Water

Environment Food and Rural Affairs written question – answered on 24th July 2006.

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Photo of Lyn Brown Lyn Brown Labour, West Ham

To ask the Secretary of State for Environment, Food and Rural Affairs what recent assessment he has made of (a) levels of pre-tax profits and (b) increases in water charges imposed by water companies.

Photo of Ian Pearson Ian Pearson Minister of State (Climate Change and the Environment), Department for Environment, Food and Rural Affairs

Water companies made profits of £2.1 billion in 2004-05. The Government recognise that companies have to pay a return on their capital. However, water companies can only increase their profits by becoming more efficient and delivering all their services at less cost. These savings are also passed to customers in lower bills when the next price limits are set.

Average water and sewerage bills for household customers in England and Wales increased by 5.5 per cent. (including inflation) in April 2006. Customers' bills rose by an average of £15, from £279 to £294. The increases are in line with the price limits set by the Water Services Regulation Authority (Ofwat) for 2005-10 and will contribute towards a total capital investment programme of £16.8 billion for environmental and service improvements.

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Alan Bland
Posted on 28 Jul 2006 9:49 am (Report this annotation)

This answer is accurate as far as it goes, but what the questioner probably does not understand is that the water industry has to use most of its profits to pay for capital investment, the requirements for which have exceeded the cash flow obtained from customers in all but one of the last 16 years since privatisation.

The result is that, from being intially free of debt, the industry is now heavily in debt ("highly geared" is how the accountants describe it)and pretty much at the limit of its borrowing powers. If the requirement to invest continues at the current levels - e.g. to fund even more environmental improvements - then this can only result in charges escalating further.

So the actual level of profits is misleading. Shareholders do not receive anything approaching this figure, and Ofwat ensures customers do not fund dividends to shareholders in excess of the low rate of return on investment it considers appropriate to the industry.