Water companies expected to lodge record number of appeals at PR24

Senior figures within the water sector expect there to be a record number of formal appeals lodged after Ofwat rules on PR24 business plans.

With spending asks tipped to be watered down, the number of appeals is expected to surpass the four lodged at PR19 and could rise as high as seven, Utility Week understands.

The regulator is due to reveal its draft determinations on the plans next month, having delayed the date by a month due to pre-election period rules.

Ofwat is then scheduled to make its final determinations at the end of the year, however last week it announced that this may be pushed back until the end of January 2025.

Despite Ofwat not yet showing its hand, senior figures within the water sector have told Utility Week that several companies are already preparing themselves for a formal appeal with the Competition and Markets Authority (CMA).

In total, water companies have asked for more than £100 billion to spend between 2025 and 2030.

Sources said that early indications suggest that Ofwat will limit spending in some areas compared to what water companies have requested.

One source said that if the regulator takes a tough stance, as it did at PR19, many companies in the sector would find it untenable. If that happens, the source said that they expected the number of appeals to surpass the four submitted at PR19.

“If Ofwat takes an approach similar to five years ago and doubles down on everything, with the scale of the challenges being laid at the feet of companies, then it’s hard not to conclude that more companies won’t go to appeal,” an insider said.

The source added that unless Ofwat were to “soften its stance”, it would likely lead to more water companies not accepting the final determinations in early 2025.

They added that from conversations with other companies as many as seven firms are already drawing up plans should they need to appeal to the CMA.

Another commentator said that with enhancement spend at a scale never seen before, there are no mature cost benchmarks to compile robust evidence of the cost of delivering these types of programmes.

They said cutting costs from programmes will undermine confidence to meet regulatory targets. “Unless Ofwat changes its stance, I don’t see how companies won’t be appealing,” they added.

To avoid mass appeals to the CMA, several sources said that the consultation period after the draft determinations would be key.

For this reason they said it was “concerning” that there will only be a seven week response period for the draft determinations consultation.

The condensed consultation period was announced last week as part of a revised PR24 timetable.

The regulator was forced to delay the publication of the first sight of determinations on the business plans by one month due to the general election being called. As reported by Utility Week last week, concerns have been raised that this will squeeze the rest of the process and limit how much time companies have to reply and provide evidence to Ofwat.

If final determinations are not published until 31 January – as Ofwat has suggested may happen – then this would also limit the window for companies to request a redetermination of their business plans.

One source suggested this was another reason why water companies are already getting themselves prepared for action.

At PR19 companies were given two months to accept or reject Ofwat’s final determinations. If they were given the same amount of time to respond this time around, then the deadline would be set during the second half of March – just weeks before the next asset management period begins.

At PR19, four companies sought a redetermination. This coincided with the beginning of Covid and lockdowns, so the CMA extended the period to do its redeterminations from six to 12 months. It said the reason was in part the change in working due to lockdown and in part due to the number of redeterminations it was tasked with.

Earlier this year, Chris Walters, head of the price control at Ofwat, told Utility Week he was “emotionally prepared for appeals” and did not see it as a bad thing if some companies approached the CMA for a redetermination.

However, Walters said the number of water companies going against the regulator did concern him. He suggested it could be a “fair fight” if there were perhaps five companies against Ofwat, “But if there’s 11 water and sewerage companies against Ofwat, then I fear our voice would get lost in that.”

Walters said companies could expect their investment plans being subject to “a trim rather than a lop”, with investment levels anticipated to remain their highest yet.