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UTILITY WEEK | 13TH - 19TH FEBRUARY 2015 | 13 Policy & Regulation Aside from Bristol Water last time out, the Competition Commission also dealt with South West Water (during PR94), and with both Mid Kent Water and Sutton and East Surrey in 2000 (for the PR99 determinations). The cases in 2000 saw both Mid Kent Water (now part of South East Water) and South Staffs Water fail to gain anything significant. The 1994 case was worse still. It was the first test of the then new regulator's first price determinations, and according to Ofwat's director general at the time, Sir Ian Byatt, South West came away "with a bloody nose". The Competition Commission judged that there was "scope for substantially lower expenditures" and slashed the amount by which the water company could hike bills. This decision has haunted the industry ever since, and usually dissuades companies from trying to take on the regulator. Analyst Anastasiou says the CMA will have no set agenda: it will not slap down Bristol for questioning Ofwat, nor will it automatically award it a more favourable determination. "It is a tricky one that can go either way," he says. He tells Utility Week that rejecting Ofwat's price judgement "opens them up" to changes in other areas of the determination where they may be happy. He says: "There has over the years been a mix of outcomes, but South West Water was hammered in their price review [in 1994]. It is a big step for Bristol Water." A number of sector analysts expect an outcome similar to what Bristol Water got last time. It will gain in some parts and lose somewhere else. Whatever happens, Bristol Water seems unlikely to get what it is asking for in its business plan. The most likely outcome is a slightly better settlement, but one that leaves significant shortfalls that will have to either be felt by the owners once again, or at the expense of the service provided and invest- ment during AMP6. Analysis Marching to a different beat The gap between Ofwat's figures and Bristol Water's made a referral inevitable, says Nigel Hawkins. I t's hardly surprising, given the scale of the financial disagreement between Bristol Water and Ofwat, that the water-only company with a customer base of 1.2 million would appeal Ofwat's final determination for the 2014/15 periodic review. The matter will be decided by the Competition and Markets Authority (CMA). For Bristol, the stakes are high. To the outsider, since Ofwat's review has been generally applauded, Bristol's stance resembles that of the squad- die on the parade ground who cannot understand why every other soldier is marching out of step. However, Luis Garcia, Bristol's chief executive, sums up the company's position by reaffirming that "we do not believe the determination Ofwat has set is in the long- term interest of our customers and stakeholders and we believe that a referral to the CMA will result in a better outcome". He goes on to say that "there is clearly a discrepancy in calculations because of the size of the gap and the CMA is the only fair way to resolve this" . Bristol has previous experience with such an appeal (see Mathew Beech's analysis, opposite) since it pursued the judicial route to challenge the PR09 periodic review. It did receive some change then, with permission to raise prices by around 15 per cent over the five-year period, compared with the 7 per cent set by Ofwat (Bristol had sought 29 per cent). This time around, it may be more difficult since Ofwat's complex methodology has been accepted by vir- tually all the other water companies, and its regulatory process has also become increasingly robust. Nonetheless, Bristol believes the methodology is flawed, especially when it comes to water supply costs. In fact, the gap between the two parties is a veritable chasm. Ofwat calculates Bristol's five-year totex bill at £409 million compared with the company's £541 million. In particular, Bristol is vigorously opposed to Ofwat's prescribed P-nought base price cut of 18 per cent, by some way the highest in the sector. It is also exercised by the treatment of the planned water investment at Cheddar. While water company appeals of this type have histor- ically tended to yield some benefits, Ofwat's views have generally prevailed. Indeed, Ofwat's senior executives will have been painstakingly assessing in recent months how the CMA would respond if such appeals were made. That the vast gap will be closed seems certain, but the key test for both parties is how the CMA's judgement set- tles between two very disparate protagonists. Nigel Hawkins, director, Nigel Hawkins Associates CMA: What next? Ofwat will refer the dispute to the CMA early in March. Once the referral is made, the CMA will set up a panel to investigate the case. This will involve the appointment of a chair and a number of panel members from the CMA's ranks, but this could take "a number of weeks". Members can be drawn from the CMA's utility panel, who have expertise in these matters – including the likes of Roger Witcomb and Martin Cave. However, a CMA spokesperson said this is not guaranteed to be the case. The make- up of the panel depends on areas of expertise and availability, so individuals from outside the utility group may be selected. Once appointed, the group gather information through submissions, site visits and oral hearings before delivering its decision within six months. Some of the key figures in Bristol Water's dispute with the water regulator. 1.2 million number of people Bristol Water supplies £132m difference between the £541 million Bristol says it needs to finance its operations for five years and the £409 million Ofwat says it needs 18.5% difference between the 23 per cent cut in bills Ofwat has demanded and the 4.5 per cent Bristol says it can afford 0.8% ➡ Ofwat wants to reduce Bristol's allowed return from 4.4 per cent to 3.6 per cent NUMBER CRUNCHING