Utility Week

16 | 20TH - 26TH SEPTEMBER 2019 | UTILITY WEEK Policy & Regulation Analysis O fwat's PR19 dra determinations were called the toughest yet when they were published in July but those water companies who came off worst have now branded them "unachievable" and "unfinanceable" in their first official responses. With the final determinations due in December, time is running out to reach a compromise that bridges sizeable discrepan- cies between the companies' business plans for 2020-25 and Ofwat's expectations of what each company should spend. Fears and doubts related to finance were voiced by all the companies in the "slow- track" and "significant scrutiny" categories, with Thames summing up the dra deter- minations as "undeliverable and therefore unfinanceable". It also accused the regulator of setting targets that contradicted its own resilience tests. Ofwat's benchmark of an efficient com- pany was also widely criticised as unrealistic and unachievable, as were its expectations of cost efficiencies. Yorkshire said it was "surprised and dis- appointed at the difference between [our] own and Ofwat's view of efficient costs" and called Ofwat's benchmark "unattainable" as a measure of efficiency. Talk about the involvement of the Competition and Markets Authority (CMA) has been rife since the dra determina- tions first emerged earlier this year, and the depth of disquiet from some of the compa- nies suggests that resorting to the appeals process has not been ruled out. Both Wessex and South Staffs raised questions about the legality of the restrictions the determina- tions would impose. South Staffs too labelled Ofwat's demands "unfinanceable" and said a lot of work was needed if a CMA referral was to be avoided. Its board said it "does not consider that Ofwat has fulfilled its legal duties to allow us, as an efficient company, to finance our functions" and called for "constructive engagement" to avoid a referral. The targets set by the regulator for what water companies must achieve by 2025 include reductions in sewer flooding, supply interruptions, leakage, and additional help for almost two million vulnerable customers. This is coupled with a targeted pre-inflation reduction in bills of 12 per cent Ofwat placed Affinity, Hafren Dyfrdwy, Southern and Thames in the "significant scrutiny" category, meaning they had to sub- stantially rework and resubmit their plans and would be subject to increased regulatory scrutiny. Thames was also one of four companies the regulator gave advance notice to – with Anglian, Yorkshire and SES – regarding the persistent gap between their business plans and Ofwat's view of what expenditure was necessary. Just three companies – Severn Trent, South West and United Utilities – had their plans approved for fast-track status. The response of the others to Ofwat is summarised here. Ofwat faces determined fightback on PR19 Ofwat played tough in its draft determinations, but those hit hardest have called Ofwat's proposals 'unworkable', 'unfinanceable' and 'unachievable'. Ruth Williams reports. Company responses to the draft determinations Affinity Water Category: significant scrutiny Affinity has re-examined its funding allow- ances for improvement and enhancements and made savings to deliver its targets on leakage at a 20 per cent reduction. The company has restricted shareholder dividends for AMP7 and will reinvest all returns to reduce gearing during the period, meaning no dividend will have been paid for seven years (2018-25) and equity will be reinvested for the six years from 2019-25. However, it queried what it called Ofwat's "skewed" calculation for retail and suggested the cost model should be re-examined. Anglian Water Category: slow track Anglian has a £251 million gap in the base cost for water, equivalent to 16 per cent of the full costs, while the difference in wastewater is £406 million, also 16 per cent of the costs. In its submission, the company said the needs of its region would not be met under Ofwat's dra determination. It insisted the level of expenditure it previously submitted was appropriate and invited Ofwat to fully consider its previous application. Bristol Water Category: slow track Bristol, which is the only company to have previously – and unsuccessfully – resorted to the CMA (over its PR14 business plan), said Ofwat's determination was not balanced. It said it did not reflect customer priorities and was not financeable for itself or any similarly sized water company. Bristol called for a holistic approach, which it said was missing from Ofwat's approach – calling it "a series of technical judgements and interventions". Dwr Cymru Welsh Water Category: slow track Dwr Cymru said that despite making changes, there remained an "unsustainably large gap" between its business plan and the dra determination. It cut some proposed spending to reduce this gap from £400 mil- lion to £250 million but it said this was as far as it could go. It reported serious concerns that it would have to commit to performance targets that it does not consider to be deliverable. It also highlighted the limited timeframe to resolve the remaining "substantial areas of disagreement" and therefore asked Ofwat to accept its updated business plan.

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