Analysis: Anglian yet to settle

All the incumbent water companies have now accepted Ofwat’s final determinations for business retail price controls for 2017-20 – except Anglian Water. Lois Vallely reports.

Before Christmas, Ofwat published its final determinations for the business retail price controls that will take effect from April 2017 until 2020. As part of these, the regulator rejected Anglian’s request for a 31 per cent increase in cost allowances, saying the company had “failed to provide sufficient evidence” in support of it.

Responding to Ofwat’s draft determination, published in September last year, Anglian Water submitted further information in support of its PR16 proposal – which the regulator had previously rejected.

The company said the generous increase to its cost allowance was needed for a number of reasons, including that general costs were above PR14 levels; that there were extra accommodation costs because of its use of separate buildings; that extra staff were needed to support separation of its retail and wholesale operations; and the costs of new IT systems.

Ofwat senior director for Water 2020 David Black tells Utility Week: “I think [Anglian Water] felt that it had a better understanding of its costs now than it previously did and that is causing some shifts in its costs.”

However, Anglian was rebuffed by the regulator, which stated in its final determination document: “We have decided that this information does not meet the evidential thresholds described in our statement of method and so we have decided to retain the PR14 caps used in its draft determination in its final determination.”

Black says the regulator was “concerned” that some of Anglian’s costs related to preparation to compete in the national market, and would be more appropriately borne by a wider set of customers. “We judge on the evidence in front of us, and we were not sufficiently persuaded by the evidence that was presented.”

Anglian Water argues that its business has “changed considerably since 2014. A spokesperson tells Utility Week: “We’re disappointed that Ofwat hasn’t accepted our evidence on the difference in costs since they were estimated in 2014, given our business has changed considerably since then in preparation for the opening of the market and our costs remain lower than the industry average.”

Anglian also proposed that the gross margin cap for customers consuming 5 to 50Ml a year should be 6.8 per cent, rather than the 5 per cent Ofwat proposed. The reason it gave was that it had extra costs from the operation of its maximum daily demand tariffs.

However, the regulator said most incumbent had suggested gross margins of less than 3.5 per cent, and on this basis a 5 per cent gross margin cap (consistent with the highest proposal of the 16 other incumbent companies) “looks relatively generous”.

Twelve companies (including South West Water, which made separate proposals for the South West and Bournemouth areas) accepted Ofwat’s draft determinations. This included a modification to South West Water’s proposal for Bournemouth Water.

Following the publication of the draft determinations, five companies submitted new evidence in support of their PR16 proposals. Four of these were accepted, and Anglian alone was left disappointed. The company now has two months to consider its position. Its choices are limited: it can refer its determination to the Competition and Markets Authority if it wishes, but otherwise the controls will be in place from April 2017 until 2020.