Utility Week

10 | 6TH - 12TH MARCH 2020 | UTILITY WEEK Policy & Regulation Analysis C ompanies were urged to engage with more customers than ever before when writing business plans for the next five years and that focus looks set to shape appeal requests. Even companies that reluctantly accepted their final determination – such as Wessex, Portsmouth, and SES – each flagged the challenges Ofwat's terms posed. They all maintained that the regulator's stance went against the express wishes of customers. Anglian's director of regulation, Alex Plant, tells Utility Week that a€er all the cus- tomer engagement the group carried out, the company felt "duty-bound to honour what our customers want us to do". The appeal process is set to take at least six months and will re-examine the entire business plan of each company, not just the areas of contention. One industry source pointed out that the volume of work involved in the process sug- gests companies must have felt they had a very solid case before opting go to the Com- petition and Markets Authority (CMA), add- ing that reaching the decision to appeal can be very "finely balanced". "It's not a contest, it's an adjudication based on evidence rather than a fight. Ofwat is not trying to beat the companies but both sides will present what they think is reason- able," they said. Nigel Hawkins, an analyst at Hardman & Co and a regular correspondent for Utility Week, says that if he were a barrister for any of the appellant water companies, he would look at three main areas. "First, if the overall package was unfair, while acceding an a la carte appeal is not an option. Second, the weighted average cost of capital [Wacc] is unreasonably tight, espe- cially over a five-year period," he explained. Compared to PR14 five years ago, the Wacc set by Ofwat is as much as a third lower, and interest rates have changed in that time, so companies must now improve their earnings against the more generous allowance at the previous price review. "Third, I would go through Ofwat's Test Area Assessment for the appellant company with a fine-tooth comb. Many of Ofwat's comments at the time on company efficien- cies read like a fun editorial piece." The Test Area Assessments gave scores on efficiency metrics to each company, which Hawkins says a legal team could use to argue whether the basis for efficiency was valid. He also suggests that companies that base their appeal on the Wacc, which North- umbrian with its significant bill hit may do, could impact the wider sector. The Wacc reduction was a tough pill to swallow across the sector, therefore if the CMA rules that it has been set too low, could other companies argue it is unfair for them also? As well as taking up management time and money, the appeal process will leave companies involved in a state of limbo. They will have to follow the final determination as it stands for the first year of the business plan, while awaiting ruling from the CMA. Matan Benjamin, director of infrastruc- ture ratings for utilities at S&P Global Rat- ings, tells Utility Week that choosing to appeal prolongs the uncertainty for compa- nies, investors and stakeholders, but could provide an upside. "It's important that stakeholders see that this process is stable and provides certainty," Benjamin says. "Of course, this means that utilities can focus on their operations, while for investors it gives assurance that compa- nies are governed by a predictable and stable regulatory framework." He says that despite the uncertainty the appeal process brings, the stability of regula- tion in the UK still makes utilities an attrac- tive prospect. "Regulatory frameworks for utilities in other countries are not necessarily as pro- gressive and evolved compared with the UK. This system, in our view, is strong and reli- able – and this is partly thanks to the CMA's involvement in the process." Ruth Williams, water correspondent, Utility Week PR19: Where CMA appeals can be won or lost With a record number of companies going to the CMA to challenge their PR19 determinations, Ruth Williams gathers expert views on the areas most likely to feature in the appeals. TIMELINE TO A SHOWDOWN 3 September 2018: Companies submit dra business plans setting out their proposals for customer bills and investmetn for the five-year asset management period, AMP7, kicking off the PR19 price review process. 18 July: 2019: Ofwat makes its dra deter- minations, which in most cases are much more demanding than the companies' proposals. Companies issue their responses to Ofwat's dra proposals. 16 December 2019: Ofwat makes its final determinations of the PR19 process, which offer more generous terms than that set out in its dra determinations. Most observers expect the companies to accept them. 10 February: Yorkshire Water rejects its determination and seeks a CMA referral. 13 February: Bristol follows suit and rejects its determination. 14 February: Anglian and Northumbrian bring the number rejecting their determina- tions to four, an unprecedented number. The difference in totex between company plans and Ofwat determinations Yorkshire Water: £370m (the second-biggest gap in the sector) Bristol Water: £32m Anglian Water: £748m (the biggest gap in the sector) Northumbrian Water: £156m

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