Calls for compensation after regulator error causes £24.1 billion hike in everyday bills

Regulators have allowed water, energy, broadband and telephone networks to overcharge customers by £24.1bn over the past 15 years, according to stark figures from Citizens Advice.

The revelation comes after an initial investigation unearthed £7.5bn of overcharging for connection to key services. Research has now found this is just “the tip of the iceberg”.

In 2017, Citizens Advice found Ofgem made errors in setting price controls for energy networks, resulting in energy customers being overcharged £7.5bn over an eight-year period. After the charity highlighted these concerns, three energy network companies returned a total of £287m to consumers.

But now the charity has found 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.

This research shows that misjudgements by the regulators Ofgem, Ofwat and Ofcom have meant customers have been paying far too much for the pipes and wires that connect their homes to essential services over the last 15 years.

These sectors include companies that face little, or no, competition to drive down their prices. 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 became. Regulators also over-estimated how risky these businesses were for investors.

Citizens Advice is now calling for both widespread compensation and a fundamental change in the way these calculations are made.

Instead of forecasting costs, regulators should use available market data to calculate costs and adjust their estimates of investment risk, it argues. 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, it says the government should step in.

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

“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 multibillion pound blunder right. They must compensate customers where they have been paying over the odds. If they don’t, government needs to intervene.”

In a statement responding to the research, the energy regulator Ofgem said: “Ofgem remains determined to drive the best deal possible for consumers. Overall, energy network regulation has delivered for consumers, with £100bn 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."

Last week, Ofgem confirmed its methodology for calculating their next set of price controls, including a lower return on equity of 4.3 per cent and a lower allowed return on debt. This would lead to customers’ bills being reduced by £6bn over five years from 2021, calculations it says Citizens Advice supports.

Meanwhile, households were warned they could be hit with an average annual energy bill rise of almost £210, or 20 per cent, as 60 fixed dual fuel energy tariffs come to an end this week, according to switching service Weflip. Charities have called for immediate action to better support energy customers in vulnerable circumstances.

An independent report published this week says urgent action is required by all energy companies, regulators and government as well as price comparison websites – with support from consumer groups and charities – to better identify customers in vulnerable circumstances and improve the help and support given to them.

Joanna Elson, chief executive of the Money Advice Trust, who served as a member of the Commission for Customers in Vulnerable Circumstances, which produced the report, said the charity is increasingly hearing from people struggling to meet everyday household costs.

She said: “This report puts the energy industry firmly under the spotlight. Significant work is needed to improve support for energy customers in vulnerable circumstances. As the report notes, there is good practice out there, but this support is inconsistent and varies greatly across the sector.

“Training frontline staff to identify customers in vulnerable circumstances is a crucial first step, while actions such as committing to not use High Court Enforcement Officers, can also make a big difference for the most vulnerable.

“There is also an important role for the third sector to play alongside suppliers through greater partnership working. This could be through signposting to debt or energy saving advice, and helping people access financial help and other essential costs.”