Severn Trent gets over £65 million in unexpected windfall

Figures from the National Audit Office show that privatised water companies in England and Wales made a combined £800 million from tax cuts and lower-than-expected borrowing charges in the last five years.

However, customers failed to see the benefits on their water bills as the regulatory regime failed to "appropriately balance the risks" between the companies and consumers, the NAO said.

Applying the figures to Severn Trent on its own, the government office said the Shropshire and Mid Wales could have charged the region's customers £65.7 million less.

Based on the fact that Severn Trent supplies 3.7 million households, that means each could have saved £17.75 over the period.

Severn Trent reported an underlying pre-tax profit of £540 million for last year.

"We welcome the recommendations from the NAO report and its emphasis on working more closely with customers which is something that we have been concentrating on for a number of years," said Severn Trent spokesman Jonathan Smith.

"For our part, we have sought to share these benefits with customers by, in the last five years, taking responsibility for private sewers and drains at a cost of £99m and by choosing to invest a further £150m in improving customer services."

The NAO said that the regulator, Ofwat, needed to act to ensure that customers saw more of the gains when the companies benefited from developments that were outside their control.

It estimated that between 2010 and 2015, water companies gained £410 million from reduced corporation tax rates and a further £840 million from lower-than-forecast rates of interest.

Over the same period the companies absorbed costs and provided water bill discounts worth up to £435 million, leaving them with a net windfall of £800 million.

The NAO acknowledged the companies would have lost out if taxes or interest rates had risen but said the balance of risks in Ofwat's price cap was weighted too heavily in favour of the companies and had not achieved proper value for money.

The head of the NAO, Amyas Morse, said: "Customers have not seen enough of the benefits of companies' unexpected financial gains from factors such as falls in corporation tax rates.

"Ofwat made significant improvements in 2014, but its price cap regime is not yet achieving the value for money that it should."

However, Ofwat chief executive Cathryn Ross said: "Overall, that is good news for customers, and going forward, the NAO recommendations will help us to further improve our regulatory approach to continue to better align the interests of customers and companies.

She said she was "surprised by a suggestion that our price control regime does not yet achieve value for money".