Ruling on Price Controls for 5 Water Firms Finalized

• Group has allowed an expected average increase of 2.2% in customer bills, nearly half of which is due to market movements

• Some extra money also granted to improve services, tackle pollution and secure investment

• 83% of increases sought by water companies rejected - companies have been allowed less additional revenue than in the group's provisional ruling

Background

A price control sets the amount of revenue companies are allowed to recover through customer bills. In December 2024, Ofwat published the price control for each of the 16 regulated monopoly companies covering the period 2025 to 2030 - a decision it said would lead to average bill increases of £157 (36%) over the 5-year period.

Five companies - Anglian Water, Northumbrian Water, South East Water, Southern Water, and Wessex Water - argued that Ofwat's decision left them unable to meet the regulatory requirements set out for them. Each of these companies chose to exercise its legal right to request a "redetermination" of Ofwat's decision by an independent group of experts appointed by the Competition and Markets Authority (CMA). The disputing companies serve approximately 14 million people and have a combined annual revenue of around £5 billion.

This process has taken place during a period of extensive debate and proposals for fundamental change for the water sector and how it is regulated. The Independent Water Commission concluded that the sector "requires fundamental reform on all sides". The UK government response stated that the current system is "failing the environment, customers and investors" and that it "will now act quickly, turning the page on a broken system with root and branch reform".

However, the group was required by law to undertake the redeterminations under the current regulatory system, with more fundamental decisions about the water sector necessarily reserved for government. A maximum of 12 months was allowed for this complex process, compared to the 4 years in which Ofwat conducts its price control.

Final decision

Over the last 12 months, the group scrutinised extensive evidence from the 5 water companies, Ofwat, and over 50 third parties - including representatives of investors, environmental and consumer groups.

The group has balanced minimising the impact on people's bills with the need for companies to have enough funding. This includes funding to meet their environmental and drinking water quality legal obligations, and for investor returns to reflect the risks involved - so companies can raise the money to deliver better outcomes for current and future customers.

In October, the group provisionally decided to allow 21% - an additional £556 million in revenue - of the total £2.7 billion the 5 firms requested. This extra funding was expected to result in an average increase of 3% in bills for customers of the disputing companies.

Following a consultation period, the group has now decided to allow 17% - an additional £463 million in revenue - of the total £2.7  billion the 5 firms requested. The £93 million reduction from the amounts proposed in the provisional redetermination is largely driven by market movements impacting financing costs for water companies. This extra funding is expected to result in an average increase of 2.2% in bills for customers of the 5 water companies, which is in addition to the 24% increase for customers of these companies levied as part of Ofwat's price control.

Water companies' funding requests for new activities and projects beyond the significant increases already allowed by Ofwat have largely been rejected. Some exceptions were made where the group found that more spending was needed to deliver benefits to consumers.

A large proportion of additional revenue allowed by the group reflects the higher cost of financing which makes investment more costly to secure for water companies compared to Ofwat's price review. The funding will also enable the water companies to meet new legal requirements and fund the delivery of critical areas like supply resilience and pollution reduction.

The funding is tied to defined outputs and required levels of performance to protect consumers. Ofwat has rules in place to claw back funding from water companies which fail to deliver on projects, so customers are not left paying for upgrades that never happen.

Chair of the independent group Kirstin Baker said:

We've rejected most of the bill increases water companies asked for but allowed limited extra funding where that's genuinely needed, balancing concerns about affordability with the need to secure our water supplies and cut pollution. A significant part of this extra money reflects market movements since Ofwat's decision.

Indicative impact of the final redeterminations on annual customer bills using 2022 to 2023 inflation levels