Ofwat has said that the higher prices allowed by the Competition and Markets Authority in the appeals by four water companies against its Final Determinations would simply be taken by investors in the form of dividends.

In an interview with Radio 4 Today programme last week, Dominic O’Connell, Business Presenter asked Rachel Fletcher, Chief Executive of Ofwat whether she thought that if the prices are allowed to go higher, as the CMA seems to think they should be, they would all just be taken by the water companies’ bosses – owners – in dividends.

Rachel Fletcher replied:

“Absolutely..….We estimate that that would represent the transfer of about half a billion pounds of those customers to investors in those companies with absolutely nothing more to show for it in terms of additional investment.”

According to the Ofwat Chief, the CMA largely agrees with Ofwat’s position on performance standards and on efficiency challenges in the water companies who have appealed. Where they have differed from Ofwat’s assessment is almost entirely on the Cost of Capital.

She told the interviewer that Ofwat was “pushing very hard for the CMA to look at the evidence and information” which in her view shows that actually customers can get better service and lower prices.

Dominic O’Connell went on to suggest that water companies have “paid themselves very large dividends in the past 10 to 15 years” and that “perhaps that Ofwat was far too generous in the past,” asking:

“And in trying to correct that mistake, you’ve over-corrected?”

Rachel Fletcher replied:

“Well it’s really clear actually that the rate of return for investors in 2009 was set too high, with hindsight. And exactly over that period we did see that money come out in high dividends to investors. We didn’t see it leading to improvements for customers.

“But we haven’t aimed to punish the investors for this, if that’s what you’re implying. In fact, we’ve aimed straight.”

Ofwat had looked at the market evidence, she explained, and the share price movements post its decisions in December suggested that the regulator had “got it about right” and was “keeping this industry investable.”

“What we are in disagreement with the CMA about actually is the CMA seems to think that it’s more important to over-reward investors – and we don’t see the rational for that at all,” she added.

Dominic O’Connell concluded the interview by commenting:

“This is quite a serious situation because I can’t recall another example of an independent economic regulator like Ofwat being over-ruled by the Competition & Markets Authority”, describing it as a “serious challenge to Ofwat’s authority.”

The Ofwat Chief responded:

“Well look this is a serious situation actually for customers – but not just water customers. The CMA’s position on allowed returns is a novel position. Indeed, it breaks ranks with decisions that the CMA itself has made as recently as February and could have an impact on energy bills as well and raise investor expectations not just in water but more widely.”

Following the CMA’s decision, on Friday Ofwat published five supplementary papers submitted by the regulator to the CMA in support of its own submission on the CMA’s Preliminary Findings.