Ofwat warns against higher cost of capital for PR19 appellants
Ofwat has warned that customers will pay more on their water bills and investors could scoop up the extra as higher dividend pay-outs if the Competition and Markets Authority confirms its position on the price review of four water companies.
In December last year, Ofwat set out what water companies should deliver for customers and the environment, and the price customers will pay over the next five years. In doing so, it demanded big improvements from water companies and most of them accepted the challenge and have been working hard to meet it.
However four companies (Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water) didn’t – and they referred our decisions to the Competition and Markets Authority. The CMA recently set out their Provisional Findings for consultation.
In its response to the CMA’s consultation, presented earlier today, Ofwat has acknowledged there are many areas of agreement, but also identified a number of areas which would leave customers worse off, for example:
- The CMA are proposing higher bills, but this is not focused on paying for better services or environmental protection. Instead, this extra money could simply flow straight to investors, as the CMA’s proposals would increase their returns by about 20%. The unusual nature of this decision is underlined by the fact that the CMA are proposing to give investors even higher returns than the companies asked for.
- The CMA has recognised that Ofwat is right to be concerned about the risk to customers if water companies take on high levels of debt. Despite that, it is proposing to strike out the mechanism Ofwat imposed to tackle this, without putting in place any alternative. This could undermine financial resilience and place a higher risk on customers from potential company failure.
- The CMA proposes that Yorkshire Water’s customers pay an extra £93m to reduce leakage to the level many other water companies already comfortably achieve without additional funding from customers.
Taken together, the CMA’s package of proposals threatens to undermine Ofwat’s ability to regulate in customers’ interests, and cause wider uncertainty for customers and investors in other regulated industries.
Ofwat’s chief executive, Rachel Fletcher, said: “While the CMA agrees in principle with the need to challenge the water sector and for companies to up their game, its Provisional Findings risk having the opposite effect. It could see customers paying more, service stagnating and the scales tipped in investors’ favour.
“These proposals risk incentivising companies to look for easy, short-term financial returns, rather than what they should be doing – delivering better services to customers and the environment over the long-term. They could undo the hard work in recent years to improve public trust in the water industry.
“Ofwat will keep pushing to protect and promote customers’ interests. We want to work with the CMA to understand their thinking. We are optimistic that if the CMA takes the time it needs to work this through, they can secure an outcome that will deliver for customers.”
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