The energy regulator has asked the Competition and Markets Authority (CMA) to make a clear distinction between the four appellant water companies and other regulated sectors in relation to its decision on raising the cost of capital.
Anglian, Bristol, Northumbrian and Yorkshire appealed their final determination from Ofwat in February and in September the CMA re-determined their business plans, which included a controversial increase to the weighted average cost of capital (WACC).
In response to the CMA’s provisional findings, Ofgem asked that the redetermination is not “treated as making broader assessments beyond the present and specific context of PR19”.
With Ofgem due to publish its final determinations for RIIO2 in December the impact of a higher WACC could lead to companies choosing to reject Ofgem’s ruling and request an appeal to the CMA.
Ofgem said it was concerned that the decision on cost of capital may be relied upon by stakeholders “to attempt to influence or challenge the RIIO2 regulatory process”.
Echoing Ofwat, CCW and Citizens Advice, Ofgem said the move would likely result in a transfer of value from consumers to investors without a clear improvement to output or service.
Akshay Kaul, Ofgem director for networks, asked the CMA to “make it clear that the findings in this price determination concern the CMA’s particular statutory role in relation to water and focus only on the water industry, and should not be read across to other regulatory contexts.”
Kaul noted that the increased cost of capital would give the appellant water companies allowances that are “out of line with market comparators and international returns, risking legitimacy and market distortion”.
Last week saw responses from the four appellant water companies, Ofwat and wider stakeholders in water and other regulated industries to the CMA’s preliminary findings with many commenting on how the decision would affect Ofgem.