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Water bills ‘could rise as investors set for windfall’

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27/10/2020
The water regulator warns customers they could pay higher bills which instead of going to improve services, would line the pockets of investors via higher dividend pay outs.

Ofwat said it is concerned customers could pick up the tab in providing investors with higher dividend payments if the competition watchdog sides with water companies over their recent appeal against a price review.

In December, Ofwat set out its price review for 2020 to 2025, forcing water companies to reduce customer bills by an average of £50 (before inflation) and cut leakages by 16% as part of a £51bn package of investment.

However, in February, the Competition and Markets Authority (CMA), said it had received appeals from water companies – Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water – against the price reviews and it was therefore examining the issue.

And the CMA has recently set out its provisional findings for consultation, which Ofwat said would leave customers “worse off”.

CMA provisional findings

The CMA said it came to “similar conclusions to Ofwat on many issues” and noted that the four water companies should be subject to a “challenging set of performance targets while keeping bills low for customers”.

However, it proposed more funding to the water companies for some projects because of climate change and demand growth; funding to the companies to help reduce water leaks; re-balancing the way water companies are incentivised to improve efficiency and service quality; and adjust the allowed rate of return to investors to “reflect market evidence and best regulatory practice”.

It added that the allowed rate of return is lower than in previous recent water price controls which means customers will still receive lower bills for 2020-25, though they will be higher than those under Ofwat’s price control.

“This reflects the judgements the CMA has made about financing investments that are needed in the sector both now and in the future”, it added.

The table below shows the effect of the CMAs provisional decision on customer bills, along with those set out by Ofwat and historic bills:

‘Proposals threaten to undermine Ofwat’s ability to regulate’

Ofwat echoed that there are “many areas of agreement” but said it had identified areas of concern.

These include the proposal of higher bills which isn’t focused on paying for better services or environmental protection. “Instead, this extra money could simply flow straight to investors, as the CMA’s proposals would increase their returns by about 20%”, Ofwat noted. It added: “The unusual nature of this decision is underlined by the fact that the CMA are proposing to give investors even higher returns than the companies asked for.”

Ofwat said customers could face higher risk from potential company failure if water firms take on high levels of debt. Ofwat proposed a mechanism to tackle this, but said the CMA is “proposing to strike this out without putting in place any alternative”.

It added that the CMA’s package of proposals “threaten to undermine Ofwat’s ability to regulate in customers’ interests, and cause wider uncertainty for customers and investors in other regulated industries.”

‘Scales tipped in investors’ favour’

Ofwat’s chief executive, Rachel Fletcher, said: “While the CMA agrees in principle with the need to challenge the water sector and for companies to up their game, its provisional findings risk having the opposite effect. It could see customers paying more, service stagnating and the scales tipped in investors’ favour.

“These proposals risk incentivising companies to look for easy, short-term financial returns, rather than what they should be doing – delivering better services to customers and the environment over the long-term.  They could undo the hard work in recent years to improve public trust in the water industry.

“Ofwat will keep pushing to protect and promote customers’ interests.  We want to work with the CMA to understand their thinking. We are optimistic that if the CMA takes the time it needs to work this through, they can secure an outcome that will deliver for customers.”

A CMA spokesperson, said: “The CMA is now consulting on provisional findings from its redetermination of Ofwat’s proposed 2020-25 price controls for four water companies. As part of this, we will consider all submissions received before making our final decision.”

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