Exclusive: Privatised water firms secretly overcharge customers by pounds 280m
Sunday 17 April 1994
The 'underspend' has built up since the 10 regional water and sewerage authorities were privatised in 1989. The Independent on Sunday has discovered that the companies did a secret deal with the Government which allowed them to build up an even bigger underspend - pounds 424m over three years - at the expense of the customer.
This means that the average water bill - up 62 per cent from an average of pounds 113 a year in 1989 to pounds 183 a year now - has been unnecessarily high and customers have been charged for services they have not yet received. Each year, company accounts have estimated how much each will spend on 'infrastructure renewals'. But eight companies have spent far less. Yorkshire has underspent by pounds 108m, Anglian pounds 102m, Severn Trent pounds 39.7m, Northumbrian pounds 19.8m, Welsh pounds 9.9m, Wessex pounds 8.3m, South West pounds 4.2m, Southern pounds 1.7m. North West Water has overspent by pounds 9.1m, Thames by pounds 6m.
The pounds 278.8m underspend up to March 1993 was discovered by the Sewer Renovation Federation which has complained to the regulator, Ofwat. It claims that three of its members have gone into liquidation and others have suffered financially because the water companies have not given them the work they had promised.
The amount of money set aside for infrastructure renewals is an average annual figure based on an estimate of the total spending needed over 20 years. In theory the reserves will eventually have to be spent. In January 1993 Ofwat indicated in a letter to the federation that all the money allocated must be spent on infrastructure repairs by March 1995.
But after intense lobbying by the companies, Ofwat agreed, in a confidential letter sent in February to the Water Services Association which represents the companies, that the money need only be spent by 2005.
Ofwat is reviewing the prices that companies will be allowed to charge for the next 10 years. An adviser said the underspend would be deducted from the capital costs which companies can charge and this will be reflected in bills.
The National Consumer Council is to write to Ofwat demanding information about the secret deals. Ruth Evans, the council's director, said: 'They are simply overcharging. If the work is not being done the price control mechanism is not working.'
Linda Leonard, a consumer council researcher, added: 'Customers have faced soaring prices and disconnections when these companies have been making extremely healthy returns.
'This very large underspend makes it even more important that the price control review is conducted as widely and transparently as possible, so all the facts are in the public domain. We ought to know what the companies are actually doing with the money the customers are paying.'
When questioned by the Independent on Sunday, Mark Blamire-Brown, an adviser to Ofwat, revealed that the Government had secretly agreed, when the price controls were set in 1989, that the companies could build up an 'accrual' of pounds 424m infrastructure money by March 1993. He said this figure was 'not in the public domain'. He stressed the prices were originally fixed by the Secretaries of State for the Environment and Wales, not by Ofwat.
So far most companies have not included the underspend in their profits because the money remains a potential future liability. But two companies have converted some of their underspend into profits. Severn and Trent Water has included pounds 15.9m of its underspend in the profits and Northumbrian Water pounds 7m. This has helped them to increase dividends to shareholders and bonuses paid to directors. Shareholders have been paid pounds 1.5bn in dividends over four years by the 10 water companies.
Charges are based on the Retail Price Index plus a percentage element called the K factor, which is fixed separately for each company. This is an estimate of the costs of repairs and improvements which will be needed over several years and consumer watchdogs have complained that it is 'over generous'. They believe the formula is open to manipulation because the estimates are made by the water companies themselves rather than by independent experts.
Some of the companies claim that they will have spent the amount estimated by the end of five years; others say the amount they estimated would eventually be spent within 20 years. Welsh and Yorkshire water companies say they have spent the money allocated for infrastructure renewals on other schemes such as improved water and sewage treatment but Yorkshire admitted this does not appear in the published accounts.
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