British water firms pocketed windfall profits - audit office

LONDON, Oct (HKSE: 3366-OL.HK - news) 14 (Reuters) - Britain's water companies have pocketed at least 800 million pounds ($1.2 billion) of unexpected profit which could have been used to cut bills, the spending watchdog said on Wednesday, pointing to failings in the regulatory system.

The water industry, privatised in 1989, had held on to savings made from falls in interest rates and corporation tax, leading to net windfall gains in the last five years, the National Audit Office said.

The comments are likely to be seized on by campaigners who argue that the privatisation of major infrastructure assets lead to higher bills for consumers.

The country's supply of water and sewerage services are managed by 10 companies which have a monopoly in the areas where they operate. The firms, which have to stick to regulated pricing, are generally either owned by pension funds, financial investors or listed on the stock exchange.

The average household bill for water and sewerage was 396 pounds in 2014-15 -- a 40 percent increase in real terms since privatisation -- and representing around 2 percent of average household spending.

The regulator Ofwat has moderated increases in bills with a price cap but the audit office said it could have gone further.

"Customers have not seen enough of the benefits of companies' unexpected financial gains from factors such as falls in corporation tax rates," said Amyas Morse, head of the National Audit Office. "Ofwat made significant improvements in 2014, but its price cap regime is not yet achieving the value for money that it should."

The audit office estimated that between 2010 and 2015, water companies gained 410 million pounds from lower corporation tax rates and a further 840 million pounds from lower than expected interest payments, which were cut during the financial downturn.

The companies did however absorb some higher costs and provided bill discounts, leading to an overall net gain of just over 800 million pounds.

In response, the head of Ofwat Cathryn Ross defended the regulator's approach, saying it gave customers certainty over their bills rather than being at the mercy of interest rates.

"What that would have meant was that had interest rates gone up between 2009 and 2014, that amount of money would have gone straight on customers' bills. I don't think that was the right thing to do," Ross told BBC Radio. ($1 = 0.6546 pounds) (Reporting by Kate Holton; Editing by Keith Weir)