Water companies get £800m windfall from price cap

Water companies have pocketed an £800m windfall as a result of a clumsy price cap that failed to take into account tax and interest rate changes, according to the National Audit Office (NAO).

The spending watchdog says a price cap operated by the regulator Ofwat is "not yet achieving the value for money that it should", reports the Guardian. It says customers were protected against potential increases in costs, but that the NAO has not "balanced the risks" between companies and consumers.

According to NAO estimates, between 2010 and 2015 water companies gained £410m from lower corporation tax rates and £840m from lower than expected interest payments. However, these benefits were not fully passed on. Over the same period the companies absorbed costs and provided water bill discounts worth up to £435m, leaving them with a net gain of £815m.

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The report claims that two changes to the price cap policy, which would have brought it into line with that imposed on the energy sector, would have lowered bills, the Financial Times notes.

First, the NAO says that if prices had been linked to real borrowing costs on company debt, customers' bills would have fallen by £840m. A further £410m would have been saved if Ofwat had forced companies to cut bills in line with cuts to corporation tax, which fell from 28 per cent to 21 per cent over the five-year period under review.

Ofwat responded by defending its record on water bills, which have risen by 40 per cent since privatisation in 1989 but fallen in recent years. 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. Bills will fall by a further five per cent under the latest price cap, which is set every five years and was last reviewed in 2014.

Ofwat chief executive Cathryn Ross told BBC Radio 4's Today programme it would not have been right to pass on to customers the risk of changes in financing costs. "Had interest rates gone up between 2009 and 2014, that amount of money would have gone straight on customers' bills. I don't think that was the right thing to do. There are swings and roundabouts here."