Public Accounts Committee

Economic regulation of the water sector inquiry

Inquiry status: Concluded

Report published 13 January 2015. Government response published 23 March 2016.

Report published

The water industry in England and Wales was privatised in 1989. It now includes 18 large regional independently run private companies. The services these companies provide are almost entirely funded by their customers and financed through private investment. Since privatisation, Ofwat and Defra have overseen major improvements in water quality and service quality. The water industry has 22 million household customers and 2 million non household customers. Total industry revenue was £11.8 billion in 2014–15, with a regulatory capital value of £64.7 billion. Water companies are monopoly suppliers to most consumers. Ofwat limits the prices they can charge, by setting price limits for fixed five-year periods.

Between 2010 and 2015, water companies gained around £410 million from lower than expected corporation tax rates and £840 million from lower than expected interest rates, but absorbed costs and provided water bill discounts worth up to £435 million over the same period. As a result of taking on the risks of changes in taxation and interest rates, reducing fluctuations in customer bills, companies have benefitted. The average household bill for water and sewerage was £396 in 2014-15—a 40% increase in real terms since privatisation, with most of the rise happening between 1990 and 1995. Bills represented around 2.3% of average household spending in 2013, rising to over 5% for the poorest households.

Ofwat made major changes to its approach in its 2014 price review, setting more demanding efficiency targets and giving companies more responsibility for managing their costs and risks. As most taxpayers rely on Ofwat to ensure they get a good deal from the monopolies which supply them, this inquiry challenges the regulator on how they are protecting customers and whether customers have seen enough of the benefits of the sector’s unexpected financial gains.

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