UK water groups pour £26m down the drain in dispute with regulator

Four of Britain’s large water companies spent at least £26m on an appeal to the competition watchdog, adding to concerns over the cost of the regulatory system.

A document released by the Competition and Markets Authority reveals that the dispute with water regulator Ofwat cost Yorkshire Water £8.3m, Anglian Water £7.6m, Northumbrian Water £6.5m and Bristol Water £3.5m.

The full cost is expected to be much higher as the figures only cover external expenditure, mostly lawyers and consultants. It significantly exceeds the £2.8m spent by Ofwat and the £3.1m spent by the CMA on the appeal.

Water companies are monopolies, so Ofwat sets the returns investors can make, how much they can charge customers, and their expenditure on infrastructure such as reservoirs and pipes every five years. 

But there are concerns that the review process has become unnecessarily cumbersome, and expensive.

Water companies say they spent three years and around £140m between them on the review, adding at least £15 a year to customers’ bills, even without the costs of the CMA appeal.

Yorkshire Water, which supplies water and sewage services to around 5m people and 130,000 businesses, said: “There has to be a simpler and less complex way of conducting price reviews.”

Last year’s appeal to the competition regulator was the biggest since privatisation 31 years ago.

Water companies argued that Ofwat had prioritised price cuts over much needed investment following an outcry over leakage and pollution, including at least 400,000 recorded sewage spills into rivers and seas last year.

The water regulator was concerned that investors — a clutch of private equity and sovereign wealth funds — would “outperform” or carry out the investments more cheaply, which under the complicated regulatory system would mean that they could retain a portion of the excess for distribution to shareholders.

The CMA overruled Ofwat and allowed a headline rate of return of 3.2 per cent over the next five years, higher than the 2.96 per cent that the water regulator had recommended. Water bills will also fall by an average of £34 rather than the £50 Ofwat had advised.

Dieter Helm, a utilities specialist at Oxford university who is calling for reform of the regulatory system, said the CMA appeal had been a profitable investment for the water companies, adding an extra 0.3 per cent to their allowed rate of return. 

But he added that the challenge showed the periodic review processes had run out of steam. “They are no longer fit for the purposes of providing the long-term investments needed to tackle climate change and rebuild our inadequate infrastructures,” he said.

Consumers pay an average of £400 a year for water and sewage, of which around 20 per cent goes on financing debt and providing a return to shareholders, according to the CMA.

Ofwat said it had “strived to keep costs as low as possible and this work was funded entirely from our existing budget”.

“It is important that we are able to defend the interests of customers and the environment,” it added.

Research by Greenwich University has shown that water companies had taken on £51bn in borrowings and paid out £56bn in dividends by 2018 after being privatised free of debt in 1989. This suggested that the bulk of borrowings were used to pay returns rather than invest in network infrastructure.