Ofwat and Regulatory Failure | tutor2u Economics

The Commons' Public Accounts Committee (PAC) has criticised the UK water regulator Ofwat for poor oversight of the water companies it is meant to be regulating, resulting in households paying too much for their water bills.

"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 said that Ofwat regularly overestimated the water companies' costs when setting price caps, resulting in total windfall gains of at least £1.2bn for the water utilities. 

Price capping in the water industry is based on the RPI - X + K approach (where X is a pre-agreed amount and K provides a sum for investment into the water and sewerage network). 

The PAC has asked Ofwat to review the way it assesses companies' cost of debt and tax and report back on how it intends to improve. 

This situation is often called regulatory capture - regulators are dependent on the utilities for the information on costs, and end up being overly sympathetic to those utilities. 

The role of Ofwat is likely to change over the coming years. There are plans in place to reduce the regional monopoly power currently enjoyed by water providers, by allowing competition to take place so that households can choose their water supplier in a similar way to choosing their gas, electricity, and broadband suppliers. 

If you want to explore this issue further click here: Water regulator must act to secure better deal for customers

The UK Water Industry

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 average household bill in 2014-15 was £396.

The volume of water traded between regional water companies has remained fairly constant at about 4–5% of total supplies.

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