In its final comments to the Competition and Markets Authority in the PR19 appeals inquiry, Ofwat has told the CMA that the latest stages of the process have seen the consumer voice “drowned out” with the submissions made to the CMA “increasingly…dominated by the well-resourced company and investor voice.”

The water sector regulator made two separate submissions – a formal response and a personal letter from Ofwat Chairman Jonson Cox OBE to Kip Meek at the CMA who is conducting the inquiry.

The regulator’s formal submission begins by saying that as the CMA reaches the closing stage of the process,” it is going to be burdened with a huge weight of final submissions from the companies” and that Ofwat had attempted to keep its own” as short and focused as possible.”

Ofwat told the CMA:

“Your decisions come at a point when the industry has been stagnating and losing public confidence. It could either continue on that track, or step up to improve performance and efficiency, achieve long-term resilience in the face of climate change, protect the environment, and meet customers’ changing needs.”

“In the absence of competitive pressures, it falls to the regulators – ourselves, and now the CMA in the case of the disputing companies – to provide the impetus for change.”

The submission says “it serves the interests of no one if investors can make returns too easily in this industry” and that “unduly easy returns also cast a shadow on the reputation of the industry, turning away the responsible long term investors it requires. Strong returns should be a reward for excellent performance and neither a given nor an easily achievable outcome. We invite you to reach the same conclusion and make your final determinations accordingly.”

Ofwat - “Did we get the balance right at PR19?”

Ofwat supports its case by asking “Did we get the balance right at PR19?” and pointing out that as over a year has passed since the PR19 final determinations, the CMA now has the benefit of empirical evidence relating to the non-disputing companies.

According to Ofwat, the evidence shows that in spite of the impacts of Covid-19, companies are delivering in line with its purpose and ambition, including: –

• Cost allowances are sufficient. Six monthly results of listed companies show that companies expect to perform in line with or outperform our efficient totex allowance, even despite the impacts of Covid-19 on water sector costs.
• Outcomes are achievable with growing evidence of companies expecting significant outperformance over the AMP and in year 1. Six monthly results from listed companies show that they expect to perform in line with, or outperform on, outcome delivery incentives
• The allowed return is sufficient and potentially generous in light of falling returns since late 2019. Companies are proposing around £1.3bn of additional investment under the green recovery initiative at the PR19 allowed return
• All companies are proposing to finance all or most of this until 2025, which indicates headroom in the settlement for financeability.

"We have struggled to identify a rationale for any radical departure from our approach”

Ofwat goes on to comment:

“We of course welcome the insights we can obtain from the CMA’s perspective on the package that each of the four companies should receive and, like other regulators, look to learn from the redeterminations as we evolve and improve our regulatory approach.

“We do not expect the CMA in all circumstances to reach the same judgements that we have. However, a year into the current price control period, all the evidence from non-disputing companies suggests that PR19 is driving the right behaviours, working for customers, and maintaining the sector as an attractive proposition for high quality, long term investors. We have struggled to identify a rationale for any radical departure from our approach.”

“In our view, extra measures are not needed to keep the industry attractive to investors. We remain troubled by the apparent failure of the CMA to fully take into account our arguments or our expert evidence on this subject.”

“Unfortunate asymmetry of voices and representation"

Referring to an “unfortunate asymmetry of voices and representation", Ofwat said the CMA had received very many submissions from the main parties, as well as from third parties, the preponderance of which had come from the disputing companies and their investors. Urging the CMA to keep in mind the need for the consumer voice to be adequately heard and given due weight, the submission says:

“….we are also concerned that the discussions on the cost of capital have become increasingly technical and dominated by the company perspective given the weight of adviser input....

“Their voices are many, loud and hugely well-resourced. Consumer representatives have played their part, but they are few and far more modestly resourced.”

Ofwat’s submission concludes by saying it is “remarkable” and “unacceptable” that the disputing companies are resisting Ofwat having sight of their costs in the appeals process and that its aim is to help the CMA ensure that customers do not pay for any excess costs from the representation of the companies’ interests “without adequate scrutiny or challenge.“

“We have confidence that the CMA will see this for what it is. The CMA is being urged by the companies to do something that not only lacks procedural fairness, but that would be indefensible in the court of public opinion.”…

“We urge the CMA to ensure that it does not become a mere triangulation between Ofwat and the disputing companies, with the outcome unjustifiably weighted in favour of the company and investor interest.”

“Views of companies’ key experts in corporate finance did not appear reflective of the ongoing investor appetite we see for the sector”

Jonson Cox’s letter to Kip Meek separately reiterates the points made in Ofwat’s final submission - he begins by saying:

“I was struck by the weight of academic expertise, focused on arguments of a highly technical nature, which appeared far removed from the ‘real world’. The views of companies’ key experts in the academic field of corporate finance did not appear reflective of the ongoing investor appetite we see for the sector.”

Describing Ofwat and the CMA as “both experienced regulators and used to probing companies’ arguments”, the Ofwat Chairman points out that customer groups have no right of appeal in the process and that while there is an opportunity at certain points to be heard, “the CMA will appreciate that such groups are much less well-funded and resourced.”

His letter says:

“As the focus of the CMA’s exchanges has narrowed to concentrate on highly technical matters, the consumer voice has been drowned out. This is particularly so in the debate about the choices of the parameters underpinning the WACC. The submissions made to the CMA, both formal submissions and letters, have increasingly been dominated by the well-resourced company and investor voice.”

Jonson Cox concludes:

“I will not rehearse the arguments that the Ofwat team has already put so well to the Panel in the course of this inquiry. I will only urge you to consider carefully in the final weeks of this redetermination the interest of the customers that cannot be easily heard in these proceedings. It is, after all, customers who will need to foot the bill.”

Click here to access the CMA PR19 appeals documentation and responses