Actually, I just remembered we do get a prompt payment discount, and there are savings by opting for paperless billing, too. Together, though, they often don't match the discount offered to DD payers.

I don't think it's fair to enforce one particular payment method on everyone. Everyone's different, after all. If I happen to choose to pay my council tax in loose change, that's my right.

How much does it actually cost them to deal with other payments? Only last year the water board made a mistake with my neighbours water meter reading. The bill they sent was £900 more than usual. With a DD you may have been debited before you realised the error. Then it takes weeks to get the money back and that could put you over drawn with all those extra costs. In this case they sent another meter reader and confirmed it was a mistake but it should not have happened.

I doubt very much that there are many situations that arise where utility companies are out of pocket by that much.
One reason they like DD is that it frequently lets them build up a credit against the customer (i.e you have effectively overpaid). Unless you stay on top of it you can be owed rather a lot of money.
The utilities argue, in the case of gas and electricity at least, that you overpay in the summer and underpay in the winter due to consumption patters. I don't have a problem with that but only if it works out that I owe them an amount of money by the end of the winter that is repaid over the summer. How often does that happen? Not very. Payments are stacked so that you have a (significant) credit balance with the utility at the end of summer and then eat it away over the winter. Even with regular meter readings I've never seen it balance out in my favour.
Still, I get my money back when I ask for it, which I do on a regular basis.

The individual cost per head of a certain payment method will increase as the number customers using it declines. DD is cheap to process because it's largely automated and a lot of people use it. Cash/cheque will continue to increase in price as the number of people using it falls though I find it immensely difficult to believe that it's £100 p/a. That's blatant profiteering and an unfortunate consequence of having shareholder backed companies running our utilities.