OFWAT wants cuts in the real cost of water bills

The water regulator OFWAT has published their latest five-year price capping proposals for the UK water industry. They want household bills to fall in real terms for water customers in England and Wales - positive news for people struggling to pay their utility bills but not so for shareholders in the water companies who have become renowned for their generous dividends on the back of price increases over and above inflation in past years.

The 22 water utility groups have plans to invest £19 billion to upgrade the country’s sewerage and water networks from 2010 to 2015. Their response to the OFWAT decision is that some of this investment might be at risk following the price review. OFWAT’s decision is based on an estimate of the average rate of return on capital employed - the 5 year price cap implies a rate of return of around 4.5% on investment. If there is less money around to invest in repairing our aging water infrastructure or fresh investment to cope with the increased risks of flooding arising from climate change, short term reductions in water bills may be at the expense of long term declines in the quality of service. This is the persistent problem that arises when price-capping regimes are introduced into an industry. Does the investment justify higher bills?

John Moylan looks at the issue in this BBC news report