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  • by Karma Loveday

CMA sets out its appeal approach, but leaves treatment of Covid impacts open

The Competition and Markets Authority (CMA) left how it will handle Covid 19 impacts an open question when it set out how it would approach the PR19 redeterminations of Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water. It said it could do anything from not address the impacts of the virus at all, to taking account of them or proposing principles for Ofwat to apply in future.

Elsewhere in the document, the CMA said it would:

• Group issues into separate areas along common themes, despite company calls not to do so. Where issues do not fit within these areas, they will be considered as stand-alone issues, including any issues which are company specific.

• Use the same regulatory building blocks Ofwat used in its determinations. “However, we do not exclude the possibility of revisions to Ofwat’s approaches and methodologies, including consideration of whether approaches may be modified, simplified, or any aspects of the controls removed or supplemented.”

• Consider whether water company performance in previous price control periods “sheds any light on how we should approach the redeterminations” – particularly on stretch.

The CMA listed among the areas it planned to consider:

• Totex – primarily consisting of an assessment of base and enhancement expenditure but also of the totex cost sharing approach and the split between fast and slow money.

• Performance Commitments and Outcome Delivery Incentives – it will consider afresh certain methodological issues including the weight that should be placed on the results of customer engagement and the design of the common PCs that have financial rewards and penalties attached.

• Cost of capital – it will independently assess and estimate each element of the cost of capital and Ofwat’s proposals for the introduction of a gearing outperformance sharing mechanism.

• Financeability – including considering whether assessing the financeability of a company with a notional capital structure is sufficient or whether it is reasonable for actual capital structures to be taken into account; and the appropriate use and reasonable scale of any financeability ‘levers’, such as PAYG rates.

Meanwhile, the CMA said it planned to leave aside aspects of the PR19 settlement including household retail, business retail, the bioresources reconciliation mechanism, the PR14 reconciliation (other than one potential data error), the switch from RPI to CPIH, innovation competition funding, pension deficit recovery costs, and activities concerning transparency around dividends and performance-related executive pay.

The CMA invited third parties to provide views on Covid issues by the end of July, and on all other aspects of its approach to the redeterminations by 25 June. It confirmed it would hold main party hearings July; prepare a provisional redetermination report containing provisional findings in September 2020; and publish final decisions by early December 2020.

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