Ofwat rebuts CMA appellants’ arguments

Ofwat defended its PR24 final determinations and responded to key areas raised by the five water companies appealing to the Competition and Markets Authority (CMA), in a suite of submissions published late last week.

The opening paragraph in the overview document set the mood. Ofwat said: “We stand by our PR24 determinations. They were the product of a collaborative, transparent and thorough four-year process, built on over thirty years of regulatory expertise and experience. They were supported by regular and meaningful engagement with water companies, customers, and a wide range of other stakeholders. Throughout our review, we consistently listened to feedback and responded to it, adapting our approach in response to new evidence or information. Our determinations reflect our regulatory judgement in light of all this evidence, exercised in line with our statutory duties.”

The regulator pushed back on key areas raised by companies in their statements of case and raised additional criticisms. These included: 

• The volume of new information companies submitted in their statements of case – including higher totex requests than in draft determination representations, and in some cases the practice of reverting to older versions of business plans. Perhaps with a nod to the industry’s narrative about price review complexity, Ofwat highlighted: “On expenditure allowances alone, the disputing companies have raised around 100 issues; on the allowed return on equity, companies have submitted nearly 600 pages along with over 100 databook files.” It said: “Given the time available and the volume of new information submitted, we have not sought to address each individual argument in full.”
  

• Selective focus – This covered both companies focusing on financeability over the other two key planks of affordability and deliverability; and in some cases, drilling down into individual items – “for example, raising concerns about individual Performance Commitments, without consideration of the wider outcomes package”.
  

• Lack of transparency – “We consider the disputing companies' submissions fall well short of the level of transparency and ownership we would expect to see as part of a business plan submission for a price review [to support customer and wider stakeholder engagement]. For example, they provide varying levels of detail around customer bill impacts, with only one clearly providing a proposed bill profile for 2025-30.”

  
  

• Statutory duty criticism – Ofwat dismissed company claims that it had not met its statutory duties, commenting: “We consider these arguments are simply disagreements as to the merits of decisions that we made in our final determinations.”
  

• Lack of attention to individual company circumstances – Ofwat said it had addressed situations where factors were genuinely outside of company control, but where the argument amounted to "whether customers should pay for inefficiency, poor performance or risky financing decisions… we strongly consider adjusting for all of the latter would not be in the interests of customers and the environment”. 
  

• Insufficient reflection of PR19 redeterminations – Here Ofwat explained: “Alongside the other economic regulators, we considered carefully the approach adopted by the CMA in its PR19 redeterminations. Following careful consideration and consultation, we applied some elements of the PR19 redetermination approach, and did not apply other elements. In its determination of the [energy] RIIO-2 appeals, the RIIO-2 CMA group stated that, while the CMA PR19 redetermination contains highly relevant material, 'this does not mean that it sets down the unquestionable methodological best practice from which a sectoral regulator cannot depart, nor that subsequent findings of a sector regulator are automatically (or even presumptively) wrong if they differ from it’.”
  

• Allowed return – Ofwat challenged some of the companies’ evidence quality, commenting for instance: “Three companies are proposing an allowed return on equity that is higher than proposed in their representations to the draft determinations, driven partly by their decision to step back from parts of their evidence base that point to a lower figure, and reflecting requests for a greater 'aim up' of the allowed return.” It defended as credible its 4.03% final determination allowed return, and pointed out that other companies had accepted it. "A submission from Pennon Group notes that we 'took a proportionate, evidence-based approach' to determining the allowed return. This, it states, resulted in an 'appropriate balance between risk, affordability and investor return' based on a 'level of engagement [that] was extensive and unprecedented in our experience'. Consistent with the advice from our advisors CEPA, Pennon's submission concludes that our overall package is consistent with a valuation that allows it to continue to raise capital, as confirmed by its recent £490m equity raise.” 
  

• Econometric benchmarking models – To the companies’ point that Ofwat relies too heavily on these, the regulator said it was “the most appropriate approach”.  

  
  

Last week, the CMA also published submissions from third parties, and disputing companies’ comments on each others’ statements of case.

The next steps are for the appellants to reply to Ofwat’s latest submissions, for Ofwat to provide further “focused replies” and for the CMA to publish details on how it will approach the cases.