Has the CMA been handed a chance to compromise?

More than a year since Ofwat unveiled its toughest ever price controls, four companies remain in limbo as the appeals process with the Competition and Markets Authority rattles on.

Months of drama followed Anglian, Bristol, Northumbrian and Yorkshire rejecting the regulator’s ruling, leaving the CMA with a record four business plans to redetermine during an unexpectedly challenging 2020.

A lot has happened since February, the latest twist could be that Ofgem’s approach to RIIO2 has paved the way for compromise.

Ofgem took a middle of the road approach to setting the cost of capital when it announced its final determinations for gas and transmission networks earlier this month, which could pave the way for a compromise on water company appeals.

It saw the regulator shift the allowed return on equity from 3.95 per cent in real terms to 4.3 per cent, meaning an overall cost of equity of 4.55 per cent.

By not aligning with its fellow regulator, Ofgem’s approach could be seen to have weakened Ofwat’s stance. Taking the same position as its water counterpart, the energy regulator could have presented a united front in opposition to the CMA and strengthening Ofwat’s argument that returns were sufficient to ensure adequate investment.

Colm Gibson, managing director at Berkley Research Group, suggested that as Ofgem is now around halfway between Ofwat and the CMA , it could tempt the latter to pitch its decision halfway between the two.

“They’ve hedged their bets on that one, it’s inviting the CMA to land there as well. It makes it more likely the CMA’s final decision will be a compromise,” Gibson said.

The higher rate of returns, if confirmed in February, Gibson said will tempt other water companies to push for a change to their cost of capital via an interim determination or a separate approach. An interim determination would give companies a right to appeal to the CMA.

The CMA’s initial determination, published in September, was more than a little surprising. The move on the WACC was far more significant than the nudges and small adjustments most spectators were expecting. Ofwat’s response was, despite being in regulatory language, fiery. One source described it as Ofwat asking the CMA not too politely to step outside and settle this. In its submission document of “fundamental errors of approach”, Ofwat threw down the gauntlet by questioning the substantive and procedural approaches as well as accuracy and reasoning the CMA used.

The CMA cited high levels of stakeholder interest and input at each stage when it said it would extend the deadline for the appeals. The December date was pushed back to mid-February after Ofwat had accused it of rushing the decision. The impact on the appellants means they will miss Ofwat’s deadline for setting prices for 2021/22 by a matter of weeks. Three of the appellants have approached Ofwat to consider relaxing the charging rules so the CMA’s determination can be reflected.

Regardless of the outcome the ramifications of four companies challenging the regulator are already being seen. Customer support for capital investment schemes has been referred to throughout the process and Ofwat has listened and is consulting on improving how evidence is gathered and applied for PR24.

With just under three months until the statutory deadline of 18 March, there are sure to be more surprises as we find out what – if anything – the CMA concedes to Ofwat, what the appellants get after more than a year of the tense process, and what regulation will look like after this turbulent ride.