Utility Week

Utility Week 13th February 2015

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Page 11 of 31

12 | 13TH - 19TH FEBRUARY 2015 | UTILITY WEEK Policy & Regulation Analysis B ristol Water is taking a "big step", according to Angelos Anastasiou, utili- ties analyst at Whitman Howard. The other water companies have played it safe and swallowed what Ofwat has dished out in the final determinations, but Bristol has turned up its nose and rejected the regu- lator's proposed PR14 price controls. It worked for Bristol last time in so far as its final settlement from the Competition Commission – now the Competition and Markets Authority (CMA) – was marginally better than what Ofwat offered up. The 2010 competition referral saw Bristol Water gain an extra 0.6 per cent increase on customer bills over and above what Ofwat's final determination specified. This was still less than half the 6 per cent increase it asked for in its PR09 business plan. The Competition Commission also gave with one hand but took with the other, cut- ting the cost of capital to 5 per cent, which was lower than the figures proposed by Ofwat (5.5 per cent) and Bristol (6.7 per cent). So while glad it got something, Bristol still complained that its service levels and investment would suffer because it did not get enough. However, the company man- aged to get through the fih asset manage- ment plan (AMP5) period, even if investment in infrastructure was scaled back to fit the much reduced budget. It is the owners of Bristol Water – Cap- stone Infrastructure Corporation, Canada (50 per cent); Sociedad General de Aguas de Bar- celona (Agbar), Spain (30 per cent); and Ito- chu Corporation, Japan (20 per cent) – that face the financial hit of any PR14 shortfall, as they did aer the last price review. The Competition Commission's amended PR09 determination limited the return the shareholders made, with dividends to Cap- stone Infrastructure Corporation falling 19 per cent during AMP5. The achieved regu- lated capital value (RCV) also continually fell short of the regulator's deemed RCV throughout this period. In 2015 as the PR14 process comes to a close, history has repeated itself and Bristol Water has again found itself breaking ranks (see Nigel Hawkins' analysis, opposite). An outlier from the very beginning – along- side United Utilities and Thames Water, both of which adjusted their business plans and eventually accepted the regulator's final determinations – Bristol Water always looked destined to end up back with the competition authorities. Hawkins says the gap between the two parties is "a veritable chasm". Ofwat cal- culates that Bristol's five-year totex bill should be £409 million compared with Bristol Water's £541 million. Under Ofwat's numbers, average domestic bills would be slashed by 23 per cent over the five years, compared with just 4.5 per cent as calculated by Bristol (based on 2012/13 prices). The regulator has also ruled that the pro- posed second Cheddar reservoir is not neces- sary and would be one way of dramatically cutting costs. Chief executive Luis Garcia rejects this, saying: "The final determination makes it very difficult for us maintain our levels of service and make sufficient investment to deliver the enhancements needed to improve and protect the water supply that our cus- tomers told us they wanted, for now and in the future." The company blamed "flawed model- ling" at Ofwat for the significant discrep- ancy between its business plan and the final determination – and for why Bristol Water was an outlier in the first place. Garcia also says his customers support the water company, with 92 per cent saying they find the business plan acceptable. Consumer Council for Water (CCWater) chief executive Tony Smith said: "We expect the CMA to give careful consideration to the costs of Bristol Water and the views of its customers to ensure whatever decision it takes clearly reflects what its customers want, at a price they accept. "Those are the principles that have driven the price-setting process and must continue to do so." Garcia's claims "there is clearly a discrep- ancy in [Ofwat's] calculations", but going to the CMA it is a bold move. History shows that rejecting the regulator's price controls rarely leads to a significantly better settlement. Determined for a showdown Bristol Water has rejected Ofwat's final determination and triggered a CMA referral, but history suggests the water company will be lucky to emerge victorious. Mathew Beech reports. Timeline 2013 2014 2015 Long time coming: the road to the CMA September 2015. CMA due to deliver its judgement 12 February 2015. Deadline to accept or reject final determinations 10 March 2014. Ofwat announces pre-qualified (enhanced) companies: Affinity Water and South West Water 30 May 2014. Early business plans draft determinations published: Northumbrian Water and Welsh Water 2 December 2013. Companies submit business plans March 2015. Bristol Water case set to be referred to the CMA 30 April 2014. Draft determinations pub- lished for enhanced companies 29 August 2014. Draft determinations published 15 May 2012. Ofwat issues its statement of principles for PR14 12 December 2014. Final determinations published

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