How regulators allowed companies to overcharge people by £24.1 billion

Our new research finds customers should get money off their bills

Today we’ve published a report which found that essential service networks have overcharged people by £24.1 billion.

Here’s how customers have been overcharged — in 150 words

Networks are the companies that provide the pipes and wires that connect energy, water, broadband and telephone lines to our homes. Running these pipes and wires cost a lot of money. Networks must attract investors to pay for things like building new pylons.

Funding for this investment is raised through borrowing money (debt) and selling shares in the company (equity). In exchange for providing this finance, investors expect a rate of return (profit).

Regulators over-estimated the cost of borrowing and investment. The costs of borrowing money and return needed for investment have been lower than they thought they would be.

We re-ran the figures based on the actual costs, rather than regulators’ forecasts. We found people have been overcharged the difference of £24.1 billion.

Companies should return money to their customers, through a rebate on their bills, by the end of this year. If companies fail to act, government should step in.

Learn more about how we approached this research

In 2017, we released a landmark report, ‘Energy Consumers’ Missing Billions’, which found Ofgem, the energy regulator, made errors in setting price controls. This led to energy network companies overcharging people by £7.5 billion over an 8-year period.

Following this, 3 energy network companies — SGN, Western Power and Scottish and Southern Electricity Network — agreed to return £287 million back to their customers.

Other companies — such as National Grid and Cadent — have also taken steps that will lead to lower bills for their customers. And Ofgem has now acted in line with the key recommendations from our 2017 report by committing to people saving £6 billion during the next price control.

We’ve now found this was the tip of the iceberg

The same errors have been made by Ofgem over a much longer period. These errors have also been made by regulators in other markets including water, broadband and phone networks over the past 15 years.

These sectors include companies that face little, or no, competition to drive down the price they can charge their customers — since it doesn’t make sense to have many sets of pipes and wires.

Instead, regulators say how much these networks 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.

This overcharging 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.

This led to people overpaying by £24.1 billion for essential services. We’re calling for this money to be given back to customers, through a rebate on their bills, by the end of this year.

Regulators need to change their approach to calculating these profits

Ultimately, we’ll always need water, electricity and telecommunications to carry out our day-to-day activities. And so, government and regulators will always make sure that these companies are always able to deliver these services to and from their customers. These are not high-risk businesses for investors.

Instead of forecasting costs, regulators should use available market data to calculate costs and adjust their estimates of investment risk. This would avoid customers having to pay too much in future.

While several companies have taken steps to return some money back to customers, others now need to follow suit by the end of this year. If they don’t, the government should step in.