In its Fifteenth Report of this Session, the Committee concludes Ofwat has consistently over-estimated water companies’ financing and tax costs when setting price limits.
As a result, water companies made windfall gains of at least £1.2 billion between 2010 and 2015 from bills being higher than necessary.
The Committee finds Ofwat’s efforts to ensure these gains were shared with customers “secured limited results that varied significantly” from company to company.
Financial support for customers who struggle to pay water bills also varies substantially.
Other concerns raised by the Committee include customers in areas of water scarcity paying to develop expensive new capacity, when water trading with other companies might be more cost-effective.
Among its recommendations, the Committee urges Ofwat to review its approach to setting allowances for the cost of debt and corporation tax, and report publicly on what actions it intends to take to improve its performance.
It also calls on the regulator to use comparisons with other sectors and international suppliers to develop a clearer picture of what services should cost if provided efficiently.
Meg Hillier MP, Chair of the PAC, said today:
"Ofwat was set up to protect the interests of customers, most of whom have no choice over who supplies their water yet must pay bills typically running to hundreds of pounds.
Many householders will therefore be appalled to learn these bills could have been smaller had Ofwat adopted a different approach to setting price limits for water companies.
This approach must be reviewed as a priority. We are also calling for greater transparency over windfall gains made by water suppliers, and more effective action to see these gains passed on to customers.
There should be consistent financial support for people who struggle to pay their water bills, which can amount to a significant chunk of household spending, and accompanying measures to ensure those people know what help is available.
These and other concerns set out in our Report represent significant and pressing challenges for Ofwat.
It must move swiftly to develop and present clear plans to achieve a better deal for customers, both now and in the years ahead."
The water industry in England and Wales, privatised in 1989, now includes 18 large independent privately-owned companies who are monopoly suppliers to 22 million households and to most of the 2 million non-household customers.
The Department for Environment, Food and Rural Affairs and the Welsh government set the policy and legislative framework for the water industry in England and Wales.
Ofwat is the independent economic regulator of the water industry. Its main statutory duties include: protecting the interests of consumers; securing the long-term resilience of water supply and wastewater systems; and ensuring that companies carry out their functions and are able to finance them.
Companies are funded from customer bills and financed through private investment. Ofwat sets limits to the prices companies may charge for 5-year periods, allowing for operational and financing costs of delivering services to customers, and making assumptions about the efficiency improvements that companies should make.
The average household bill in 2014-15 was £396.
The Water Services Regulation Authority’s (Ofwat’s) approach to setting price limits for water companies in England and Wales has not resulted in the best possible deal for customers.
By consistently overestimating financing costs, Ofwat has allowed companies to make windfall gains which have not been shared in a structured way to ensure customers get a fair deal.
Ofwat uses comparisons between water companies to help improve overall efficiency, but acknowledges that it should do more to benchmark companies’ costs with other sectors and internationally, to ensure that the amounts customers are charged are minimised.
Ofwat should also do more to promote water trading between companies instead of developing expensive new supplies.