Solutions offered to address impact of deal on water regulation
The CMA has found Pennon’s purchase of Sumisho Osaka Gas Water UK (including its subsidiary Sutton and East Surrey Water), could harm Ofwat’s ability to make comparisons between water companies and carry out its statutory functions.
Pennon Group plc (Pennon) and Sutton and East Surrey Water plc (SES) are two water utility companies that provide water and services, such as leak detection and water treatment, to household and non-household customers in England.
A fast-track Phase 1 investigation by the Competition and Markets Authority (CMA) has found that Pennon’s purchase of SES could impact Ofwat’s ability to make comparisons between water companies, as part of its regulation of the supply of water to household customers – by removing SES from Ofwat’s dataset and reducing the number of comparators available for it to estimate cost allowances and set service quality targets.
Ofwat regulates the supply of water and sewerage services to household customers in England and Wales. Mergers between water and sewerage companies are subject to a separate review process to ensure that deals do not prejudice Ofwat’s ability to make comparisons in order to carry out its statutory functions – such as setting price controls on regulated water companies, monitoring and enforcement and setting best practices in the industry. The CMA has engaged with Ofwat throughout its investigation.
The merging businesses conceded that the deal could have a detrimental impact on Ofwat’s ability to make comparisons in order to carry out its statutory functions.
Joel Bamford, Executive Director of Mergers at the CMA, said:
“Water services are vital to our day to day lives, whether at home or in the workplace, and we’re concerned that this deal could impact Ofwat’s ability to make comparisons and carry out its role of regulating the water sector.
“We will now carefully consider the solutions put forward by the companies and seek views from Ofwat to determine whether they address our concerns.”
More information can be found on the Pennon / SES case page.
Notes to editors:
- On 10 January 2024, Pennon acquired Sumisho Osaka Gas Water UK Limited (SOGWUK). Following the Merger, SOGWUK’s name was changed to Sutton and East Surrey Group Holdings Limited (SESGHL). SESGHL’s subsidiaries include Sutton and East Surrey Water plc (SES).
- SES operates as a water undertaker in parts of Surrey, Kent, West Sussex, and South London, providing wholesale and retail household water services.
- Pennon operates as a water and sewerage undertaker in the Southwest of England through South West Water. It also operates as a water undertaker in the Bournemouth and Bristol regions, through Bournemouth Water and Bristol Water, respectively.
- Guidance on the CMA’s procedure and assessment of water and sewerage mergers can be found on its website.
- In reaching its Phase 1 decision, the CMA has taken into account submissions made by Pennon, including modelling undertaken by its economic advisors Oxera, Ofwat’s opinion on the Merger, and third-party views of the Merger.
- Where merging parties wish to offer proposed remedies to avoid a Phase 2 reference (undertakings in lieu (UILs)), they must do so within 5 working days after receiving the CMA’s Phase 1 decision. The CMA then decides, within 10 working days after the Phase 1 decision, whether to provisionally accept the UILs offered. The CMA then has 50 working days from the date of the Phase 1 decision (subject to an extension of up to 40 working days) to consider whether to finally accept these remedies, which includes a public consultation on the UILs.
- In order for UILs to be accepted in water mergers, they must remedy, mitigate, or prevent the merger’s prejudicial effect on Ofwat’s ability to make comparisons. When considering whether to accept the proposed UILs, the CMA will request and consider Ofwat’s opinion on the effect of the solutions offered.
- All media enquiries should be directed to the CMA press office by email at press@cma.gov.uk or by phone on 020 3738 6460.