Standard content for Members only
To continue reading this article, please login to your Utility Week account, Start 14 day trial or Become a member.
If your organisation already has a corporate membership and you haven’t activated it simply follow the register link below. Check here.
There was little call for popping corks at Bristol Water HQ last week. The company may be set to pocket £20 million more than Ofwat would have allowed, but at £429 million, its wholesale expenditure is still significantly below the £537 million it asked for. If the provisional rulings remain unchanged in the Competition and Markets Authority’s (CMA) final analysis, due in September, Bristol Water will have won a small victory at a great cost.
The CMA acknowledges that by its very nature no economic model can be perfect, and suggests that Ofwat may have placed too much emphasis on its totex benchmarking models. It also says it has identified “issues” with specific aspects of the specification and design of the models. Score one to Bristol Water, which has been outspoken in its criticism of the models.
But the difference is small, resulting in an overall upwards adjustment of just £20 million. Moreover, the CMA has largely vindicated Ofwat’s downward pressure on the cost of capital, which Bristol Water claimed left the company unfinanceable. The CMA’s numbers have come up with a 3.65 per cent cost of capital – a whisker more than Ofwat’s 3.6 per cent, but a good chunk less than Bristol’s bid of 4.37 per cent. Score one to Ofwat.
The CMA has dismissed a number of specific projects Bristol wanted to finance, including construction of the Cheddar 2 reservoir. It has also taken a swipe at the company’s business plan, saying there is significant uncertainty about how much it will actually need to spend. It has put the average customer bill across the regulatory period at £159 a year before inflation. Ofwat would have had it at £155; Bristol Water at £187 – so Ofwat takes the day.
The consequences for Bristol Water could be profound. The company’s relationship with the regulator has been severely frayed by the dispute, and it will need to take action to address that. Questions will be asked in the boardroom, with Bristol likely to become a takeover target once the final ruling is given in September, or even before. Thanks to this ruling, the company could be in play for a sum significantly less than its own view of its intrinsic value. That’s a high price to pay for £20 million.
Please login or Register to leave a comment.