These Water UK background briefings provide further information on the price review (PR19) and key features of the water industry.
How water prices are set
Water companies cannot just set whatever prices they like. They have to follow strict rules. For example, in England and Wales, price limits are set for them for five-year periods by the independent economic regulator, Ofwat.
Prices go up only as much as the regulator thinks is absolutely necessary and are pegged very closely to inflation. This is why water bills have risen far more slowly and steadily over time compared to electricity and gas.
Water companies are expected to be highly efficient in the way that they operate – to deliver water services cost-effectively and to a very high standard while reflecting their customers’ priorities. Ofwat quantifies this and says that because of this efficiency, bills are £120 lower than they would be otherwise.
Water companies’ investment and tax
Companies look to finance their investment as efficiently as possible. They use a mixture of debt finance and equity finance, of which the equity finance is more expensive, to compensate shareholders for the greater risk they face.
The stable and predictable regulatory regime has allowed companies to secure more of their finance through debt finance than the average UK company, which reduces bills for customers. It has also made the UK water industry an attractive destination for global investment in our essential services.
Successive governments have encouraged investment both through sector specific policies and through tax policy that applies to all companies.
When companies invest for the future, they can defer – but not avoid – corporation tax due to the tax relief on capital allowances. This reduction in tax has directly led to lower customer bills.