Anglian and Northumbrian appeal to CMA

In a flurry of announcements this morning Anglian and Northumbrian Water have both confirmed they will ask Ofwat to refer their final determinations to the Competition and Markets Authority (CMA).

Meanwhile, Thames has said that while it “carefully considered” a CMA referral, it ultimately judged that this would be a “significant management distraction” at a key time.

Southern Water, which announced its decision this afternoon, also reluctantly accepted Ofwat’s stance.

Affinity and the fast-tracked South West have also both accepted the regulator’s final determination for their plans.

Announcing their referrals, both Anglian and Northumbrian said the main drivers were reflecting the priorities of their customers and investing for long-term resilience.

The deadline for CMA appeals is set for tomorrow but Portsmouth, South East and South Staffs have not yet announced whether they accept the final determination handed out by Ofwat on 16 December.

Anglian and Northumbrian join Bristol and Yorkshire in triggering a CMA investigation.

Anglian

Anglian had the largest gap between its proposed investment of £6.5 billion and Ofwat’s final determination of £5.7 billion. The totex gap of £747.8 million means bills would come down by 10 per cent compared to Anglian’s proposed 1 per cent bill reduction.

Peter Simpson, chief executive of Anglian, said the business plan was written to mitigate the challenges of climate change and population growth and the company wants to invest more in long-term resilience.

“Our plan aimed to address these challenges, and our customers wholeheartedly supported it. They want us to invest now, not wait. We also recognise that delaying now will mean that costs for customers in future will be much higher.

“Social and environmental needs are firmly embedded in our business purpose. We have a long-term focus on improving the resilience of the region and investing in infrastructure to cope with the impacts of climate change and population growth.”

He said the company did not believe the final determination allowed the company to fulfil its resilience goals and requested the CMA referral “to consider if the right balance has been struck between bill reductions and investment”.

Northumbrian

At final determination, Northumbrian was left with the biggest cuts to bills of any water company, after Ofwat made no movement from draft determination. The regulator’s 25.6 per cent target cut compared to Northumbrian’s proposed 21.3 per cent reduction.

The regulator conceded £23.3 million in spending allowance to £2.7 billion –  leaving a shortfall of £156.1 million.

In its statement today, the company referenced its survey of half a million customers, which found their priorities were “efficient costs and assurance that water and waste water services would be robust, deliverable and resilient for the future”.

It said the final determination “firstly it falls well short of what customers clearly stated were their priorities and secondly it would adversely impact the long term financial resilience of the company”.

Chief executive, Heidi Mottram, said: “NWL is a high performing and efficient company with a long track record of delivering for our customers and protecting the environment.  We have listened carefully to our customers in the development of our business plan.  Our assessment of the PR19 final determination is that it is contrary to the long term best interests of our customers and doesn’t provide for sustainable investment going forward, to the detriment of all our stakeholders.”

Thames

The UK’s biggest water company was also the one that saw the biggest shift from Ofwat at final determination, including bespoke allowances dependant on shareholder contribution.

Thames said that while it was accepting the final determination, it still had concerns that it did not allow for “essential resilience upgrades over the entire system”. It stressed that the next price control must set in motion “a programme to replumb London”.

The company said: “A request to Ofwat to make a reference to the CMA was carefully considered as part of the price review process. However, it was agreed a CMA referral would lead to significant management distraction at a time when the company is seeing improvements in customer service and leakage reduction. It was deemed to be in the best interests of both customers and employees to accept the final determination, to ensure certainty in the months and years ahead, and to move forward positively and constructively.”

Affinity

Affinity’s customer bills will fall by 5.5 per cent compared to 12 per cent proposed by Ofwat in the draft determinations but higher than the 1 per cent reduction the company requested.

Its wholesale totex of £1.4 billion is £19.6 million lower than the company had put forward. The regulator allowed £1.46 billion for final allowed revenue, compared to the £1.56 billion requested.

The company must achieve a 20 per cent leakage target and 12.5 per cent reduction in PCC by 2024/25. Water supply interruptions must be slashed by 17 per cent by the end of the price control period.

Chief executive Pauline Walsh said of the decision: “We have a very challenging and ambitious plan but this Final Determination now gives us clarity on what we need to deliver up to 2025. We are determined to deliver that plan, to improve the services we provide to our customers and to improve our environment.”

South West

For fast-tracked South West, it will have to make ambitious bill cuts of 20 per cent by 2025; its total revenues are set at £2.5 billion and its totex figure was reduced from the draft determination to £1.9 billion. A further £312 million is available to invest in service, resilience and environment

Parent company Pennon said it will consider the decision as part of its ongoing strategic review of its companies including waste management firm Viridor.

The determination included totex allowance of £2 billion and gave the green light to the company’s proposed WaterShare+ scheme that will give all customers a share in the company and voice at the AGM.

The company dividend policy will be announced in June.

Southern

Southern accepted its final determination following “significant deliberation”, particularly over the allowed cost of capital and punitive incentive regime.

In accepting the final determination, Southern said the “quite stringent” final determination would add to the increased overall balance of risk that the business faces over the next five years.

At final determination, Ofwat increased the reduction in customer bills it expects Southern to achieve over the next five years – from 14 per cent to 18 per cent. This compares to the company’s proposal of 6.7 per cent.

The final determination allowed wholesale totex of £3.4 billion – up £64.3 million from the draft determination but still £235 million off Southern’s expectation.

CMA response

An inquiry group of independent panel members will be appointed to review the final determination, supported by CMA staff. The body confirmed that it will have six months from tomorrow (15 February) to complete the review but that this timeframe could be extended if necessary.

Kip Meek, CMA inquiry group chair, said: “Everyone needs water, so it’s really important that customers’ bills are not set too high, but at the same time the water companies have enough money to deliver an efficient and high-quality service. The CMA will look closely at whether Ofwat’s decision strikes the right balance in this and other areas and will make changes if not.”

Ofwat response

Rachel Fletcher, chief executive of Ofwat said the price review lays down “a major challenge for the sector to transform” and added that the regulator is ready to face the challenges in the CMA process.

She said: “Companies must become more efficient, and step up to deliver better services, lower bills and secure long-term resilience.

“We have been clear that shareholders’ rewards will only be earned through a new standard of operational excellence. Some investors have accepted this scale of ambition and change, but others need to face up to the new reality.

“We are ready to fully engage with the CMA, setting out our analysis and why we are confident this is the right settlement for customers, the environment, and companies.”