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The water consumer watchdog has called for a review of household bill rises in England and Wales, after accusing the sector regulator of being “too generous” to the utilities and handing customers £5.4bn more in charges.
Because water companies are regional monopolies, Ofwat sets how much they can charge customers in order to raise and service debt as well as maintain and improve infrastructure.
The sector regulator in January said it would allow water companies to raise bills by 26 per cent on average to £603 per household from April 1, the biggest annual increase since privatisation 36 years ago.
But the Consumer Council for Water on Wednesday called for the Competition and Markets Authority to review the increase after finding Ofwat’s estimate of the cost of raising debt was “too generous”, and would add £205 to household bills over the five years to 2030.
Mike Keil, chief executive of the Consumer Council for Water, said the rise over the five years would amount to £5.4bn more in charges for households.
“We hope the CMA will look closely at our report and ensure customers get a fair deal and not one that risks repeating the mistakes of the past by being too generous to investors,” he added.
The CCW’s intervention came as part of a submission to an appeals process run by the UK competition regulator, with charities, environmental groups and water companies also contributing.
Five water companies — Anglian Water, Southern Water, South East Water, Wessex Water and Northumbrian Water — have asked the CMA to approve higher increases to bills. A final decision is expected by March next year.
Thames Water, the largest water utility, may still appeal but has put a decision on hold while it seeks to agree a deal with private equity group KKR to take over the heavily indebted business.
The CCW said in its report that it was concerned Ofwat had overestimated the weighted average cost of capital (WACC), which predicts the costs water companies will incur to raise finance in order to deliver investment.
Ofwat has set the WACC at 4.03 per cent over the five years to 2030, but the CCW’s submission said it should be 2.95 per cent.
The CCW said higher borrowing costs in the sector were in part its own fault, with companies “experiencing the consequences of their own inefficient and risky structures”.
Noting that Ofwat was monitoring the financial resilience of 10 of England and Wales’ 16 water companies, the report said the regulator had frequently overestimated financing costs.
The 16 water companies, which were free of debt when privatised, have accrued £74bn in borrowings in the past three decades, while taking out £83bn in dividends, according to research by the Financial Times.
In its submission Southern Water, which increased bills by 47 per cent from April, said further rises were justified because it needed “unprecedented levels of new capital at a time where investor sentiment towards our sector is at an all-time low”.
Ofwat said it was “crucial to consider the price review package as a whole” and that it had “delivered the largest package of water sector investment since privatisation, while ensuring that customers do not pay for inefficiency, past underperformance or risky financing choices”.
Water UK, which represents the industry, said the “methodology used in this research is deeply flawed . . . and if implemented, would jeopardise over £12bn of new money to secure our water supplies and end sewage entering our rivers and sea”.
