Utility Week

UTILITY WEEK | MAY 2021 | 25 Policy & Regulation Drawing a line under PR19 Almost 18 months after Ofwat delivered its final determinations on PR19 the price review is finally settled, says Ruth Williams. T he four appellant water companies have all told Utility Week they consider the matter closed, indicating there will be no further chal- lenges to the CMA's decision. This is unsurprising given the comments from Bristol Water's chief executive, Mel Karam, at Utility Week's Investor Summit the day a•er the CMA passed down its verdict. He said: "We got 99 per cent of our cost base in our busi- ness plan approved. We have 95 per cent of our cost of capital approved by the CMA. Almost all of our performance criteria and outcome deliveries were signed off by the CMA." But he said the process was neither easy for the business nor reassuring to investors: "The whole conduct of the way things are done, and I have heard this directly from the investor com- munity, has definitely shaken the confidence of investors in water." Karam also pointed to the cost of the process. The CMA's final redetermination revealed that all four companies forked out £25.9 million and Ofwat spent £2.8 million. The regulator appears as eager as the appellants to bring this saga to a close. It clawed back some points from the pro- visional findings, and ground was conceded by the CMA on the contentious cost of capital. Although its figure remains higher than Ofwat's, there was far closer alignment, suggesting a shared view that returns must be earned and there is no given right for profits from water ser- vices – an important message from the regulator throughout the process. The appeals body followed the structure and models used by Ofwat in much of its work, "including in areas of conten- tion". Service targets and finan- cial incentives were largely untouched. The voice of consumers was included: written and oral evidence from representative groups was put forward, some- thing Ofwat and the appellants all pushed for. Despite the inclu- sion, CCW raised the issue of whether customers had suffi- cient voice in the process, some- thing to be considered in the RIIO2 appeals. More spending has been per- mitted for infrastructure pro- jects, which had been a central point for rejecting Ofwat's rul- ing. Customer support for such projects was used as evidence by companies that resilience schemes were not only necessary but popular with billpayers. An additional £75 million of spending was also permitted by the CMA for company-specific projects. Meanwhile, the appeals body stuck with its message that Ofwat's approach to the gearing outperformance sharing mecha- nism was not fit for purpose and should be scrapped. Despite these differences, the CMA appears to have allowed all parties to claim its final verdict as at least a partial victory – some- thing which seemed unlikely at the start of the process. Ruth Williams, water correspondent Analysis ing costs and on cost of equity. The ability of the CMA to take account of data that was not available to the regu- lator is explicit in both the energy and water legislation but effectively gives companies two bites at the cherry. If the numbers are moving in a helpful direction then companies can effectively choose to have their settle- ment judged against a later set of metrics. If not they can "stick". SSE code modification appeal Ofgem's transmission charging review was contentious (see utilityweek.co.uk/cma-rejects-sse-appeal), involv- ing as it did a re-cutting of effectively a fixed "cake" of charges with, inevitably, winners and losers. There are also good reasons for thinking that the impacts on renewables might have been underplayed, given most of the work was done before Ofgem's Damascene conver- sion to net zero. However, it was always unclear whether SSE would get anywhere arguing that Ofgem's decision was "wrong". SSE set out six grounds of appeal, one with five sub-grounds, based on detailed legal points. The CMA rejected all SSE's arguments. Even in the odd place where it said it would have been better if Ofgem had taken a different approach it still concluded that Ofgem was not "wrong" . That is a strong reminder, if any is needed, that the bar is high for finding that Ofgem is "wrong". Ofgem was probably helped by having the Electricity System Operator and Centrica as interven- ers on their side. However, as noted above, the RIIO2 appeals have the same chair (and largely the same legal framework) so the read across is very relevant. Next steps Following the RIIO2 set of administrative announce- ments, it is unclear whether we will hear any more about the progress of the appeal until the deci- sion in September. On the ED1 appeal there was radio silence and you had to qualify as an intervener if you wanted to know more. It is certainly a much more closed process than the water equivalent. I continue to reiterate that transparency is important and that given the wider public policy implica- tions of these decisions they should not be seen as purely bilat- eral disputes. Learning from all these appeals, which involve significant time and costs, there clearly is a need for a wider re-think on what the best approach is going for- ward. Neither model is perfect. Whether the answer is a hybrid or a more fundamental change is a diffi- cult question. The RIIO2 appeals will be an important test. CMA has a tricky balancing act with networks

• Cover