CMA decision could cost households £3.7bn

Consumer advocate Citizens Advice has calculated that the Competition and Markets Authority’s findings in the appeal of four water companies’ price review could cost households as much as £3.7 billion.

Last month the CMA published its initial redetermination for Anglian, Bristol, Northumbrian and Yorkshire water companies after they all rejected Ofwat’s price determination in February. In response to its findings, the water regulator said the CMA had put investor interests ahead of consumers’ by raising the weighted average cost of capital (WACC).

In its response to the decision, Citizens Advice warned that the regulatory body’s preliminary redetermination, which saw the WACC for the appellant companies increased by more than half a percentage point to 3.5 per cent, would set a precedent for energy networks to appeal against Ofgem’s RIIO2 price controls, most of which are due to be finalised in December.

Alistair Cromwell, acting chief executive of Citizens Advice, said the decision sets a “dangerous precedent for other price controls, like energy, where billions of pounds of people’s money is at stake”.

The charity calculated that the CMA’s preliminary decision would add around £50 to the average water bill for the four appellant companies over the current five-year regulatory period – or £0.5 billion in total.

The group also estimated that if the same cost of capital increase were applied to the RIIO2 price controls then it would cost consumers a further £3.2 billion – or £62.50 per household. The figures are based Ofgem’s draft determinations for electricity and gas transmission, gas distribution and the electricity system operator, and the regulatory asset values from its latest annual report on the performance of the electricity distribution networks, whose price controls begin two years later than the rest in April 2023.

“Both Ofwat and Ofgem have made progress towards delivering fairer deals for water and energy consumers,” said Cromwell. “While our evidence shows these two regulators could have gone even further in cutting the excess profits of water and energy network companies, the CMA’s decision risks undermining that progress.”

Ofwat previously warned that, if extrapolated across the water sector, the inflated cost of capital would add around £2 billion to consumer costs with no environmental or societal benefits but the CMA said it wanted to make the sector attractive to investors.

Citizens Advice rejected the CMA’s position that the higher cost of capital is necessary to incentivise investors and would only add to profits at the expense of billpayers.

Its submission suggested the CMA provided insufficient evidence on why it raised the WACC and largely ignored evidence from customers and watchdogs.