The Water Services Regulation Authority (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 retail price index (RPI)).
After further assessment following the provisional findings published in July, the CMA has determined that Bristol Water’s household customer bills should fall on average by 16% before inflation for the period 2015 to 2020. This compares with Ofwat’s original determination that household bills would fall on average by 19% before inflation and has increased by £1 a year compared with the CMA’s provisional findings due to small changes made to depreciation, the cost of capital and some other costs.
A summary of the CMA’s report is available on the case page. The full report has been sent to Ofwat and will be published at a later date after the Department for Environment, Food and Rural Affairs (Defra) has determined whether any excisions are required to the report.
Inquiry group chair, Anne Lambert said:
Our determination results in a substantial reduction in customer bills, compared with Bristol Water’s plans. The resulting bills are also slightly above the level set in our provisional findings because of further information provided by Bristol Water.
We have considered 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 have rejected several projects proposed by Bristol Water because we did not consider they were fully justified and in the interests of customers. We have also placed funding for a large water treatment project on hold. It is subject to approval by Ofwat if further investigation by Bristol Water justifies the investment. Overall, we considered that a small increase from the Ofwat determination was justified.
In arriving at its determination, the CMA assessed submissions and information provided by Bristol Water, Ofwat and third parties including the Consumer Council for Water (CCWater), Bristol Water’s Local Engagement Forum, customers and other water companies. The CMA also appointed its own independent engineering consultants.
The CMA determined the efficient level of expenditure on wholesale activities (largely the costs of abstracting, storing, treating and transporting water and the associated investment requirements) at £428.6 million. This is broadly the same as the CMA found in its provisional findings, although the CMA made small changes in the underlying numbers. This compares 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 average annual 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 determination average annual household bills for the period 2015 to 2020 would be approximately £160. 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 estimated that Bristol Water’s wholesale cost of capital should be 3.67%, versus Ofwat’s figure of 3.60% and Bristol Water’s figure of 4.37% and found that the determination would enable Bristol Water to finance its functions.
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.
- 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 reflects a mix of expertise and experience (including industry experience).
- Section 15 of the Water Industry Act requires Ofwat, on receiving our report, to send a copy of it to Bristol Water and to the Secretary of State for the Department for Environment Food and Rural Affairs. If, within 14 days, it appears to the Secretary of State that publication would be against the public interest or the commercial interests of any person, the Secretary of State may direct Ofwat to exclude such matter from the published version. Ofwat must, not less than 14 days after the copy report is received by the Secretary of State, publish a copy in such manner as it considers appropriate for bringing the report to the attention of persons likely to be affected by it.
- Enquiries should be directed to Rory Taylor (firstname.lastname@example.org, 020 3738 6798).
- For CMA updates, see 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.