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  • by Karma Loveday

Positions entrench as CMA publishes latest responses to January papers

The Competition and Markets Authority (CMA) has published a raft of new responses to its January working papers, including updated appellant company and Ofwat submissions on cost of capital following a round table on 20 January; third party responses on cost of capital; and main party and third party responses on including 2019/20 data for base cost models, Anglian’s Elsham scheme, and leakage enhancement totex allowances.

HIGH LEVEL SUMMARY Cost of capital

Unsurprisingly, the cost of capital papers attracted the greatest number of responses.

The appellant companies continued to challenge the CMA’s position as set out in its January working papers. Yorkshire Water, for instance, argued this lacked sound economic rationale and likely left the company unfinanceable on a notional basis. Anglian Water meanwhile illustrated that should the January position on embedded debt stand: “Anglian would effectively be penalised by c£100m, an amount that is in line with the highest penalties ever levied on any water company for any offence. This would also be a penalty levied nearly 20 years after the event, just for issuing long tenor debt that was in line with regulatory guidance of the time, and raised at a cost that was lower than prevailing market rates at the time. This cannot be seen as a proportionate approach.”

Ofwat maintained its position that the CMA had not gone far enough in unwinding its Provisional Findings position, and drew attention to the consumer voice being drowned out in these late stages of the case as the arguments became more technical (the majority of the many responses were from companies and investors). Citizens Advice however responded. It argued strongly against any aiming up on cost of equity, and highlighted in particular the existing stretch in consumer budgets.

2019/20 data

Ofwat agreed and the companies challenged the CMA’s working paper view to exclude the latest year’s data from its base cost models.


Ofwat endorsed the CMA’s January position that the redetermination should not revise the scope of the Elsham direct procurement for customers (DPC) scheme, and that no consequential adjustments to totex allowances, performance commitments or Outcome Delivery Incentives are needed.

Anglian Water however requested that the CMA rethink its position and “reflects in the final redetermination the necessary amendments to the scope of the Elsham DPC scheme so that only the Elsham treatment element is taken through the DPC process”.

Leakage allowances

Responses on leakage are harder to summarise because in its January working paper, the CMA proposed adopting an individual approach for each company tailored to its circumstances and the levels of evidence available. This induced company and issue specific arguments that are difficult to generalise. Anglian Water for instance argued the CMA’s position had not translated into allowances appropriate for it as a company at the “frontier of leakage reduction”.

Yorkshire Water meanwhile argued the CMA’s analysis of some company evidence was deficient and highlighted the CMA’s incorrect use of its assumed industry upper quartile unit costs. Ofwat’s main issue was with the proposed allowance for Yorkshire Water.


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