Ofwat is warning the Competition and Markets Authority not to go beyond the CMA’s remit in the PR19 appeals proceedings and not to address requests from water companies which go beyond the scope of the appeals process.
Ofwat is warning the Competition and Markets Authority not to go beyond the CMA’s remit in the PR19 appeals proceedings and not to address requests from water companies which go beyond the scope of the appeals process.
The water sector regulator was commenting on its latest submission to the CMA on the responses the CMA has received to its Provisional Findings from a number of organisations, including the disputing companies.
Ofwat has told the CMA that the disputing companies have submitted “a range of new evidence and argument” to argue for a substantial increase in cost allowances and even higher returns than proposed by the CMA in the Provisional Findings.
“They have also made some entirely new claims, or advanced claims in ways that we have not previously seen. Elements of the approach by the companies appear to us to be very surprising,” Ofwat said.
The regulator reiterated its own response to the Provisional Findings which said that the allowed return and incentive package proposed by the CMA “materially alters the overall balance of risk and return in the companies' favour” and was above the level that was proposed by the companies for the sector in their original business plans.
Ofwat said:
“It is surprising therefore that each of the disputing companies continues to claim that the determination proposed by the CMA is challenging and proposes more amendments that would further skew the risk and return package further to companies at the expense of customers.”
According to the regulator, there is strong evidence that the PR19 allowed return incentivises investment. Ofwat said that as part of the green recovery in response to the call in July to the companies to accelerate AMP 7 investment, bring forward AMP8 investment or to bring forward specific new innovative ideas, to date more than £2 billion of additional expenditure has proposed for the AMP7 investment period.
This included around £500 million of proposals from Anglian Water and Northumbrian Water before they were aware of the CMA provisional findings on the allowed return.
Ofwat has also told the CMA that each of the disputing companies is advancing claims for allowances that are new or presented in ways that it has not previously seen.
For example, even though the provisional findings would provide Yorkshire Water with a comparable average bill of £379 to its April 2019 business plan, Ofwat said the utility is now arguing for an additional £79 million that it has not asked for previously in the CMA process in order to address internal sewer flooding.
“Disputing companies are seeking more revenue than they sought in their April 2019 revised business plans”
Ofwat is suggesting that the aggregate effect of the claims now made by the disputing companies on top of the CMA’s Provisional Findings, together with other repeated claims on both cost allowances and the allowed return, is that the disputing companies are seeking more revenue than they sought in their April 2019 revised business plans.
“This is both inappropriate as a matter of procedure, and undermines the credibility of the claims…. The combined impact of these proposals would drive bills higher than those that would have flowed from those business plans even if we had accepted them in full,” the regulator says.
Summing up, the response says:
“We suggest that these matters should give the CMA pause for thought. In particular, the CMA is entitled to ask why new and reformulated claims are being advanced at this late stage of proceedings.
“Such claims advanced only after the Provisional Findings have already been made – at the same time as the companies are inviting the CMA to truncate the re-determination process by not using the time available to it under statute – ought to require a high standard of justification by any company seeking to advance them.”
We therefore encourage the CMA to apply a high bar before even considering these new and reformulated claims. It is entirely reasonable to put the companies to strict proof of the necessity of any such claim at this stage.”
Ofwat is also inviting the CMA “to view with scepticism any arguments that would, if accepted, skew risk and return further in favour of the companies”, commenting:
“In short, the CMA should be astute, in our opinion, to avoid the disputing companies seeking to take advantage of this re-determination process to obtain benefits beyond those that they need or have previously claimed. That would involve a highly questionable use of the current process. It would risk creating severely distorted incentives on companies in relation to their handling of future price controls.”
The water sector regulator is also warning the CMA not to address requests from water companies which go beyond the scope of the appeals process, saying:
“Some of the disputing companies have invited the CMA to make various recommendations or observations as to the future. Some non-disputing companies, in their role as third parties, have invited the CMA to make recommendations as to Ofwat's actions in relation to their own price controls.
“Both of these requests concern matters that go beyond the CMA’s remit in these proceedings. They seek to persuade the CMA to come to conclusions or express views on matters in respect of which it unavoidably does not possess all of the relevant information and on which it has not been fully sighted.
“We respectfully suggest that this is a position which the CMA should avoid.”
With regard to the non-disputing companies, the water sector regulator also points out that their price controls must “ultimately be matters for Ofwat in circumstances in which those companies had the opportunity to seek a referral to the CMA, but decided to accept the controls that we had determined.”
Commenting on the CMA’s proposed revised timetable, Ofwat added:
“We do not consider the arguments put forward by the companies on this issue have any merit and their views as to the potential impacts and legal or practical barriers to address them, should that be appropriate or necessary at the time, are either incorrect or overstated.”
“We therefore invite the CMA to focus on issues of central importance to customers of the disputing companies, and to use its time judiciously to address the issues that have been identified as being of fundamental concern.”
Ofwat’s response document is also accompanied by two separate papers setting out its responses to the submissions made by the disputing companies. In addition, although the regulator has not responded to all of the issues raised by third party respondents, it considers it important to set out its response to the Energy Networks Association submission (and the accompanying Annexes by Oxera) “given the level of detail they have provided.”
Click here to download:
Ofwat response : Risk and Return
Ofwat response : Costs and Outcomes
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