Customers should be compensated after being overcharged by £24.1 billion due to regulator error, says Citizens Advice
Citizens Advice has found regulators have allowed water, energy, broadband and telephone networks to overcharge customers by £24.1 billion over the past fifteen years.
The charity is calling for companies to return some of this to customers through a rebate on their bills and for regulators to stop this happening again.
The research follows its 2017 report, which found Ofgem made errors in setting price controls for energy networks, resulting in energy customers being overcharged £7.5 billion over an 8-year period. After the charity highlighted these concerns, 3 energy network companies returned some money to consumers.
Citizens Advice has now found this was the tip of the iceberg. The same errors have been made by Ofgem over a much longer period and by regulators in other markets including water, broadband and phone networks over the past 15 years.
This research shows misjudgements by the regulators (Ofgem, Ofwat and Ofcom) on key decisions have meant customers have been paying far too much for the pipes and wires that connect energy, broadband, phones and water to their homes.
These sectors include companies that face little, or no, competition to drive down the price they can charge their customers. Instead, regulators tell the network companies how much they can charge by setting a price control. Customers then pay the charges for these networks as part of their water, energy, broadband and phone bills.
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.
The charity is recommending that, instead of forecasting costs, regulators should use available market data to calculate costs and adjust their estimates of investment risk. This would avoid consumers paying too much in future.
While several energy and water companies have taken steps to return some money to customers, Citizens Advice is calling for all firms to provide a voluntary rebate to their customers. If they don’t, 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.”
This research follows our Missing Billions report on energy networks from July 2017. That report focussed solely on energy over an 8-year period. After we highlighted these concerns in the energy sector, three companies (SGN, Western Power and Scottish and Southern Electricity Networks) returned £287 million to customers.
Previously in the water industry, in 2013, Ofwat called on firms to recognise the difficulties that customers were facing as a consequence of the financial crash. Amid planned bill increases, some firms voluntarily didn’t collect revenue from customers, reducing bills by £435m.
Ofwat have since indicated substantially lower returns for investors from 2020 for the PR19 price control. In April, Ofwat announced a deal with three water companies that could see some water bills fall by as much as £70 a year for 8 million households.
Last week Ofgem confirmed its methodology for calculating their next set of price controls, including a lower return on equity of 4.3% and a lower allowed return on debt. This would lead to customers bills being reduced by £6 billion over the five years of the RIIO-2 price control (staring in 2021) when compared to RIIO-1.
Notes to editors
This research covers specific time periods for each sector, due to necessary data being missing for other periods. This research covers 2004-2019 for energy; 2005-2019 for water and 2014-2018 for broadband & telephone networks. The breakdown is £11bn for energy networks, £13bn for water providers & £100m for broadband and telephone networks.
This research covers the United Kingdom for broadband, Great Britain for energy and England and Wales for water. Scottish Water is excluded as it is publicly owned.
Consumer bills are often made up of different components. Companies are charged for the cost of using and maintaining the networks. These charges get passed onto consumers through their bills.
Broadband infrastructure is slightly different from the other monopolies. While providers compete in some areas of the country to lay down infrastructure, it’s BT’s infrastructure that supports most services.
Using a standard financial model, our research estimates 4 key elements of the cost of capital: the risk-free rate (the return on a safe investment), the cost of debt, the equity beta and the total market return. We use market data and the latest research to estimate what these 4 elements should have been.
Our model finds that firms have collected £81.1 billion in baseline returns for equity and debt costs from consumers’ bills. Our model finds that this should have been £57 billion. The difference between these two figures is £24.1 billion.
The Missing Billions report can be found here
Citizens Advice is made up of the national charity Citizens Advice; the network of independent local Citizens Advice charities across England and Wales; the Citizens Advice consumer service; and the Witness Service.
Our network of charities offers impartial advice online, over the phone, and in person, for free.
We helped 2.7 million people face to face, over the phone, by email and webchat in 2018-19. And we had 29 million visits to our website. For full service statistics see our monthly publication Advice trends.
Citizens Advice service staff are supported by more than 21,000 trained volunteers, working at over 2,600 service outlets across England and Wales.
You can get consumer advice from the Citizens Advice consumer service on 03454 04 05 06 or 03454 04 05 05 for Welsh language speakers.