CMA ‘on track’ to deliver PR19 redeterminations next month

The Competition and Markets Authority (CMA) says it expects to hit its deadline for publishing provisional determinations for Anglian, Bristol, Northumbrian and Yorkshire Water in mid-September in a closely watched public battle between water companies and their regulator.

All four appealed Ofwat’s final determinations on their business plans for the AMP7 price control.

The CMA told Utility Week its investigation is on track despite anticipating delays because of lockdown. The deadline for redeterminations is 18 March 2021 at which point the four appellant companies will have had the opportunity to respond to the provisional determination and the CMA will analyse each case before reaching a final decision.

More than 60 third party stakeholders submitted documents or comments to the CMA raising apprehensions about the impact of cuts to capital investment programmes if funding was not allowed as well as concerns that bill payers were not being listened to.

A central argument within Anglian, Northumbrian and Yorkshire’s cases was that their customers support their plans to invest now to improve resilience for the future. However, Ofwat remained firm that bills should be kept affordable and said greater efficiencies must be found within business plans rather than asking customers to pay more.

The regulator announced broad bill cuts for the five years to 2025 so householders will be paying around £50 less after inflation.

Consumer watchdog groups Citizen’s Advice and CCW supported the bill reductions, but CCW warned that customers could feel misled if their bills do not come down in real terms as it predicted rises for five firms.

Water efficiency experts including Waterwise suggested savings for consumers would be more appropriate by encouraging people to use less water and raised concerns that by disallowing funding the water companies would not be able to invest sufficiently in water efficiency programmes.

Anglian’s board voted unanimously to reject the determination on the basis that it would not allow the company to invest adequately. Director of regulation Alex Plant told Utility Week in February the company “felt duty-bound” to honour customer’s demands for investment in resilience over bill cuts.

Northumbrian’s chief executive Heidi Mottram told Utility Week in April that greater balance was needed between investment and bill cuts. The company has a proactive approach to mitigating the effects of climate change on its region and said resilience planning was more important for its customers than lowering bills. Mottram said Ofwat were “trying to argue this is business as usual” rather than recognising the changes and the need to invest now.

“The fundamental point is the climate is changing so we must do things differently,” Mottram said. “We are scratching our heads to understand why Ofwat is not seeing the same thing the rest of us are seeing.”

Bristol Water is no stranger to the CMA process having appealed PR14 and PR09. Mel Karam, who became chief executive in 2017 said being at odds with the regulator a third time was not a position any company would want to be in, but felt Bristol had no alternative.

The company’s case is focused on Ofwat not giving Bristol an additional cost allowance, without which its business plan was not financeable. Karam said previous appeals to the CMA set a precedent to include the allowance and expressed disappointment this had not been followed.

Meanwhile Yorkshire said the determinations were flawed and created “inter-generational unfairness” because costs for resilience would be deferred and subsequently increased for future customers. The company cited customer support for its business plan that invested now to benefit the next generation of consumers.

Ofwat has said that, despite these four rejections, the final determinations were accepted by the majority of the sector that rose to the challenges set to increase efficiencies and deliver services to billpayers while keeping costs in check.

The regulator rejected accusations that the determinations favoured short-term savings over long-term investment and told the CMA the companies needed to be in better shape to manage within their means. It said the price review was never about maintaining the status quo and it expected the sector to change to meet the stretching targets laid out in PR19.

Ofwat has pushed for greater innovation and collaboration across the sector to achieve these targets. It recognises the environmental challenges at play due to climate change and population growth putting pressure on water supplies and introduced a £200 million innovation fund with the price reviews that will commence from January 2021.

The assessment of weighted average cost of capital (WACC), which was widely disputed as too low by companies that accepted their final determination as well as those appealing, is likely to be scrutinised.

At the draft determination stage in July 2019 WACC was cut by Ofwat for PR19 by about one-third of the PR14 level and was further cut by the regulator when it published the final determinations in December.

The ramifications of a decision about WACC will be felt by gas and electricity network operators that received draft determinations from Ofgem for the RIIO-2 price review. A leading energy lawyer argued that price controls-based cost-cutting were “completely incompatible” with innovation. Richard Goodfellow from Addleshaw Goddard said the focus on lowering cost of capital to keep prices low created an “inherent tension” for companies’ ability to innovate.