Ofwat referred an appeal from Bristol Water plc (Bristol Water) to the Competition and Markets Authority (CMA) in March, following Bristol Water’s decision to reject the regulator’s final determination on price controls for the period 2015 to 2020. Bristol Water argued that Ofwat’s determination would not leave it with sufficient funds to run the business and invest and that higher prices were needed.
Bristol Water had estimated the impact of its plan would be to reduce household customer bills on average by around 6% for the period 2015 to 2020 before the impact of inflation (measured by the RPI). After a detailed assessment of Bristol Water’s costs and expenditure requirements, the effect of the CMA’s provisional findings is that Bristol Water’s household customer bills should fall on average by 17% before inflation for the period 2015 to 2020. This is in comparison to Ofwat’s original determination that household bills would fall on average by 19% before inflation. This represents a small increase in the prices previously set by Ofwat.
The CMA’s figure is a provisional estimate which may be subject to further adjustment when it issues its final determination, which it is required to do by 3 September 2015. A
is available on the case page. The full report will be published shortly.
Inquiry Group Chairman, Anne Lambert said:
We are very conscious of the effect our provisional findings would have on customer bills. Our provisional findings would result in substantial reductions in bills, as compared with Bristol Water’s plans, although they involve a small rise above the price limits set by Ofwat.
This provisional decision was taken after a careful review of the needs of Bristol Water’s customers and the levels of investment required to maintain quality and reliability of supply. As part of this process, we provisionally rejected several projects proposed by Bristol Water which would have increased its expenditure – and ultimately bills – because we did not consider they were fully justified and in the interests of customers.
However, we provisionally agreed that a small increase from the Ofwat determination was necessary to maintain the quality of service Bristol Water provides to its customers.
In arriving at its provisional findings, the CMA assessed submissions and information supplied by Bristol Water, Ofwat and third parties including Consumer Council for Water (CCWater), Bristol Water’s Local Engagement Forum and other water companies. The CMA also appointed its own independent engineering consultants.
The CMA has developed models, based on an assessment of those used by Ofwat, to help determine the efficient level of spend for Bristol Water and has assessed Bristol Water’s business plan, including examining specific projects to form a view of their need.
The key reason for the differences in price is that the CMA assessed expenditure on wholesale activities (largely the costs of abstracting, storing, treating and transporting water and the associated investment requirements) for Bristol Water of £429 million. This compared with Ofwat’s assessment of £409 million and Bristol Water’s estimate of £537 million.
Ofwat expressed all figures in 2012/13 prices and on this basis showed that household bills would reduce from £191 per customer in 2014/15 to an average of £155 for each year over the period 2015 to 2020. Using the same 2012/13 price base, under the CMA provisional findings average household bills for the period 2015 to 2020 would be approximately £159. Bristol Water estimated household bills would reduce from £198 in 2014/15 to an average of £187 for the period 2015 to 2020 under the same price base.
The CMA has also provisionally decided that Bristol Water’s wholesale cost of capital is 3.65%, versus Ofwat’s figure of 3.60% and Bristol Water’s figure of 4.37%.
Comments on our provisional findings are welcome and should be submitted by 27 July 2015. They should be made in writing to: firstname.lastname@example.org or:
Bristol Water price determination
Competition and Markets Authority
Notes for editors
- The CMA is the UK’s primary competition and consumer authority. It is an independent non-ministerial government department with responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law. From 1 April 2014 it took over the functions of the Competition Commission and the competition and certain consumer functions of the Office of Fair Trading, under the Enterprise and Regulatory Reform Act 2013.
- The Water Industry Act 1991 requires Ofwat in accordance with the terms of Bristol Water plc’s licence to refer any disputed determination of price limits to the CMA for determination.
- The members of the Bristol Water plc Price Determination Group are: Anne Lambert (Chairman of the group), Robin Aaronson, Katherine Holmes and Stephen Oram. Ofwat referred the Bristol Water plc price determination to the CMA on 4 March 2015.
- All the CMA’s functions in price determinations are performed by CMA groups chosen from the CMA’s panel members. In such investigations, the appointed inquiry group are the decision-makers.
- The CMA’s panel members come from a variety of backgrounds, including economics, law, accountancy and/or business. The membership of an inquiry group usually reflects a mix of expertise and experience (including industry experience).
- Enquiries should be directed to Rory Taylor (email@example.com, 020 3738 6798) or Siobhan Allen (firstname.lastname@example.org, 020 3738 6460).
- For CMA updates, see our our homepage or follow us on Twitter @CMAgovuk, Flickr and LinkedIn. Sign up to our email alerts to receive updates on regulatory references and appeals.