Privatised water companies pocket £800m from tax and interest windfall savings

According to the NAO, water ombudsman Ofwat should have been recommending steeper price cuts.

Over the course of five years, water companies have retained £800m in profits that should have been passed back to the customer, an investigation has found.

Water bills have risen in price by 40% since 1989, with the biggest increases coming between 1990 and 1995.

RBC analyst Choy said that although he believes Ofwat, the water regulator, will take the NAO’s report into account when it decides the regulatory environment for the 2020 to 2025 period, he thinks Ofwat understands the unexpected gains could well have been unexpected losses.

Ofwat’s estimate of the gains to water companies between 2010-11 and 2014-15 from reductions in corporation tax rates after price limits had been set was £410 million but the NAO estimates it could have saved customers £840 million over that period if it had used an indexation approach to calculate the allowed cost of debt.

Over the same period they absorbed costs and provided water bill discounts worth up to £435 million, leaving them with a net windfall of £800 million.

The recommendations from the regulator’s 2014 “price review” mean that by 2020 bills will be £3 billion lower than companies had planned.

It estimated that the companies gained £840m from lower-than-forecast rates of interest and £410m from reduced corporation tax rates.

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

The NAO acknowledged the companies would have lost out if taxes or interest rates had risen but said the balance of risks in Ofwat’s price cap was weighted too heavily in favour of the companies and had not achieved proper value for money.

Amyas Morse, head of the National Audit Office, said: “Since privatisation, Ofwat and Defra have overseen major improvements in water quality and service quality”.

She told Radio 4’s Today programme it would not have been right to pass on to customers the risk of changes in financing costs.

“In looking at this the NAO also however acknowledge that the way Ofwat balanced risk between companies and customers shielded customers from increased financial risk which could have led to significant bill increases had rates increased”. “Had interest rates gone up between 2009 and 2014, that amount of money would have gone straight on customers’ bills”.

“We do expect companies to own their relationship with their customers, be transparent and do the right thing by them”. Over the five years covered by the report charges fell 2.6 per cent in real terms, with water now accounting for two per cent of customers’ annual spending on average.