CMA sets new cost of capital for PR19 appellants

The Competition & Markets Authority (CMA) has increased the rate of returns for the four companies that appealed Ofwat’s final determinations for the PR19 price control – at 0.54 per cent higher than the regulator’s decision.

The CMA has this morning (29 September) published its provisional redetermination of the business plans for Anglian, Bristol, Northumbrian and Yorkshire Water, in which all four also saw an uplift in overall totex allowance and a softer reduction in customer bills over the five years.

On the Weighted Average Cost of Capital (WACC), the CMA said that taking into account more up-to-date market data it considered a range of between 2.82 per cent and 3.99 per cent was justified. After selecting a point estimate, this resulted in a figure slightly above the midpoint range of 3.5 per cent.

The CMA admitted that its approach to WACC would impact the reduction in customer bills – resulting in a 9.3 per cent drop as opposed to 12.6 per cent under Ofwat’s figure. However, it stressed that its decision “achieves the right balance for customers, who benefit not only from lower bills but also from continued investment in the water and sewerage networks”.

In its provisional findings, the CMA also:

• provided more funding to the water companies for some projects to address challenges to resilience because of climate change and demand growth
• provided funding to the companies to support a reduction in leaks from water networks
• re-balanced the ways the companies are incentivised to better promote improvements in efficiency and service quality

All companies received an uplift in overall totex, with enhancement allowances increased for all but Bristol.

While the CMA admitted the full impact of coronavirus on the industry will not be fully understood for some time yet, it proposed that Ofwat takes this into account as part of its ongoing work.

Kip Meek, chair of the CMA inquiry group, said: “We’ve looked closely at all the evidence provided by Ofwat, the disputing water companies and third parties. While we came to similar decisions as Ofwat on many issues, we think the water companies need to be provided with more revenue to secure continued investment in the sector.

“We have sought to ensure that our provisional findings strike the right balance between bill reductions and the interests of current and future customers in resilient infrastructure, particularly in the face of climate change.

“We consider our position is balanced and supported by the evidence before us. We welcome further input before finalising our redeterminations.”

Ofwat chief executive Rachel Fletcher said: “We wanted this price review to be demanding, making companies more efficient, improving their performance for customers, and closing off easy returns for investors. Our aim is for companies to give everyone the high quality and resilient services they deserve, while looking after the natural world and keeping bills affordable.

“To support companies in making this transformation, we have sanctioned customer funding of more than £50 billion over the next five years. Nonetheless, our final determinations demanded a step change from the sector, so it is unsurprising that four companies considered the challenge uncomfortable.

“We are already seeing examples of positive change from that challenge: last year saw the biggest reduction in leakage for over two decades, bills are falling, and the best performing companies are already on track to make significant improvements in service.

“We respect the CMA and will look closely at their analysis before submitting further evidence to inform their final decision in December. Over the coming weeks we will make the case to the CMA to ensure customers get a good outcome, and that it is not too easy for investors to make returns in this sector.

“In the meantime, our focus will remain on pushing companies to deliver more for customers and the environment and we will continue to hold them to account for doing so.”

The CMA will now consult on the provisional findings before publishing its final decision in December. The consultation will be open for four weeks.

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