The Competition and Markets Authority (CMA) looks set to rule against water regulator Ofwat following a challenge from water companies that feel its regulatory framework goes too far in crimping their profit.
The energy industry is watching the case closely after regulator Ofgem proposed much lower returns for electricity transmission networks and gas networks than it allowed under the previous regulatory framework, with electricity networks also nervous about the regulator’s demeanour.
Anglian, Bristol, Northumbrian and Yorkshire all challenged Ofwat’s price controls via the CMA. They want to be able to spend more and get a better return on the capital they deploy to manage the network to supply water and sewerage services, and for related responsibilities, such as resilience.
The Authority is minded to allow them an extra 0.54% on cost of capital, at 3.50% versus 2.96% set by Ofwat.
Overall ‘totex’ (total expenditure) would increase by £263m over five years under the CMA’s provisional plan.
The CMA will now consult on its provisional findings, and a final decision is expected by the year-end.
Citizens Advice said the CMA had bowed to industry pressure.
“When the expected cost of maintaining industry infrastructure is set unrealistically high, bills are inflated unnecessarily,” said CEO, Dame Gillian Guy.
“We call on the CMA to look again at all the evidence before it makes a final decision.”
If rubber stamped, the CMA’s ruling will likely encourage energy companies to challenge Ofgem’s price controls, which the likes of National Grid and SSE are currently considering.
However, Ofgem’s proposed rate of return, at 3.95%, is still significantly higher than the rate proposed by the CMA for the four water companies.
CMA provisional finding here.