Watchdogs to CMA: Customers must come before shareholders

Concerns that redeterminations of water company business plans could benefit shareholders more than consumers have been raised by watchdog groups, with one suggesting firms that argued otherwise were masking “a far more important conflict” between themselves and the regulator.

Stakeholders were invited to share their views on the redetermination of the four water companies that asked Ofwat to refer their business plans to the Competition and Markets Authority.

Anglian, Bristol, Northumbrian and Yorkshire submitted their statements of case last month and the regulator responded in due course to the concerns highlighted in the plans – ranging from costs, long-term planning and resource issues and customer priorities not being addressed.

The water watchdog CCW and consumer advocate Citizens Advice told the CMA that if the majority of companies found the determinations acceptable then the rest of the sector should manage the same.

In its submission, Citizens Advice said the acceptance by three quarters of the water companies shows they are achievable and the “overall approach is reasonable”.

CCW cited its own research into bill payer acceptability of the business plans at draft determination stage, which showed Anglian and Northumbrian to each receive 90 per cent acceptability for the draft determination from Ofwat in July 2019. Yorkshire was close behind with 89 per cent of billpayers finding the plan acceptable at that stage.

Some in the sector had questioned the balance Ofwat was striking in PR19 between lowering bills and allowing businesses to finance themselves. Citizens Advice maintained that Ofwat’s statutory duties – to consumers, companies and investors – are not contradictory and can be achieved without conflict to each other. It suggested arguments from appealing companies framed as tensions between regulatory duties and company objectives are unjustified and unhelpful.

It said arguments framed as such “only serve to mask a far more important conflict” between shareholders wishing to maximise process and profits and the objective of consumers who want fair prices for services. It said letting companies recover more costs or capex is more likely to end in higher shareholder returns than better service for billpayers.

Customer interaction and feedback featured centrally in the submissions of appellant companies, with the consultations undertaken to write their business plans often referred to as a reason to stick to them.

However, Citizens Advice said it was concerned that some companies are “misrepresenting consumer evidence to claim that consumer interests would be best served by setting higher prices for a better level of service”.

The charity said its consumer evidence work with the energy sector for setting network price controls was applicable to the water sector. It found people’s willingness to pay for a service can be deduced from engaging with consumers, but said this does not show what level of spending is necessary, adding: “that is the job of good regulation”.

Despite the level of engagement included in the PR19 business plans, Citizens Advice said it had not seen evidence of consumers being helped to evaluate the implications of capital costs and a fair rate of of return.

It believed consumers would prefer greater efficiencies to be found that allow long term sustainability rather than paying “over the odds” for water services. “We are concerned that in their appeals, several water companies have portrayed the impact of Ofwat’s determinations as delivering less investment and so leading to different outcomes for consumers.”

Ofwat stated in its own submissions to the CMA that the choice is not between investing in resilience or lower bills. This notion is supported by both CCW and Citizens Advice which noted the strong incentives for the companies to grow their asset base and maintain their networks.

On financebility, CCW roundly supported Ofwat’s use of a notional capital structure in setting the weighted average cost of capital (WACC) rather than a company’s actual structure. It said companies and their investors – not their customers – should bear the risk of a company’s choice of its actual capital structure.

Affordability for billpayers has come into a sharper focus in recent months  as coronavirus has impacted millions of households’ finances.

A recent Citizens Advice survey showed 13 million people have already been unable to pay at least one bill because of the coronavirus outbreak. It said the affordability of essential services will be exacerbated because of the crisis but even before it emerged there were millions of households struggling to pay bills.

CCW ‘s company-specific observations included the following:

Anglian: CCW said that Anglian’s stance that its billpayers wanted investment in resilience prioritised over lower bills did not mean customers should pay more than necessary. It said the company must face a tough challenge from both Ofwat and the CMA on all its spending on resilience.

It urged the CMA to “very critically assess” Anglian’s argument in favour of an uplift to base costs and totex on the grounds that Ofwat had found Anglian historically to be an inefficient company compared to other water and sewerage businesses.

Bristol: A central trope of Bristol Water’s appeal was that it had previously been granted a small company premium on top of the weighted average cost of capital (WACC), which was not included in PR19. CCW does not support this and said the notion of Bristol or any other company receiving such a premium “would look perverse to customers” and not incentivise small companies to mitigate any additional costs caused by their scale.

Northumbrian: CCW blasted Northumbrian and its subsidiary Essex & Suffolk Water for its low-scoring customer service performance and perceptions of fairness among its billpayers. It said the bill reductions should help improve those opinions. It found the plans overall to be well supported by customers and urged the CMA to consider that when making a redetermination. However, the praised approach Northumbrian took to customer engagement showed 91 per cent of householders did not want a bill reduction if it meant investment was not made. CCW asked the CMA to assess whether Ofwat was right to reduce the allowed spending on resilience schemes.

Yorkshire: Yorkshire also received high levels of acceptability from its customer base for the draft determinations made by Ofwat. CCW said it welcomes the intervention to push Yorkshire to more stretching performance targets on sewer flooding, sewer collapses and pollution incidents because these were areas the company was a poor performer. Furthermore, it expressed disappointment that Yorkshire’s leakage reduction target was lowered from 40 per cent to 15 per cent and said customers had greater expectations.