Wider water sector raises concerns to CMA

The ramifications of the price review and the redeterminations for four appellant companies will be felt across the wider water industry.

That is clear message from the submissions to the Competition and Markets Authority (CMA) about the business plans for 2020-25 of Anglian, Bristol, Northumbrian and Yorkshire. All four referred Ofwat’s final determinations on their business plans to the CMA.

Support and concerns from other water companies which accepted their final determinations include environmental resilience, deteriorating credit quality and the regulator using “leaps of faith” rather than evidence-based judgements.

Wessex told Ofwat that, while it accepted its plan, it did not believe it was right for customers, who wanted greater investment to mitigate the effects of climate change.

In its submission to the CMA, Wessex reiterated its concerns that the long-term interests of customers and the environment had not been well-served by PR19 and urged the CMA to consider the shift in public mood and policy towards investment that safeguards future generations.

It said the price review meant the industry “will not be able to adapt at the speed required to meet the new challenges” raised by climate change.

Secondly, it said the deterioration of credit quality across the sector following the regulator’s determinations posed a challenge to ongoing financial resilience and inflicted increased financing costs onto future generations to make savings today.

Welsh Water requested the CMA consider Ofwat’s methodologies, which relied on “a number of ‘leaps of faith’ that are more in the way of assertions than reasoned judgement”. Welsh Water said these could not be objectively assessed because they were purely subjective. It said this issue was central to how the CMA develops and rationalises its own determinations and would have “far-reaching implications for future determinations”.

The company said expectations about improved productivity represented “a significant degree of hopeful optimism rather than a balanced, evidence-based judgement”, as did predictions about penalties and rewards leading to – or permitting – adequate returns. It warned that this use of assertion in place of evidence-based judgement would put unrealistic demands on companies for future price reviews that would undermine trust and confidence in the regulatory system and damage the industry in the eyes of investors and other stakeholders.

It said Ofwat’s claims that improvements to performance could be achieved without additional cost allowance were another “major leap of faith” on the part of the regulator.

This was echoed by both Southern and South West, which questioned how improvements could be made without spending more.

Fast-tracked South West Water, although broadly supportive of Ofwat’s methodologies, said the economic concept linking improved service levels with rising costs “underpins the principles of economic regulation”. It said this disregard by the regulator needed addressing before PR24 commenced.

Southern said that not allowing for such costs while asking firms to strive for higher levels of performance “results in a level of stretch that cannot reasonably be delivered in the required timeframe without a negative impact on the resilience of the sector, particularly in our ability to absorb shocks”.

Elsewhere Southern Water, which had been touted as a likely candidate to reject the price review in the aftermath of the final determination, said its acceptance was more to do with its own transformation and the disruption an appeal would have presented, rather than because it agreed with Ofwat’s balance of costs, outcomes and financeability.

Southern said the level of customer engagement – which it noted was both costly and time consuming to undertake – must not be overlooked and the priorities of billpayers to see investment made for future resilience should not be overlooked.

It also said Ofwat’s methodology was skewed towards short term bill reductions that would require levels of efficiency “beyond what is reasonably achievable”.

Southern accused Ofwat of significantly reducing equity returns while also increasing the risk involved as a way of redressing the balance and regaining public trust in the sector. It noted the positive steps companies have made over the past few years to underline their public commitment and suggested the price review was being used as a way to improve on “past failings” of investors.

Meanwhile fast-tracked United Utilities outlined its views that models and baselines used for the price review could never be perfect but “broadly fit for purpose” and any alterations made by the CMA should be company-specific rather than a change to industry models.

It suggested assessing atypical or company-specific issues for adjustment but not changing the baseline for the whole industry would be a fairer outcome.

Many in the sector, including appellants, supported Ofwat’s ambition to boost social purpose and value, however Southern said that had to be done in balance with the other demands.

“Taken as a whole the final determination package does not, in our view, move us toward the more resilient sector that our customers and other stakeholders want to see,” Southern concluded.