Final pitches urge CMA to ‘reset the dial’

This week marks one year since the deadline for water companies in England and Wales to accept or reject Ofwat's final determinations for PR19. Ruth Williams delves into the final submissions to the Competition & Markets Authority (CMA) - from the appellant companies and the regulator - and recaps the arguments so far.

Last February, an unprecedented four companies sought an appeal to the CMA, each disputing the financeability of Ofwat’s verdict on their business plans and insisting that billpayers favoured investment over bill cuts.

In their final submissions before the CMA is due to send its determinations to Ofwat at the end of this month, the main parties, including the regulator, have called on the CMA to reposition itself.

After its provisional findings were far closer to the appellants’ original business plans, a series of working papers with novel approaches to costs left investors and stakeholders pleading against the revisions.

Ofwat

The regulator has been unmoved through the process on its approach to efficiencies and even argued that empirical evidence from the start of APM7 showed that companies can perform in line with expectations, even despite the impacts of Covid-19 on costs.

In its final submission, published today (9 February), Ofwat said its concerns about resilience were at least as great as those of companies in the approach to PR19. However, it said it put more value on efficiency and avoiding unearned returns because “it serves the interests of no one if investors can make returns too easily in this industry”.

The regulator argued generous returns undermine incentives and damage the reputation of the sector by attracting short-term investors not the longer-term ones it needs.

The regulator urged the CMA to keep the consumer voice in mind and give it due weight, which – from a different angle – has also been the appellants’ plea.

Anglian

The companies persistently criticised Ofwat’s “unbalanced” approach and insistence on bill reductions despite consumer support for investment.

Anglian said it remained a source of regret that Ofwat had not taken up opportunities during the PR19 process to resolve “relatively straightforward issues” relating to opex and capex, addressing uncertainty around population growth and housing and recognising the company’s claims to cost adjustment for leakage.

Chief executive Peter Simpson asked the CMA to ensure the business plan is financeable and consistent with the notional company financeability set out in the provisional findings. However, he said risks to security of water have increased even during the redetermination process. During this AMP the company claimed it could only address this via remand reduction – namely through cutting leakage therefore it requires the funding for leakage base costs and smart meter programmes.

Simpson concluded that the CMA’s provisional findings provided much of the framework the industry needs “to put it on a sustainable and stable path to meet its future challenges”. He said it would be a mistake to move away from how the CMA “corrected the biases towards short-term bill reductions and away from long-term resilience” in Ofwat’s final determinations.

Bristol

Bristol Water focussed its case, just as in two previous appeals at PR09 and PR14, on the higher debt financing costs it faces due to its size. In the most recent submissions, Bristol said Ofwat’s main point appeared to be that Bristol was no longer small. The water only company argued this did not hold up to any scrutiny.

It outlined the ways its costs would not allow it to meet Ofwat’s final determination, underlining the financeability, which it said should be considered explicitly using a realistic overall cost of debt. As chief executive Mel Karam highlighted to Utility Week at the start of this process, the precedent of previous appeals to the CMA was that Bristol should be permitted a small company premium.

Bristol said if it were left to cope with Ofwat’s final determination, the impacts would include no return to investors, a rating position far below notional assumptions with risk of further downgrade, and only essential investment possible in the short term.

It asked the CMA to send a clear statement to Ofwat that Bristol should not be in the same position for a fourth consecutive price review.

Northumbrian

Northumbrian reiterated that the final determination was contrary to the priorities and long-term interests customers and stakeholders had set out, due to the “unbalanced nature” of Ofwat’s plan, which it maintained was too focused on short-term bill reductions. It noted that cost allowances and service level targets would put a high-performing water company at risk of significant penalties and overspend.

Chief executive Heidi Mottram said: “As we reviewed the detail of Ofwat’s decision it was obvious that it moved us a long way from the ambitious plan that we had set out and which had enjoyed such widespread customer and stakeholder support.”

As with other appellants, the CMA’s provisional findings were a step closer to Northumbrian’s business plan but the company called the latter part of the process “a more bumpy road” that left the board nervous about fairness and independence of the outcome.

She raised the risk of the sector’s role in the green recovery being muted by Ofwat’s short-term focus on bills as further evidence of an unbalanced approach when there is clear customer support for investment.

Northumbrian’s submission sets out an alternative package that is financeable and focuses on closing the outstanding cost gap, allowing extra investment for sewer flooding. This, the company stated, would deliver a 21 per cent bill reduction whilst allowing nearly £150 million of investment in resilience.

Yorkshire

Failure to address financeability and the asymmetry between risk and return would, according to Yorkshire, lead to increased costs for customers and exacerbate concerns about investor confidence in the sector.

The company urged the CMA to “reset the dial” and allow adequate investment where required and as supported by billpayers. Yorkshire’s customer forum raised the issue of flooding, which affects many residents, as an area billpayers would gladly pay more for to be protected against now and in the future.

Yorkshire asked the CMA to step back from the U-turn it made in January with the consultation papers on costs of equity, debt and capital. These, the company said, would mean the CMA failed on its statutory responsibility that companies should be financeable.