Ofwat has told the Competition and Markets Authority “we stand by our PR24 determinations” as the competition regulator begins the process of examining requests by five water companies to review Ofwat’s decisions on their AMP8 business plans.

The comment comes in Ofwat’s overview of its response to the statements of case submitted to the CMA by Anglian Water, Northumbrian Water, South East Water, Southern Water and Wessex Water. The regulator has also provided separate responses to each individual statement of case.

Ofwat says in the introduction to its overview of response:

“We stand by our PR24 determinations. They are the product of a collaborative, transparent and thorough four-year process, which was in turn built on over thirty years of regulatory expertise and experience. Our approach was, and continues to be, evidence-led….

“We support the CMA's efforts to ensure customers and other stakeholders can meaningfully engage with the redeterminations process, like they did at PR24.

"Unfortunately, we consider the disputing companies' submissions fall well short of the level of transparency and ownership we would expect to see as part of a business plan submission for a price review, to support such engagement."

“Unlike the companies” we are “positioned to take an expert, independent, and objective view of the entire sector”

The regulator goes on to level a number of criticisms at the water companies throughout the response, suggesting that “unlike the companies” it is “positioned to take an expert, independent, and objective view of the entire sector.”

Ofwat also makes a robust defence of its decisions throught the response - according to Ofwat, the water companies allege that it has not met its duties (and/or have failed to giveappropriate weight to, or to have regard to, particular duties) on a wide range of issues.

Pointing out that some disputing companies' arguments selectively focus on specific areas of disagreement, “it is neither helpful nor accurate to characterise each such disagreement as a failure to meet our statutory duties,” Ofwat says.

“We consider these arguments are simply disagreements as to the merits of decisions that we made in our final determinations. Our determinations were the result of an exercise in regulatory judgement on complex multi-faceted decisions,” the regulator continues.

The response also refers to the fact that the disputing companies provided a significant volume of new information in their statements of case. In some cases, Ofwat says the companies have “resiled from the latest view of their business plan” it used to set the final determinations, and “reverted to their 'original' plan.”

"It has not been possible for us to provide our comprehensive consideration of all points raised in the statements of case"

Ofwat goes on to explain that given the time available and the volume of new information submitted, it has not sought to address each individual argument in full, saying:

“While we have aimed to address key points raised in the submissions, it has not been possible for us to provide our comprehensive consideration of all points raised in the statements of case, even when supported by our economic and academic consultants….

“In their statements of case, the disputing companies ask the CMA to consider significant amounts of new material in a challenging timescale. Some have even indicated that further changes to their proposals may be necessary later in the process…..”

To address this, Ofwat suggests to the CMA that one option to manage new information and potential changes to company proposals would be to set a cut-off date for considering new evidence. However, the regulator also says that at the same time “we think it is important that the redeterminations do not focus only on issues raised by the disputing companies.”

"PR24 built on a long-standing framework that has been refined and improved over time”

Commenting on the PR24 process, Ofwat says PR24 was built on a long-standing framework that has been “refined and improved over time” and that in a sector consisting of natural monopolies, the price review aims to replicate some of the conditions companies would face if they operated in a competitive market.

“To remain competitive, companies in such a market would need to continually innovate and find efficiencies, improve service to customers, and manage a number of internal and external risks, with the ultimate aim of realising returns to investors. Left unchecked, investors and management of monopoly companies would face weak incentives to keep bills low, improve service, innovate, manage risks, and make certain strategic investments.

“A company that is inefficient, delivers poor service, and fails to appropriately manage risk would find, in a competitive market, that its revenues and returns fall. This is because customers would switch to other companies. In the absence of this choice, our price controls protect customers from having to pay for inefficiency, poor performance or risky financing choices simply because they have no other option….

“PR24 therefore had a strong focus on ensuring customers do not pay for inefficiency, past underperformance or risky financing choices, consistent with the consumer objective, and our duties in the round….

“Since companies hold the information we require to conduct a price review, the burden of proof lies with the company…..However, we faced some challenges at PR24 relating to the quality of the information provided by companies….In some cases, we needed to assess multiple versions of company plans, with some companies submitting new information, including consultancy reports, late in the process. There were also cases where new information was submitted too late for us to have reasonably been able to consider it fully and reflect it in our final determinations.”

Other companies “have recognised the work we have done to consider all the available evidence"

As support for its approach, Ofwat says that other companies that have accepted the final determination “have recognised the work we have done to consider all the available evidence.” The regulator refers to a submission from Pennon Group noting that Ofwat 'took a proportionate, evidence-based approach' which had resulted in an 'appropriate balance between risk, affordability and investor return' based on a 'level of engagement [that] was extensive and unprecedented in our experience'.

Referring to the key challenges at PR24 of affordability, deliverability and financeability, Ofwat reminds the CMA that it continues to be important “to be duly mindful of these key challenges” and that now the CMA is required to set the PR24 determinations in a manner “best calculated to meet all applicable statutory duties”: in particular:

• to further the consumer objective
• to secure that the functions of the companies are properly carried out
• to secure that the companies are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of those functions
• to further the resilience objective.

Referring to its 'Your water, your say' sessions during the PR24 process, Ofwat says “we are open to funding an independent Chair to facilitate direct engagement between the CMA and customers during the redeterminations process.”

Suggested areas for deprioritisation in CMA redetermination process include asset health, PFAS, PCLs and ODIs for total pollution incidents

Commenting on the redetermination process and in order to achieve the challenging timeline, Ofwat says it supports the CMA's approach to consider which issues 'would have the largest effect on customer prices and other outcomes' in assessing whether issues may be deprioritised from its redeterminations.

The regulator has identified a number of areas that could be deprioritised, including asset health, expenditure allowances associated with PFAS, cyber security, the large schemes gated process, major project development costs, Havant Thicket, PCLs and ODIs for total pollution incidents.

Ofwat also flags up the fact that “certain disputing companies complain” that its focus in PR24 was unduly short term and that in doing so, “these disputing companies make sweeping criticisms.” Ofwat describes the complaints, “whether implicit or explicit” in the companies' submissions, as “imprecise and ill-founded.” The companies' submissions are “erroneously reductive” to suggest that the choices available to Ofwat “and now, therefore, to the CMA” are between achieving short-term savings and delivering long-term investment, the response says.

According to Ofwat, “certain of the companies seek to undermine (Ofwat’s) discharge of the financing duty by making submissions to the effect that PR24's short-term focus undermines their ability to finance their functions.”

Companies are relying on “vague and bare assertions, unsupported by evidence”

Ofwat forcefully rebuts this, saying:

“We disagree. The regulatory regime strongly supports companies to invest and raise the finance they need to deliver the investment required to properly carry out their functions. PR24 is an evolution of approaches that have been in place for many price reviews and underpin the aim of supporting investment over the long term. Key consistent features of the regime include regulatory independence, five yearly determinations, reopeners and uncertainty mechanisms and indexed returns. Ofwat’s evidence shows that contrary to the submissions of the disputing companies, the water sector continues to attract investment.”

In Ofwat’s view, through their requests for re-determination the companies are “seeking to shift equity risk to customers either by improving financial resilience at extra customer cost, or enhancing the value of existing equity.”

Ofwat also accuses the companies of relying on “vague and bare assertions, unsupported by evidence” and refers to certain arguments as “untenable, suggesting incorrectly that increased investment equates to growth, and amount to no more than “thinly veiled complaints that our funding was less generous than the companies would like.”

Click here to download Ofwat’s PR24 redeterminations Overview of our response to the statements of case

Click here to access the Competition and Markets Authority dedicated page for its PR24 process and all documents submitted to the CMA.