CMA seeks views on its redetermination priorities

The Competition and Markets Authority (CMA) has asked for views by 11 June on its approach and prioritisation plan for the PR24 price appeals.

It intends to de-prioritise issues that have not been challenged by anyone, and then to de-prioritise based on four criteria: insignificant impact on bills or other outcomes; an alternative route outside of the appeal process is available; the issue reflects a well-established regulatory practice where there is no compelling evidence to justify a revisit; and where the issue would require a disproportionate amount of work to resolve in the context of the CMA process. This is all in light of the time available, the scale of work involved in the five cases, and procedural complexity.

The CMA has further confirmed that, contrary to advice from Ofwat, the Consumer Council for Water and Citizens Advice, it will use additional and updated information (with timing cut offs) where this is robust and reliable. 

A lot remains in scope following this assessment. The key areas include: 

Risk and return

• In keeping with requests from the five disputing companies, investors and customer organisations, the CMA will carry out an independent assessment of the Weighted Average Cost of Capital, as well as of company-specific issues raised on cost of debt. All parameters are in scope. The cut off date for market data will be 30 June for the provisional redeterminations due in September, and likely 30 September for mid-December final redeterminations. 

• Balance of risk will be addressed at source. On risk mitigation and uncertainty, the CMA will only consider the two mechanisms raised as issues – Aggregate Sharing Mechanisms and the Outturn Adjustment Mechanism. 

• How best to assess financeability will be considered, including the appropriate target credit rating and the appropriate debt and equity metrics, as well as whether it is appropriate to use any financeability levers, such as PAYG rates or RCV run-off rates as part of the assessment. 

Base costs

• Ofwat recommended the CMA deprioritise base cost modelling. However, the Authority said: “Given that modelled costs represent the bulk of base costs, and that some of the issues raised by disputing companies appear to be supported by substantial arguments and evidence, we do not intend to deprioritise base cost modelling.” It said it will, however, take a proportionate approach and set out how it would approach company-specific issues. 

• The CMA will review sector-wide cost adjustment claims for mains renewal, meter replacement and network reinforcement. In addition, it listed which company-specific cost adjustment claims it will evaluate as follows:

  • an Anglian claim for £150m for storage points and gravity sewers; 

  • Anglian and Southern claims relating to boundary boxes; 

  • a Northumbrian claim for £180m for civil structures and service reservoirs; 

  • a Northumbrian claim for £47m for climate change adaption; 

  • a Southern claim for £101m for sludge treatment centres; and 

  • Wessex claims for £178m for bioresources and £47m for disinfection at water treatment centres.

• However, the CMA will deprioritise the issues raised by disputing companies relating to asset health which are not covered by the above. 

• It will evaluate the approach used to set the frontier shift. 

Enhancement costs

• The disputing companies have raised specific concerns in relation to the performance of Ofwat’s phosphorus removal, water supply interconnector and bioresources industrial emissions directive (IED) costs models. The CMA will consider whether these models provide a reliable basis for setting the relevant cost allowances.

• On individual assessment allowances (shallow and deep dives), the Authority will consider some and deprioritise others, for instance where an alternative route is available. 

Outcomes

• The CMA will look at each of the specific Outcome Delivery Incentive issues that have been raised by the disputing companies “in a proportionate manner”. 

• Price Control Deliverables will be in scope.

After responses to its approach and prioritisation plans are received, the CMA will hold a series of hearings over three weeks in late June and early July, to hear further from the main parties and the Consumer Council for Water.