The Competition and Markets Authority has published a paper setting out its proposed approach to the appeals by Anglian, Bristol, Northumbrian and Yorkshire Water against Ofwat’s PR19 Final Determinations on their AMP7 Business Plans.
The Competition and Markets Authority has published a paper setting out its proposed approach to the appeals by Anglian, Bristol, Northumbrian and Yorkshire Water against Ofwat’s PR19 Final Determinations on their AMP7 Business Plans.
THE CMA has set out the issues it intends to consider and the areas where it is less likely to prioritise and re-consider due to finite resources and time available, commenting that as a consequence “we are more likely to come to similar conclusions in our redeterminations to those of Ofwat’s with respect to these issues.”
The CMA will also consider the possible approaches to taking account of the impact of Covid-19 on the redetermination , specifically, whether adjustments should be made and whether it is desirable and practical for this to be done by Ofwat or itself.
However, the paper emphasises that the issues identified in this document are “simply ones that, at this stage, we consider merit detailed investigation and analysis.” As the investigation progresses the range of issues identifed or deprioritise could therefore change.
The CMA have pointed out that the redeterminations are not driven solely by the issues raised by the Main Parties – Ofwat and the four water companies - and it will also be considering issues raised and evidence provided by Third Parties.
While the CMA is proposing to use the same regulatory building blocks as Ofwat used in its determinations, it is not excluding the possibility of revisions to Ofwat’s approaches and methodologies, including consideration of whether approaches may be modified, simplified, or any aspects of the controls removed or supplemented.
It also intends to consider how Ofwat has sought to discharge its regulatory duties, saying “we may make different judgments from Ofwat on how duties and guidance should be interpreted and balanced.”
As context for the redeterminations, the CMA says:
“We note the disagreement between Ofwat and the four water companies on whether Ofwat’s determinations impose an excessive degree of stretch on the water companies, and on whether outcomes of previous periodic price controls have shown excessive returns and limited productivity gains.
”We also note various Parties have argued that there is insufficient emphasis in Ofwat’s determinations on matters of long-term resilience and environmental impacts relative to levels of customer charges and affordability.”
The Authority also intends to consider the utilisation of customer evidence and the extent to which this should be given weight in informing decisions on the redeterminations. Issues include:
- Where and to what extent can customer evidence give useful guidance on forming business plans, performance commitments and ODIs, and whether there are aspects of the regulatory process where customer evidence may be less likely to be informative.
- Whether the evidence collected by the water companies is robust and of high quality.
- How Ofwat has interpreted and made use of customer evidence (including comparisons between different companies’ research) in assessing business plans and in forming its determinations.
Performance Commitments – if CMA reaches different conclusions to Ofwat …this will potentially affect all or many PCs and ODIs
The inquiry will also focus on Performance Commitments – the paper says:
“ In order to set appropriate performance commitments (PCs) and outcome delivery incentives (ODIs), we will consider afresh certain methodological issues that arose during Ofwat’s price control process. To the extent that we reach different conclusions on one or more of these issues than Ofwat did, this will potentially affect all or many PCs and ODIs.”
The methodological issues the CMA is proposing to address in this context include the weight that should be placed on the results of customer engagement, and particularly customer views about the benefits of incremental improvements in performance.
While the CMA is able to address any aspect of the price controls in the redeterminations, the Authority said it needs to prioritise its work given the limited time available. Issues it is proposing to deprioritise include:
- Household retail
- Business retail
- Bioresources reconciliation mechanism
- Grants and contributions
- Switch from RPI to CPIH
- Innovation competition funding
Covid-19 - may take some time to better understand the implications for the water industry
In respect of submissions about Covid-19, the CMA said it recognised it may take some time to better understand the implications for the water industry and on the price determinations and has requested submissions on the issue by the end of July 2020.
With regard to the impact of Covid-19 on the water companies - and the economy more generally – the CMA says this continues to evolve, commenting:
“ It is therefore probable that the nature of the impacts occurring, their scale and duration will still be unclear at the time of our provisional and final redeterminations. This is something we will have to take into account when deciding how to proceed, as well as the resources available for us to address these issues in the context of a redetermination.”
“It is possible that we decide not to address the impacts of Covid-19 either at all or in some areas of our redeterminations.”
In terms of timetable, the CMA is planning to hold Main Party hearings in July, followed by the preparation of a provisional redetermination report containing its provisional findings on the issues for the four redeterminations to be published in September 2020.
The CMA will consult on the provisional redeterminations before publishing its final report in early December 2020
The Authority is now inviting submission of stakeholder views in response to the paper, together with supporting evidence, by Thursday 25 June 2020.
Click here to download the paper in full.
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