CMA final decision loosens PR19 settlement for all four appellant firms

The four companies who appealed to the Competition and Markets Authority (CMA) last year last week walked away with a more generous final redetermination package than Ofwat offered back in December 2019. Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water will all will benefit from an increased rate of return and expanded totex package and a softer cost sharing rate.

Fitch Ratings said the outcome was credit positive, increasing the companies' (Anglian and Yorkshire) headroom at their current ratings, though unlikely to lead to positive rating actions. Analysts also remarked on the positive implications of the return increase for the energy sector appeals currently at the CMA. CCW said customers should have had a bigger say over the decisions. Chief executive Emma Clancy commented: “We believe some of the decisions will still benefit shareholders at the expense of customers who could have received even better value from this deal. That risks overshadowing the additional investment in this package which customers will undoubtedly welcome.” The CMA has submitted its full determinations to Ofwat. There is a minimum two week formal process that Ofwat and Defra need to follow before the full report is published. A summary of the main points is below. More detail will be in the April edition of The Water Report, to be published next week.

The CMA’s summary of findings is available at https://www.gov.uk/cma-cases/ofwat-price-determinations

MAIN POINTS

Rate of return The CMA set a headline rate of return to investors of 3.2%. This is compared with 4.67% in the previous price control period, approximately 3.6% proposed by the water companies, 3.5% in the CMA’s Provisional Findings (PFs) and 2.96% proposed by Ofwat. It was in line with its January working paper proposal. The weighted average cost of capital (WACC) reflects a cost of equity of 4.7% in CPIH-real terms. The CMA picked a point estimate 0.25% above the mid-point of its range of possible estimates. The cost of debt was set at 2.18% in CPIH real terms. Bristol was awarded a slightly higher cost of capital of 3.37% (in CPIH real terms) reflecting the higher cost of debt it incurred as a smaller company. Gearing Outperformance Sharing Mechanism

The CMA stayed with its PF decision to remove this. Revenue advancement (PAYG)

This also remains removed. The CMA said this action offset the impact in bills of the higher WACC. Impact on bills Average bills will reduce 10% / £34. Reductions range from £9 at Yorkshire to £95 at Northumbrian. Bills will be £10-£13 higher than under Ofwat’s Final Determinations (FDs) Costs and service Ofwat’s service/incentives package largely remains in place. The CMA awarded a 3% totex uplift (£400m) compared to the FDs. This is an increase of £142m (1%) on the PFs. The companies requested £1.8bn. The CMA provided a £75m enhancement funding uplift, which will help fund schemes including Anglian’s Strategic Interconnector, Northumbrian’s Essex Resilience Scheme and Yorkshire’s Hull flood scheme. On leakage, the CMA recognised the need to spend more than in the past to continue to improve outcomes and adjusted allowances accordingly. Ofwat’s cost sharing rate approach was softened and the same asymmetric rate applied to all four companies under which the company will bear 55% of the cost of any overspend and receive 45% of the benefit of any underspend. 2019/20 data

This was included in the calculations, a change from the proposed position in January.

Covid impacts

These have been left to Ofwat to assess.