Yorkshire: This is still a tough settlement

Yorkshire Water has told Utility Week that notwithstanding the gains allowed by the CMA on its PR19 appeal, the regulatory settlement remains tough, particularly with the opex challenge and difficult ODIs to deliver.

This week the Competition and Markets Authority delivered its provisional redetermination for Yorkshire, Anglian, Bristol and Northumbrian who all rejected their final determination from Ofwat on their business plans for the next five years.

“We welcome the fact that the CMA has taken a clear view on the need for long-term investment in resilience,” said Richard Emmott, Yorkshire’s director of corporate affairs. “It’s the recognition that long-term investment is important and the shift from opex to capex is really significant for us, but that doesn’t change the fact that the settlement remains a tough one that we have to deliver.”

The company was granted around £200 million of spending that Ofwat had rejected including around £92 million for leakage, which Emmott said: “reflects customers’ priorities and will enable us to make significant strides to improve performance”.

Totex allowance in the redetermination is around £92 million higher than the final determination but remains around £773 million lower than Yorkshire’s proposal.

One significant scheme the CMA shifted on was for flooding in Hull and Haltemprice, for which Yorkshire requested £28.7 million. It said the balance of the £50 million scheme would be raised via partnership funding. Ofwat only permitted £16.4 million towards it despite the company arguing that residents were disproportionately more likely to be affected by flooding.

The CMA ruled that there was evidence supporting the additional flooding risk and permitted £23.7 million of the spending, which was £6.6 million above Ofwat’s determination. The company will have to meet a new performance commitment and ODI relating to the scheme.

Yorkshire was the first company to request a referral to the CMA on the grounds that the long-term risks to the company’s resilience and customers “would be at a level which it cannot accept”.

On financeability the CMA said the company should achieve strong investment grade credit ratings based on the notional capital structure given the WACC and cost of debt.

The companies have four weeks to respond to the CMA, during which time Emmott said Yorkshire would examine how the redetermination in the round will stack up when ODIs and penalties have been considered.

Emmott commended the CMA for being “extraordinarily fair” in the way it conducted the appeal process accepting many of both Ofwat’s and the appealing companies’ points.