Millions of households in England face the prospect of even bigger water bill increases than originally expected, as the competition regulator prepares to give a preliminary verdict on industry spending plans as soon as this week.
Five water companies appealed to the Competition and Markets Authority (CMA) to ask for permission to raise bills higher than allowed previously by the industry regulator, Ofwat.
If the CMA approves the larger increases to bills, it could give a political headache to Emma Reynolds, the newly installed 10th environment secretary in 10 years.
The five companies – Anglian, Northumbrian, Southern, Wessex and South East – together serve 14.7 million customers. Thames Water, Britain’s biggest water company with another 16 million customers, also initially appealed but has paused the process amid negotiations to try to cut its debt burden and secure its future.
Under England and Wales’s mostly privatised water system, Ofwat sets the amount that water companies can charge customers over a five-year period. Ofwat in December said average annual household bills could rise 36% to £597 by 2030 to help pay for investment.
However, the six companies have argued that they should be allowed to spend more in order to pay for upgrades to creaking infrastructure. Any extra allowed spending would be added to customer bills.
Water industry insiders believe that the CMA is more likely to allow bill increases than to cut them, given the huge need for investment, although they cautioned that there are few clues to the regulator’s thinking.
S&P Global Ratings, an influential agency, said that the water companies were requesting as much as £2bn in extra spending, on top of £104bn already allowed over five years. However, the agency said there was too much uncertainty over the CMA’s position to try to forecast an outcome.
The CMA initially promised to publish provisional determinations by mid-September but has adjusted that to early October. Water companies had expected the announcement to come as soon as the coming week, although it could slip later.
Martin Young, a former investment bank analyst who now runs the Aquaicity consultancy, said: “We could see upwards movement in the allowed spend” for Southern, South East and Wessex in particular because of the large gaps between what they originally requested and what Ofwat granted in December.
Young said that Ofwat’s assumptions about the cost of equity – the return given to shareholders – were lower than those used by Ofgem, the regulator for energy companies. The CMA could therefore decide to increase the allowance for spending.
“Given the challenges and the clear need to invest and my observations from Ofgem, I would not be surprised to see movement,” Young said.
However, a water industry source suggested that the CMA would be under political pressure to avoid major price increases, as the government plans for a new regulator to replace Ofwat. The former environment secretary Steve Reed – now in charge of housing – said in July that households should be “never again hit by the shocking bill hikes we saw last year”.
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Reynolds told the Labour party conference that there would be “no more ripping off the British people”, but also that she would oversee investment that would be “good for jobs, consumers, and good for growth”.
Reynolds has not yet made it clear to the public and the industry how she will try to resolve the tension between keeping down bills and increasing investment to prevent leaks and sewage overflows. She is understood to have postponed a meeting with water bosses last week.
Thames Water’s effective owners this week said it may not be able to clean up sewage pollution in rivers for as long as 15 years, given the scale of investments needed.
A person involved in the Thames Water restructuring said Ofwat had a “blinkered approach” when setting its spending allowance. It is understood that Thames could resume its appeal to the CMA for higher bills if the government does not grant it requested regulatory leniency, although it is not the preferred option.
A government spokesperson said: “This government inherited full water system failure which has left our infrastructure crumbling and sewage spilling into our rivers.
“This failure was not dealt with, and the public rightly feel frustration at seeing bills increase. We are fixing the system to prevent future price hikes.”
