The Competition and Markets Authority  has published a statement outlining the issues it intends to investigate into the potential adverse impacts  on the takeover of Bournemouth Water by Pennon Group, owners of South West Water.

The issues statement sets out the scope of the investigation and outlines initial theories on what might be adversely affecting competition, but it does not set out findings or conclusions.

The CMA said the statement does not preclude the consideration of any other issues which may be identified during the course of its investigation.  It could also revise its theories as the inquiry progresses and new evidence emerges.

In an unconditional completed acquisition, Pennon acquired 100% of the issued share capital of Bournemouth Water and its subsidiaries from Singapore based Sembcorp Holdings Limited in April this year.

Currently Ofwat obtains information from the ten WASCs and eight WOCs in England and Wales for the purpose of making comparative benchmarking assessments. After the merger Ofwat will have 17 independent comparators with which to make its benchmarking assessments.

The statement sets out the following theories of adverse impacts resulting from the merger which the CMA now intends to investigate on Ofwat’s ability to:

(a) set wholesale price controls;

(b) set retail price controls;

(c) monitor and incentivise service quality; and/or

(d) use comparisons to carry out ongoing monitoring and enforcement activities and to identify and spread best practice.

The CMA said it would also take into account any potential changes to Ofwat’s regulatory approach and the broader regulatory framework in undertaking its assessments, which will take both a static and forward looking approach. Also plans to take into account both quantitative and qualitative evidence. For example, in addition to the impact on Ofwat’s benchmarking analysis, the CMA will also review the qualitative evidence on Ofwat’s ability to use aspects of companies’ actual performance or business plans to demonstrate efficiency improvements or approaches to service quality which could deliver benefits to customers.

The investigation will also consider the detriment to customers that might result from any adverse impact identified.

Key issues to be addressed  include an assessment of the impact of the merger on Ofwat’s ability to set wholesale price controls by examining its likely effect on the parties’ costs used in the totex models and on the precision of Ofwat’s econometric modelling results.

The CMA  will also assess the impact of the merger on Ofwat’s ability to set retail price controls for non-household retail activities. The regulator set revenue controls for a period of two years in recognition of the opening of the non-household retail sector to competition from 2017.

If the CMA concludes that the merger has resulted, or may be expected to result in, a prejudicial effect it will consider whether, and if so what, remedies might be appropriate, and will issue a further statement.

The CMA is currently separately considering  Bristol Water’s appeal against Ofwat’s Final Determination on its AMP6 Business Plan.  In April the water company launched a swingeing attack on Ofwat’s rejection of the company proposals, saying that the evidence the regulator used to come to its conclusion calls into question both the robustness of Ofwat’s business models and its ongoing failure to substantiate its criticisms.

Deadline for responses to the issues statement is 17 July 2015 – click here to download the statement in full.