Competition and Markets Authority lifts cost of capital and allows companies additional costs

The Competition and Markets Authority (CMA) released its provisional findings last Tuesday in the appeal cases of Yorkshire Water, Anglian Water, Northumbrian Water and Bristol Water against Ofwat’s PR19 final determinations. These significantly improved the companies’ position on risk and return, and allowed some additional costs, while largely endorsing Ofwat’s framework, models and outcomes. Among the CMA's key points were:

• appointee-level weighted average cost of capital was increased 0.54% on Ofwat’s number to 3.5%;

• Bristol Water was allowed an additional 0.10% increase in its embedded debt allowance as a small company premium;

• Ofwat’s gearing outperformance mechanism was rejected;

• average bills cut by 9.3%, down from Ofwat’s 12.6%;

• totex allowances increased by £144m for Anglian, £5m for Bristol, £22m for Northumbrian and £92m for Yorkshire incorporating enhancement cost increases for specific projects for all but Bristol;

• a blanket totex cost-sharing rate was put forward for the appellants, with firms bearing 55% of any cost overspend and retaining 45% of the benefit of any underspend;

• Ofwat’s outcomes package was largely endorsed, including its intervention in business plans following company comparison and its use in some instances of asymmetric and penalty-only incentives;

• more demanding performance targets should not always be accompanied by higher costs – although, in the case of leakage, it allowed Yorkshire £93m in enhancement costs to deliver the leak reductions it had committed to, and extra for Anglian and Bristol to maintain their upper quartile performances; and

• the impact of Covid-19 was left to Ofwat to handle on a sector-wide basis.

Responses are due by 27 October, and final decisions are expected mid December.

Subscribers to THE WATER REPORT can see the full analysis in the October edition.