Customers ‘overcharged £24bn due to regulator error’

Utility customers have been overcharged by more than £24 billion over the last 15 years due to regulatory errors, research from Citizens Advice has found.

The consumer advocate is today (30 May) calling for these customers to be compensated through a rebate on their bills and for the regulators to stop this happening again.

The research follows Citizens Advice’s 2017 report which found energy regulator Ofgem made errors in setting price controls for energy networks, resulting in energy customers being overcharged £7.5 billion over an eight-year period.

Following the report three network companies returned some money to customers.

Yet Citizens Advice has claimed more errors were made by Ofgem over a much longer period and by regulators in other markets including in water (by Ofwat).

The breakdown is £11 billion for energy networks and £13 billion for water providers.

Citizens Advice says its research shows “misjudgments” were made by the regulators on key decisions, meaning customers have been paying more than they should.

A statement from Citizens Advice said: “These overpayments partly occurred because regulators made forecasting errors.

“They predicted that costs, such as debt, would be higher than they in fact were. Regulators also over-estimated how risky these businesses were for investors.”

Citizens Advice is recommending that instead of forecasting costs, regulators should use available market data to calculate costs and adjust their estimates of investment risk.

This, it claims, would avoid consumers paying too much in future.

It added that while several energy and water companies have taken steps to return some money to customers, it wants all firms to provide a voluntary rebate to their customers and if they do not, the government should step in.

Gillian Guy, chief executive of Citizens Advice, said: “Regulator error has meant customers have been charged too much by energy, broadband and phone networks for far too long.

“At a time when so many people are struggling to pay their essential bills, regulators need to do more to protect customers from unfair prices.

“They have started to take steps in the right direction but it is vital they continue to learn from their past mistakes when finalising their next price controls.

“Companies need to play their part in putting this multi-billion pound blunder right. They must compensate customers where they have been paying over the odds. If they don’t government needs to intervene.”

Responding to the report Ofwat’s chief executive, Rachel Fletcher, said: “Ofwat aims to make sure customers receive a fair deal and a reliable service while delivering the investment needed to clean up the environment and serve future generations.

“Customers have benefited from a decade of falling bills before inflation, improved customer service as well as significant reductions in pollution and flooding.

“As we set the price review for the five years from 2020 we expect to see prices continue to fall before inflation and a step change in performance for customers and the environment.

“We are always looking to improve our approach, pushing ourselves and water companies to deliver more for customers.

“We therefore welcome the recommendations from the Citizens Advice and the work they and other consumer bodies do to highlight important issues around the affordability of essential services.

“We have already made changes to the way we set the cost of capital through our price review, so customers will not lose out. Our early view on the cost of capital for 2020 onwards is the lowest so far, and together with other measures would reduce customers’ bills by £15- £25 (before inflation).

“We will set our final view on the cost of capital in December this year. We are requiring companies to share the benefits of high gearing with their customers.”

Meanwhile an Ofgem spokesperson said: “Ofgem remains determined to drive the best deal possible for consumers. Overall, energy network regulation has delivered for consumers, with £100 billion invested, power cuts halved, record customer satisfaction and reduced costs.

“While we do not agree with Citizens Advice’s estimate of excess profits, we welcome their report and recommendations. We will continue to work closely with them and wider stakeholders to apply lessons learnt from previous price controls for the next price control period (RIIO2).

“Our plans include the lowest ever returns for investors in energy networks which would cut costs for consumers by £6 billion.”

Tony Smith, chief executive of the Consumer Council for Water, said: “Citizens Advice’s report echoes many of the concerns we’ve repeatedly raised about regulatory over-generosity in the water industry, which has benefitted shareholders but not consumers.

“Ofwat has listened to us and is now setting much tougher price controls, but since 2015 we estimate water companies have pocketed an additional £500 million windfall and we want to see a share of that returned to customers in lower bills or investment in essential services.”

David Smith, chief executive of Energy Networks Association, said the calculations used in the research are “simply wrong”

He said: “The calculations underpinning this research are simply wrong, with the numbers plucked out of thin air. The analysis conveniently ignores the pace of change that has been taking place in our country’s energy infrastructure to deliver record levels of renewable energy and prepare for things like electric vehicles, producing an inflated figure as a result.

“The full cost of these changes is not reflected in this research. The fact is that overall network costs are down 17 per cent since 1990, delivering savings for the public by running a world-class system of energy networks more efficiently.

“Meanwhile over the past six years alone more than £32 billion has been invested in Britain’s network infrastructure, helping drive economic regeneration in communities across the country whilst securing a sustainable and affordable energy supply for future generations.”

A spokesperson for SSE also criticised the calculations. They said: “It is right regulatory systems are scrutinised but it’s important this is done on the basis of complete evidence. Applying today’s assumptions to yesterday’s market conditions and price controls is not the basis of sound research.

“This report recycles the same flawed methodology as previous analysis, completely ignores the significant investment and performance improvements that an effective incentive-based regulatory system has delivered and uses selective metrics to support its arguments.

“SSE targets a post-tax return of between 4-5 per cent from its regulated network businesses, which continue to deliver record levels of investment, improvements in reliability and lower costs to consumers.”