Windfall gains of £800 million flow into UK water companies

The UK National Audit Office (NAO), an independent organisation that scrutinises public spending for Parliament, released its economic regulation of the water sector report on Wednesday, which estimates that water companies made net windfall gains of at least GBP800 million between 2010 and 2015.

According to the NAO, water companies in the UK gained approximately GBP410m from lower than expected corporation tax rates and GBP840m from lower than expected interest rates from 2010 to 2105. However, these companies absorbed costs and provided water bill discounts worth up to GBP435 million during the same period.

Water companies have reportedly benefitted from taking on the risks of changes in taxation and interest rates, reducing fluctuations in customer bills, but could seen losses if interest and tax rates were higher than expected.

However, there have been major improvements in water quality as a result of regulatory framework for the water industry and this latest report also found that there has been marked improvement to most measures of service quality, including the quality of drinking and bathing water in the UK, since the industry was privatised in 1989. In addition, the UK has not had to pay fines for failing to comply with EU water directives to date, compared to other member states.

These improvements have been paid for through higher water bills, with the average household bill for water and sewerage being GBP396 in 2014-15. This is 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. Since then, water bills have stabilised, but are still a significant component of household spending. Water bills represented around 2.3% of average household spending in 2013, increasing to over 5% for the poorest households.

Support is offered to disadvantaged and indebted customers by the water companies, including financial assistance measures, which is expected to be given to 1.8 million people by 2020. NAO added that the regulator of water and sewerage providers in England and Wales, Ofwat, expects bills to fall by 5% in real terms between now and 2019-2020 as a result of its 2014 price review and bills are expected to be reduced by GBP3bn compared to original proposals from the water companies.

The NAO also said that Ofwat’s approach has encouraged greater company efficiency, which has resulted in lower customer bills, although the rate of saving is now smaller than in earlier years. Ofwat reportedly expected new efficiency savings from the average household’s annual bill of GBP39, between 1995 and 2000, but this fell to GBP11 annually for the period 2010 to 2015. In its approach in its 2014 price review, Ofwat made changes that included setting more demanding efficiency targets and giving companies more responsibility for managing their costs and risks, as well as requiring companies to incorporate customers’ views within their plans.

Since privatisation, UK water companies have raised approximately GBP49bn to finance improvements, mainly in the form of debt. Regulatory framework includes protections against risks to customers and taxpayers arising from factors such as high debt levels, through restrictions on some actions of companies and their ultimate controllers. 

Amyas Morse, head of the National Audit Office, said: “Since privatisation, Ofwat and Defra have overseen major improvements in water quality and service quality. Ofwat’s 2014 price review committed companies to improving services further over the next five years while cutting customer bills, increasing 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.”