Ofwat: CMA’s redetermination undermines ability to regulate for customers

Ofwat has said the Competition and Markets Authority’s preliminary redetermination for PR19 threatens to undermine its ability to regulate in customers’ interests after setting a rate of return that benefits investors over billpayers.

In its response to the decision by the CMA published four weeks ago, the water regulator said today (27 October) that the decision could “cause wider uncertainty for customers and investors in other regulated industries”.

Anglian, Bristol, Northumbrian and Yorkshire water companies all appealed to the CMA after rejecting Ofwat’s determination in February. The CMA published its preliminary redetermination in September, which set a higher weighted average cost of capital (WACC) and permitted companies to spend more money on projects they said had customer approval.

Ofwat has hit back at the CMA’s approach to the WACC that would give more generous returns to investors than the companies had requested, with no clear benefits to consumers whose bills would rise. Ofwat said the “unusual nature” of this decision would see money flowing straight to investors rather than paying for better services or environmental protection.

The CMA’s proposals would increase returns by around 20 per cent.

Rachel Fletcher, chief executive at Ofwat, said: “While the CMA agrees in principle with the need to challenge the water sector and for companies to up their game, its provisional findings risk having the opposite effect. It could see customers paying more, service stagnating and the scales tipped in investors’ favour.

“These proposals risk incentivising companies to look for easy, short-term financial returns, rather than what they should be doing – delivering better services to customers and the environment over the long-term.  They could undo the hard work in recent years to improve public trust in the water industry.

“Ofwat will keep pushing to protect and promote customers’ interests.  We want to work with the CMA to understand their thinking. We are optimistic that if the CMA takes the time it needs to work this through, they can secure an outcome that will deliver for customers.”