Ofwat blamed over high water bills in damning report

Households have been paying too much for their water supply because regulator Ofwat has consistently overestimated companies' costs when setting price limits, according to a damning report.

The Public Accounts Committee (PAC) said many householders would be "appalled" to learn that their water bills - which averaged £396 last year - could have been smaller if Ofwat had adopted a different approach to setting limits to the amount companies can charge customers.

The committee of MPs said Ofwat, which was set up to protect the interests of consumers - many of whom have no choice over who supplies their water - had consistently overestimated companies' financing and tax costs when setting price limits.

As a result, companies made windfall gains of at least £1.2 billion between 2010 and 2015 from bills being higher than necessary.

The committee found that Ofwat's efforts to ensure these gains were shared with customers "secured limited results that varied significantly" from company to company.

Financial support for struggling customers also varied substantially.

The committee said it was also concerned that customers in areas of water scarcity were paying to develop expensive new capacity despite the possibility of water trading with other companies being more cost-effective.

It has urged Ofwat to review how it sets allowances for companies' cost of debt and corporation tax, and report publicly on how it intends to improve its performance.

PAC chairwoman Meg Hillier said: "Ofwat was set up to protect the interests of customers, most of whom have no choice over who supplies their water yet must pay bills typically running to hundreds of pounds.

"Many householders will therefore be appalled to learn these bills could have been smaller had Ofwat adopted a different approach to setting price limits for water companies.

"This approach must be reviewed as a priority. We are also calling for greater transparency over windfall gains made by water suppliers, and more effective action to see these gains passed on to customers."

She added: "There should be consistent financial support for people who struggle to pay their water bills, which can amount to a significant chunk of household spending, and accompanying measures to ensure those people know what help is available.

"These and other concerns set out in our report represent significant and pressing challenges for Ofwat.

"It must move swiftly to develop and present clear plans to achieve a better deal for customers, both now and in the years ahead."

The water industry in England and Wales was privatised in 1989 and now includes 18 large independent, privately owned companies who are monopoly suppliers to 22 million households.

Ofwat chief executive Cathryn Ross said: "Holding companies to account and protecting customers is at the heart of what we do. That's why we've made sure bills will fall 5% by 2020 and companies will deliver more. We will carefully consider the thoughts of the PAC.

"PAC's comments on gains relate to decisions Ofwat made six years ago. Since 2012 we've stressed that customers are having a really tough time, and stepped in to claw back £435 million from companies. We then challenged companies to reduce bills further, resulting in £3 billion of savings, which will mean bills fall 5% in real terms over the next five years. Service will continue to improve and we will have kept bills below inflation over two decades.

"Yet it's no time for complacency. We've made changes so that companies become more transparent and resilient. And plan more changes to help create a sector customers can trust. That means making companies more efficient, more accountable and much better at responding to what customers want.

"In the last decade we have clawed back £800 million from companies' shareholders, where they have let customers down. If companies don't step up, we'll step in."