Water regulator pays consultants £18m. Guess who'll foot the bill?

Under-resourced Ofwat doesn't have the staff to assess the utilities' new charges to customers

The much-criticised water regulator has been accused of costing bill-payers nearly £20m after hiring consultants at the same time that it was pressuring utilities to reduce their prices.

Ofwat is said to be badly under-resourced and has asked a team led by the accountants PricewaterhouseCoopers (PwC) to assess the business plans of the water companies for 2015-20. The utilities must hand in their final proposals for bill prices, customer service and investment for those five years by tomorrow, with Ofwat's chairman, Jonson Cox, demanding that bills come down in real terms.

However, to cover PwC's contract, which is valued at £6.5m, and the cost of changes to the way that prices are set, Ofwat has trebled the licence fee it charges water companies to 0.3 per cent of turnover. This represents a rise of £18m, to £27m, which industry sources say will inevitably be covered by increases to bills.

One leading executive accused Ofwat of incompetence, lacking in resources and poor planning. "They are a shambles," he said.

"Ofwat is paying shedloads to PwC because they don't have the people to assess the plans. They're putting up their charges to the water companies to pay for their lack of planning – and it gets passed through to customers. Shameful."

Sources also questioned Ofwat's determination to keep bills down, best demonstrated by a ruling it made against the country's biggest water company in early November. The regulator refused Thames Water's proposal for an 8 per cent increase, which would have added about £29 to the typical bill of its 14 million customers in London and the South of England.

However, Thames Water argued that the increase would help to pay for a new super-sewer in London, which is needed to stop waste from entering the River Thames. Bad debts are also on the increase, as those struggling in the wake of the financial crisis are unable to pay up.

There are concerns that the water companies will now be forced to abandon costly maintenance and renewal programmes, leading to leakages and possibly collapsed tunnels on infrastructure that can be well in excess of 100 years old. Ofwat has already been critical of Thames Water over what it views as underspending on flood defences and sewage treatment.

"The question must be: what are we risking in this charge to get bills down? The regulator hasn't publicly said that this [lower investment] could happen as a result," said an industry source.

Mr Cox has been a particular target for the water industry, which has been outraged at news that he has taken an outside appointment with a New York-based fund that invests in European utilities.

The IoS revealed last week that the water companies believe this advisory role with I Squared Capital has a clear potential for acute conflict of interest, though Ofwat insisted that Mr Cox will not discuss the UK water industry with the firm. The GMB union said the appointment was "absolutely disgusting". It has been cleared with the Government.

Earlier this year, Mr Cox was also accused of hypocrisy. He criticised "morally questionable" tax structures used across the industry, even though the water company he used to run, Anglian, paid only £1.6m in corporation tax during his six years in charge.

In barely 12 months in the role, Mr Cox has been on a mission to transform the industry. He recently wrote to the water companies telling them it was time to "build trust and legitimacy by listening to their customers". Meanwhile, the Labour leader, Ed Miliband, as part of a pre-election game plan to focus political debate on the cost of living, has said that the utilities cannot "escape scrutiny".

The change in the political mood has been shown by Yorkshire Water's decision to scrap plans for above-inflation price raises that had already been agreed with Ofwat for 2014-15. The average bill in Yorkshire will be £373, about £6 less than was previously planned.

An Ofwat spokesman said that the licence fee would come down again once the price review is completed. He added: "We've changed the way we will set prices so that customers will get a better deal. These changes mean that more than £2bn in benefits are on the table and we believe there is significant scope for bills to come down.

"These changes have led to an increase in our costs during the period of the review. Using consultancy support for peak periods of work is an efficient way to ensure that we have sufficient capacity to deliver a price review which results in the best deal for customers."

Ofwat will set the final prices on how much the water companies can charge in January 2015.

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