CMA issues final decision on water price controls

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Following a 12-month review, the Competition and Markets Authority (CMA) has issued its final decision in the appeal lodged by four water companies against water regulator Ofwat’s decisions on the money they can charge customers and the service standards they need to deliver in the period to 2025.

In December 2019, Ofwat published its price controls setting out the total amount water companies can charge for services in 2020-25.

In March 2020, Anglian, Bristol, Northumbrian and Yorkshire asked CMA to re-determine their price controls.

The CMA’s role is set out by law and requires it to appoint an independent Special Reference Group to conduct a redetermination of the price controls.

The Group must promote the interests of consumers, consider the long-term resilience of water infrastructure, and ensure financeability of the water companies.

According to CMA, this means the Group must provide the four water companies with enough money for them to cover their current running costs and pay for improvements for the future, including by providing investors with a reasonable rate of return.

In coming to its conclusion, the independent Group examined all of the evidence provided by Ofwat, the water companies and a range of third parties, including new information that was not available to Ofwat when it made its decision in December 2019.

The Group reports to have consulted widely throughout the process, including through the publication of provisional findings and working papers.

Kip Meek, the Chair of the Group, commented: “In coming to our decision, we have sought to balance keeping bills low with the need to maintain a good quality of service and to invest in critical infrastructure for the future.

“Our decision means that customers of these companies will be paying, on average, £34 less per year for their water than they did in 2019/20.”

The Group considers that its determination will allow sufficient investment to ensure bill payers receive a sustainable quality of service.

The Group has:

  • Adopted the same basic methodology as Ofwat.
  • Set a headline rate of return to investors of 3.2%, compared with 4.67% in the previous price control period, approximately 3.6% proposed by the water companies and 2.96% proposed by Ofwat.
  • Provided increased allowances to pay for improvements in some priority areas such as security of supply and leakage.
  • Maintained ‘strong incentives’ on the companies to improve cost efficiency and service quality.
  • Placed the companies ‘on a stronger footing’ by reducing their exposure to future costs that may be beyond their control.

The return to investors will be 32% lower than the last price control period, 9% lower than the Group’s provisional findings and approximately 12% lower than the rate proposed by the water companies.

Although Ofwat had proposed an even lower headline return to investors, it was also proposing to increase revenues for three out of four of the companies by bringing forward revenue from future price control periods, and to pass this charge to bill-payers, and the Group has reversed this adjustment.

The Group considers that the return set out in its determination is the minimum that is sufficient to allow the companies to finance their activities and invest in long-term infrastructure.

On the basis of the most up-to-date evidence, the Group has also concluded the companies will together need to spend more than Ofwat had estimated to carry out essential operations – but if the companies do not spend all of this extra cost allowance on providing services, customers will get more than half of this money back.

As a result of this determination, customers are reported to be spending, on average, £34 less per year on their bills than they were paying in 2019/20.

This is a smaller reduction than was proposed by Ofwat, but bills are reported to be slightly lower than set out in the CMA’s provisional findings, in September 2020.

Rachel Fletcher, Chief Executive of Ofwat, commented on the findings: “We are challenging all water companies to transform their performance and deliver more for customers and the environment.

“In 2019 we backed a huge £50 billion five-year spending package for companies to do just that.

“Most companies accepted the challenge and, over the last year, we have seen tangible improvements, including on priorities like reducing leakage. However, four companies appealed to the CMA to intervene.

“I am grateful to the CMA for its engagement with us and the considerable analysis it has conducted.

“Overall, the CMA has supported the ambition we have for the industry. Its decisions require the four companies to make a step change in productivity and performance.

“Crucially, the CMA has backed the principle we have been advocating, that investors must work hard for their returns, bringing customers better, more resilient services and a healthier environment for generations to come.

“In the coming years much work is needed to deliver net zero, improve the natural world, provide resilient water services in the face of climate change, and keep up with customers’ changing expectations.

“Ofwat will continue to hold companies to account for delivering against these goals, while enabling them to innovate and attract the investment they need.”

Today (17th March) CMA has submitted its full determinations report to Ofwat, as well as published the executive summary of its findings.

There is now a formal process that Ofwat and Defra need to follow before the full report is published by the CMA on Ofwat’s behalf. By law, this process will take a minimum of two weeks.

For more information, including the executive summary, visit the Ofwat Price Determinations case page on the Government website.