Bristol Water – Everybody else out of step?

Hardly surprisingly, given the scale of financial disagreement, Bristol Water - a water-only company supplying around 1.2 million people - has decided to appeal against Ofwat’s final determination for the 2014/15 periodic review, writes Nigel Hawkins.

Hence, its determination will be referred to the Competition and Markets Authority (CMA) for a final ruling.

For Bristol, which is owned predominantly by the Canadian-quoted, Capstone, and the Spanish-based, Agbar, the stakes are high.

To the outsider, since Ofwat’s review has been generally applauded, Bristol’s stance resembles that of the squaddie on the parade ground who cannot understand why every other soldier is marching out of step.

But Luis Garcia, Bristol’s chief executive, summed up the company’s position by re-affirming that ‘we do not believe that the determination Ofwat has set is in the long-term interest of our customers and stakeholders and we believe that a referral to the CMA will result in a better outcome’.

He went on to claim that ‘there is clearly a discrepancy in calculations because of the size of the gap and the CMA is the only fair way to resolve this’.

In fact, Bristol has previous experience with such an appeal since it pursued the judicial route to challenge the 2009/10 periodic review: the CMA’s predecessor, the Monopolies and Mergers Commission (MMC), presided.

Undoubtedly, it did receive some change then, with permission to raise prices by c15 per cent over the five-year period, compared with the seven per cent set initially by Ofwat: Bristol had sought a 29 per cent increase.  

This time around, it may be more difficult since Ofwat’s complex methodology has been accepted by virtually all the other water companies; its regulatory process has also become increasingly robust.

Nonetheless, Bristol believes the methodology remains flawed especially in its assessment of water supply costs.

Importantly, the gap between the two parties is a veritable chasm. Ofwat calculates that Bristol’s five-year totex bill should be £409 million compared with the Company’s £541 million.

Under Ofwat’s numbers, average domestic bills, based on 2012/13 prices,  would be slashed by a formidable 23 per cent over the coming five-year regulatory period compared with just 4.5 per cent as calculated by Bristol.   

In particular, Bristol is vigorously opposed to Ofwat’s prescribed Po base price cut of 18 per cent, by some way the highest in the sector. It is also exercised by the treatment of the planned water investment at Cheddar. 

Whilst water company appeals of this type have historically tended to yield some benefits, Ofwat’s views have generally prevailed.

Indeed, Ofwat’s senior executives will have been painstakingly assessing in recent months how the CMA would respond if such appeals were made.

That the vast gap will be closed seems nigh certain, but the key test for both parties is how the CMA’s judgement settles between two very disparate protagonists.     

Nigel Hawkins (nigelhawkins1010@aol.com) is a Director of Nigel Hawkins Associates which undertakes investment and policy research