Ofwat has warned that customers will pay more on their water bills and investors could scoop up the extra as higher dividend pay-outs if the Competition and Markets Authority confirms its position on the price review appeals by four water companies.
Ofwat has warned that customers will pay more on their water bills and investors could scoop up the extra as higher dividend pay-outs if the Competition and Markets Authority confirms its position on the price review appeals by four water companies.
The water sector regulator has rejected the CMA's Provisional Findings on the appeals, accusing it of "fundamental errors of approach."
Ofwat has today published a detailed 33 page document in response to the Competition and Markets Authority provisional Findings in the appeals by Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water against Ofwat’s Final Determinations on their AMP7 Business Plans.
Commenting on the response, Ofwat said:
“Taken together, the CMA’s package of proposals threatens to undermine Ofwat’s ability to regulate in customers’ interests, and cause wider uncertainty for customers and investors in other regulated industries.”
In December last year, Ofwat set out what water companies should deliver for customers and the environment, and the price customers will pay over the next five years, commenting:
“ In doing so, (we) demanded big improvements from water companies and most of them accepted the challenge and have been working hard to meet it. However four companies …didn’t – and they referred our decisions to the Competition and Markets Authority.”
In its response to the CMA’s consultation, the regulator has acknowledged there are many areas of agreement, but also identified a number of areas which it said would leave customers worse off, for example:
- The CMA are proposing higher bills, but this is not focused on paying for better services or environmental protection. Instead, this extra money could simply flow straight to investors, as the CMA’s proposals would increase their returns by about 20%. The unusual nature of this decision is underlined by the fact that the CMA are proposing to give investors even higher returns than the companies asked for.
- The CMA has recognised that Ofwat is right to be concerned about the risk to customers if water companies take on high levels of debt. Despite that, it is proposing to strike out the mechanism Ofwat imposed to tackle this, without putting in place any alternative. This could undermine financial resilience and place a higher risk on customers from potential company failure.
- The CMA proposes that Yorkshire Water’s customers pay an extra £93 million to reduce leakage to the level many other water companies already comfortably achieve without additional funding from customers.
Ofwat: "Some of disputing companies continue to claim wrongly ..we prioritised lower customer bills at PR19"
Ofwat’s response says:
“We note that some of the disputing companies continue to claim wrongly that we prioritised lower customer bills at PR19, to the detriment of long-term resilience. We have repeatedly set out the reasons why this is simply incorrect. For the avoidance of doubt, bills were an outcome of our price review process.
“The disputing companies also claim that we have ignored the results of their customer engagement. On the contrary, when we have intervened, we have used their own customer research to better align company plans with customer preferences.”
The regulator has also drawn attention to the drive to improve leakage rates in the sector, commenting:
“Recent performance data on leakage …also highlights the power of challenging the sector to do better. The dramatic transformation in leakage performance with no additional funding after 19 years of stagnation follows our challenge to the sector to reduce leakage by at least 15% at PR19 and highlights the important role that a regulator can play in stimulating better performance.”
Ofwat has also rejected the water companies’ comments on the extent of their engagement with the regulator over the course of the Price Review:
“The disputing companies allege in their hearings that they only had limited opportunities to engage with Ofwat during the price review. This is factually incorrect.”
The response goes into extensive detail about the levels of engagement and feedback, emphasising that PR19 included “more stages than commonly used by other regulators (which are usually limited to draft and final determinations), with a far greater level of feedback provided to companies.”
“During the PR19 process, companies had a wide range of opportunities to engage with Ofwat on PR19 and other issues.”
These included:
- two formal meetings with Ofwat Board members (
- regular contact with a dedicated PR19 company engagement team, including calls and emails; and
- an extensive two-way query process where, as well as Ofwat being able to ask companies queries, companies were able to ask Ofwat for a response to queries about its assessment.
- numerous webinars where Ofwat explained its approach and decisions.
Ofwat – CMA Findings could see customers paying more..and scales tipped in investors’ favour”
Ofwat’s Chief Executive, Rachel Fletcher, said:
“While the CMA agrees in principle with the need to challenge the water sector and for companies to up their game, its Provisional Findings risk having the opposite effect. It could see customers paying more, service stagnating and the scales tipped in investors’ favour.
“These proposals risk incentivising companies to look for easy, short-term financial returns, rather than what they should be doing – delivering better services to customers and the environment over the long-term. They could undo the hard work in recent years to improve public trust in the water industry.
“Ofwat will keep pushing to protect and promote customers’ interests. We want to work with the CMA to understand their thinking. We are optimistic that if the CMA takes the time it needs to work this through, they can secure an outcome that will deliver for customers.”
Click here to download Ofwat’s response in full: Reference of the PR19 final determinations: Fundamental errors of approach - response to CMA provisional findings
Click here to watch a full video of Ofwat Chief Executive, Rachel Fletcher commenting on the CMA’s Provisional Findings.
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