The Competition Commission (CC) has now made public its final report on Bristol Water’s appeal against water industry regulator Ofwat’s price decision.

The Commission has spent the last six months investigating and whether the price which Bristol Water can charge for supplying water to its customers for the period 2010–15 should be increased.

The Commission, which undertook a redetermination (rather than deciding an appeal), said it had used the best data available, focusing on areas where Ofwat and Bristol Water disagreed. This involved using data updated from those used by Ofwat, and further information that Bristol Water supplied and the Commission’s investigations produced.

The Commission assessed and built on the work undertaken by Bristol Water, Ofwat, and Bristol Water’s ‘Reporter’ (an independent engineering consultant appointed by Ofwat to assess Bristol Water’s proposals). It also appointed its own engineering consultants, Halcrow Management Services (Halcrow), to assist.

Ofwat and Bristol Water "sharply at odds"

The Report highlights the fact that both parties were “sharply at odds with regards to capital maintenance”. Bristol Water considered that it needed to make a step change in investment, particularly in mains replacement and relining, to maintain an aged system to protect customers’ service levels and to cope with significant predicted population growth.

In contrast Ofwat, however, considered that Bristol Water had achieved stable serviceability, and could see no reason why Bristol Water’s system should deteriorate below that level in the review period or the foreseeable future if it was not given the funds it requested.

Bristol Water’s costs in mounting its challenge amounted to approximately £2.5 million. Ofwat stated that it could not claim any costs directly against Bristol Water. The Competition Commission’s costs (which Bristol Water will have to pay to the Secretary of State under the conditions of its licence) amounted to approximately £650,000 (including external engineering consultants).

The Commission decided that it was reasonable to take into account in its own determination approximately one-fifth of the aggregate of Bristol Water’s costs and its own costs. Accordingly, the CC has provided for a one-off award of £600,000 to cover the costs of Bristol Water’s reference to the CC and treated it as part of Bristol Water’s opex incurred in 20010/11. Implications for Water White Paper

The Report may also have implications for the Government’s forthcoming Water White Paper. The Commission has also commented on more general issues and made informal recommendations which it said were designed to assist Ofwat and others as they prepare for the next price determination, including:

i. The CC found the relationship between it’s own role and the DWI’s role unsatisfactory. The Commission understood DWI to be tasked with maintaining water quality, while Ofwat and the CC were the economic regulators with responsibility for efficiency. In the Commission’s view the DWI, by its decision to accept an undertaking during the course of its determination that specified how Bristol Water should rectify the problem at Shipton Moyne, appeared to have ventured into its own remit, as this decision had cost implications which directly affected its own determination. The Commission is recommending greater transparency and information sharing between Ofwat and the DWI (in line with their Memorandum of Understanding) to ensure that consistent decisions are taken on a common evidence base. ii. The Commission noted the difference of view that arose between Ofwat and Bristol Water with regard to the extent of mains replacement necessary to maintain stable serviceability. The CC said that “This seems to have arisen because Ofwat did not fully understand or accept Bristol Water’s ELLEN model. If Ofwat can only accept evidence based on its preferred UKWIR model, then we recommend that it makes this explicit, to allow companies to prepare effective submissions”. The full Report is available to download at: www.competition-commission.org.uk