Ofwat: Companies must prove appeals are about customers not profits

The Ofwat director heading up PR19 has told Utility Week that companies appealing to the Competition & Markets Authority (CMA) will face tough questions about their rationale for rejecting a “comfortable” final determination.

On the final day before the deadline four companies have now requested appeals by the regulator to the CMA. This afternoon Southern became the latest to reluctantly accept Ofwat’s terms.

Ofwat’s David Black said it was not yet clear what had driven companies to appeal.

He noted the significant difference between the regulator’s base cost allowance and Anglian’s request was evident, but for other companies there would be questions about what drove the decision.

“It’s not clear to us how companies have gone about the decision process. There will be questions asked about whether it is about allowed returns from an investment perspective,” Black said. He suggested public purpose and public interest should have factored into companies’ decisions also.

Yorkshire had hit out at the regulator’s “poorly designed penalty measures”, but Black said Yorkshire needed to improve.

“The comparative evidence from across the sector is that Yorkshire have fallen behind on performance where other companies have been able to deliver,” Black said. “The onus is on Yorkshire to catch up and that requires shareholder funding put into the company. We are concerned they are a highly geared company and they haven’t made investment to the levels customers would expect.”

Black echoed Ofwat chief executive Rachel Flether who defended the final determinations and said investors need to “face up to the new reality” of the ambitious business plans.

He highlighted that the three listed water companies – South West, United Utilities and Severn Trent – have each seen their share prices rise “quite significantly”, which Black said demonstrated “the determination is very comfortable indeed and the CMA will be taking that point into account”.

He concluded that Ofwat is “very pleased” with its final determinations and will stand by them and “look forward to presenting to the CMA”.

Southern accepts

Southern accepted its final determination following “significant deliberation”, particularly over the allowed cost of capital and punitive incentive regime.

In accepting the final determination, Southern said the “quite stringent” final determination would add to the increased overall balance of risk that the business faces over the next five years.

The company said its board had “reluctantly come to the conclusion that the significant disruption and substantial costs of a CMA referral would not be in the ultimate interest of Southern Water’s customers.”