Citizens Advice blames Ofwat for industry overcharging and wants firms to repay

Citizens Advice has called on water companies to return £13bn to customers, arguing regulatory errors have led to significant overcharging over 15 years.

Water was among the utility sectors called on to issue refunds in a report published last week, Monopoly money – how consumers overpaid by billions. Citizens Advice said energy firms had overcharged by £11bn over 15 years, and BT by £100m in 2014-18 for broadband and phone services. It insisted the government should step in if firms don’t voluntarily repay.

While the onus is on companies to make the repayments, Citizens Advice put the responsibility for the situation firmly on the shoulders of the regulators. It said they had systematically set prices too high, leading to bills well in excess of what is required to deliver investment. It cited “mistakes, errors in judgement and poor forecasts” resulting in elevated cost of capital figures, teamed with bias in firms’ favour – “a conscious strategy from regulators: fearing under-investment, they have ‘aimed up’ on capital costs, choosing higher values than their estimates indicated they should”.

The total £24.1bn overpayment figure is derived from Citizens’ Advice re-running the figures based on the actual cost of these essential services rather than regulators' forecasts.

The customer body noted recent moves from Ofwat and Ofgem to bear down on cost of capital, and made a series of recommendations beyond calling for refunds. These included indexing rather than forecasting costs; reducing equity betas (risk measure); pursuing competitive options where feasible; and a National Audit Office review.

It also noted the link between customer/shareholder fairness and the ownership debate. “The political debate on this question is dominated by whether monopolies should be publicly or privately owned. But the driving force underpinning public concern is, in great part, the cost burden that people bear just to meet essential bills and other important costs. For many of these utilities, it is the poorest who are hit hardest - who pay 14% of their incomes on energy and water bills alone. Companies and regulators must do a better job of demonstrating the virtues of our current model of ownership, or people will lose faith in it.”

Tony Smith, chief executive of the Consumer Council for Water, said: “Citizens Advice’s report echoes many of the concerns we’ve repeatedly raised about regulatory over-generosity in the water industry, which has benefitted shareholders but not consumers. Ofwat has listened to us and is now setting much tougher price controls, but since 2015 we estimate water companies have pocketed an additional £500 million windfall and we want to see a share of that returned to customers in lower bills or investment in essential services.”