Yorkshire rejects Ofwat’s final determination and seeks CMA appeal

Yorkshire Water has asked Ofwat to refer its final determination to the Competition and Markets Authority for review because of “poorly designed penalty measures”; meanwhile Welsh Water has accepted its determination but suffered a drop in its credit metrics.

Yorkshire said the long-term risks to the company’s resilience and customers “would be at a level which it cannot accept”.

Following the final determination, a gap of £370 million remained between Ofwat’s allowance for totex and the company’s – second only to Anglian’s £744 million difference.

Yorkshire said after significant work to assess the levels of risk to the company it found: “The overall approach to the determination, including as it does poorly designed penalty measures over the next five years means that the company would be forced to focus on short term performance at the expense of longer term capital investment, vital for securing resilience of critical water and waste water infrastructure in Yorkshire.”

Liz Barber, chief executive said: “Everyone at Yorkshire Water shares a common purpose to provide safe and reliable services to our customers and our county, long into the future. We’re naturally committed to being the most efficient company we can, but have decided that accepting this determination would jeopardise Yorkshire’s resilience and our own.”

The final determination set a bill reduction target of 8.7 per cent compared to 10 per cent in the draft determination and the company’s proposed 0.8 per cent cut.

Wholesale totex costs were set at £4.165 billion – £142.7 million higher than in the DD but £370 million lower than proposed by Yorkshire.

The company was allocated £905 million to improve service, resilience and the environment.

Allowed revenue was set at £5.14 billion, compared to a request of just under £5.4 billion from Yorkshire.

Yorkshire’s key performance commitments included a 15 per cent leakage reduction on a three-year average basis, a 9 per cent cut in PCC, a fall of 41 per cent in pollution incidents to 19.5 incidents per 10,000km of the wastewater sewer and a 47 per cent  drop in internal sewer flooding incidents to 1.34 incidents per 10,000 connections. Its target on water supply interruptions was set to reach a level of five minutes by 2024/25.

The company also had a number of bespoke commitments set by the regulator, including a 30 per cent increase in the number of hectares of land conserved and enhanced by 2024/25, a 25 per cent reduction in external sewer flooding incidents per 10,000 connections, a 34 per cent drop in complaints about drinking water quality and 742 additional kilometers of rivers improved.

The range of returns from outcome delivery incentive in the final determination was estimated to be between -2.46 per cent and +2.95 per cent.

Meanwhile, Welsh Water accepted its final determination including a 9.4 per cent bill cut and 15 per cent leakage reduction.

Financial rating agency S&P downgraded Welsh Water’s credit metrics in light of the company accepting its final determination. S&P said the company’s metric will be lower than with the previous issue ratings.

A spokesperson for Welsh Water said: “While disappointing, this decision by S&P is therefore not unexpected – and will not change our financing strategy for the next five years.

“Welsh Water remains firmly of the view that strong credit ratings are in the long-term best interests of our customers as they help us to minimise financial costs borne by customers through their bills.”

As part of its final determination, the regulator imposed a 9.4 per cent bill cut on the company as opposed to the 14 per cent reduction suggested in the draft determination. The company was allowed a totex budget of £2.95 billion, which is up from the draft determination but still £163.4 million lower than what Welsh had proposed.

Other commitments the company agreed to include a 6.3 per cent PCC drop, pollution incidents must come down by 33 per cent and water supply interruptions should fall by 58 per cent by 2014/25.

S&P downgraded the senior secured class B debt issued by Welsh Water from A to A- and lowered the issue rating on the subordinated Class C debt from BBB+ to BBB.

However, it affirmed the AA issue rating with a stable outlook on the four secured class A bonds issued by Welsh Water.

S&P said: “The stable outlook on Welsh Water’s senior secured (class B) debt reflects our views that the company will maintain its adjusted funds from operations (FFO) to debt significantly above 6 per cent and debt-to-EBITDA ratio significantly below 9x, with adequate operating performance over the next regulatory period.”