, a body appointed by the House of Commons to scrutinise the value for money of public spending, generally holding the government and its civil servants to account for the delivery of public services.
In a report, the committee charged that Ofwat has "consistently over-estimated" water companies' financing and tax costs when setting price limits, leading to "at least" GBP1.20 billion of windfall gains from bills being higher than necessary between 2010 and 2015.
Ofwat hit back, highlighting that it aims to reduce average UK household water bills by 5% by 2020 compared to 2014, and said the gains referred to by the Committee were the result of decisions it made six years ago when it set out the parameters for the regulatory period for 2010 to 2015.
The allegations follow on from news back in October that UK water companies had made huge gains from lower-than-expected corporation tax and interest rates, placing the industry under the spotlight.
That news in October was released by the National Audit Office, which tracks the spending and accounts of all government departments, which said water companies gained around GBP410.0 million from lower-than-expected corporation tax and GBP840.0 million from lower-than-expected interest rates between 2010 to 2015. However, the Audit Office said UK water companies also absorbed costs and provided water bill discounts in the period worth GBP435.0 million - meaning overall, water companies made GBP815.0 million in net windfall gains.
On Wednesday, Ofwat said: "Since 2012, we?ve stressed that customers are having a really tough time, and stepped in to claw back GBP435.0 million from companies. We then challenged companies to reduce bills further, resulting in GBP3.00 billion 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."
The committee report put London-listed water companies Severn Trent PLC, United Utilities PLC, Pennon Group PLC, which owns South West Water, and SSE PLC, which owns SSE Water and Dee Valley Group PLC, under the spotlight.
In the report released Wednesday, the Public Accounts Committee said: "The Committee finds Ofwat's efforts to ensure these gains were shared with customers 'secured limited results that varied significantly' from company to company. Financial support for customers who struggle to pay water bills also varies substantially."
Ofwat was backed by Water UK, the trade body that represents all water companies in the UK. The body released its own statement Wednesday stating the sector should not just be judged by what happened between 2010 and 2015, but also on what the sector has committed to do over the next five years.
"Over the next five years, customers will see sustained high investment to improve services alongside a 5% average drop in prices. At the same time one million more people will be helped to pay their water bills," said Michael Roberts, chief executive of Water UK.
"Recent research by CCWater shows that 94% of customers in England and Wales are satisfied with their water supply, while three quarters believe they are getting value for money from their water company. Both figures show an increase on previous year's results," the industry body added.
However, Water UK added that the UK government and Ofwat "need to avoid acting in ways which might undermine the confidence of investors".
Other concerns raised by the Public Accounts Committee include customers in areas of water scarcity paying to develop expensive new capacity, when water trading with other companies might be more cost-effective.
In early December, Ofwat proposed opening up a wastewater-to-energy market and a water trading market to unlock at least GBP1.00 billion of unrealised benefits as it tries to get utilities to make better use of their resources. Ofwat wants water companies in the UK to work closer together as it believes this can make better use of the country's water resources, in turn lowering household bills, and to use wastewater more effectively.
The UK water companies are almost a year into the new five-year regulatory period (stretching between 2015 to 2020) with regulator Ofwat having introduced new incentives schemes for spending and operational metrics.
Companies are funded from customer bills and financed through private investment, and Ofwat sets limits to the prices companies may charge for five-year periods, allowing for operational and financing costs of delivering services to customers, and making assumptions about the efficiency improvements that companies should make.
Ofwat argues it has been firm with water companies. When it conducted its price review in 2014 for the 2015 to 2020 period, Ofwat shunned water companies' proposals on pricing which meant overall bills between now and 2020 will be GBP3.0 billion less than what water companies proposed during the review.
The water industry in England and Wales, privatised in 1989, now includes 18 large independent privately-owned companies which are monopoly suppliers to 22.0 million households and to most of the 2.0 million non-household customers.
UK water companies have spent a combined GBP126.0 billion in capital investment in the 25 years since privatisation, and to put that into perspective, water companies are expected to spend a combined GBP44.0 billion in the 5 years between 2015 and 2020 on improving water quality.
However, customer bills have also risen to pay for those improvements. The average UK household water bill, including sewerage services, rose to GBP396 per year between 2014 and 2015, up 40% from 1989, according to the National Audit Office, which said most of that 40% rise occurred between 1990 and 1995, just after the sector went private.
"Among its recommendations, the Committee urges Ofwat to review its approach to setting allowances for the cost of debt and corporation tax, and report publicly on what actions it intends to take to improve its performance," said the Public Accounts Committee.
"It also calls on the regulator to use comparisons with other sectors and international suppliers to develop a clearer picture of what services should cost if provided efficiently," the committee added.
On Wednesday morning, Severn Trent shares were trading up 0.7% whilst United Utilities also were up 0.7%. Pennon Group shares were up 0.4%, whilst SSE shares were trading up 0.8%. Dee Valley Group shares were up 1.0%.
By Joshua Warner; [email protected]; @JoshAlliance
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