Utility Week

UTILITY Week 17th July 2015

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Page 10 of 31

UTILITY WEEK | 17TH - 23RD JULY 2015 | 11 Policy & Regulation Analysis Y ou can't always get what you want. The Rolling Stones knew the truth of that statement and so this week does Bristol Water. The company rejected its final determination for AMP6 in February, effec- tively taking Ofwat to the Competition and Markets Authority (CMA) as it sought a £128 million upli in its totex settlement to £537 million. The CMA released its initial findings this week, which, subject to confirmation in September, see Bristol Water handed just £20 million extra, taking its total totex allowance to £429 million. The company put a brave face on the settlement, with chief executive Luis Gar- cia declaring the findings "positive in some areas". Bristol Water will have been pleased to see its concerns over Ofwat's reliance on financial models vindicated to some degree, with the CMA saying: "The type of high-level totex benchmarking models that Ofwat used have some advantages but also suffer from some drawbacks, and we were concerned with the emphasis that Ofwat had placed on these types of models." However, there was more bad news than good for Bristol Water. A number of major projects it wanted were blocked. Its business plan also came under fire, with the CMA say- ing "much of the expenditure did not relate to identified assets that need replacing" due to a lack of supporting evidence. The company also failed to win a sig- nificant upli in its cost of capital, instead seeing this figure increase from Ofwat's proposed 3.6 per cent to just 3.65 per cent. Again, this is well below the 4.37 per cent Bristol Water was hoping for. It's all too reminiscent of the PR09 price review, which Bristol also appealed. Then too the company was only able to claw back a limited amount from the Competition Com- mission, winning a 0.6 per cent increase in consumer bills to fund its AMP5 programme. This win was tempered by the hit to its cost of capital, which fell from 5.5 per cent in Ofwat's determination, down to just 5 per cent. Under the provisional findings, Bristol has gained 2.5 per cent on how much it can charge customers over the AMP6 period. Ofwat set this at £155 per year on aver- age between 2015 and 2020, but the CMA increased this to £159 – a long way short of the £187 Bristol Water was aiming for. Bristol Water can't get what it wants – but, according to the CMA, it's got just what it needs. KEY PROJECTS: Cancelled: Cheddar 2 reservoir (£42.8m) Bristol Water had not "sufficiently demonstrated" the need for construction of Cheddar 2 to commence in AMP6 and no allowance was made in this price review period. Cancelled: Bedminster service reservoir (£6m) The CMA provisionally found no replacement was required in AMP6 as the need to replace the asset "had not been demonstrated" by Bristol Water. Pending: Cheddar water treatment works (£20.8m) There is "evidence of raw water deterioration" at the Cheddar site, affecting the existing water treatment facility. However, the CMA provisionally ruled that there is currently "insufficient evidence" that a new water treat- ment works is "the most suitable option", especially as it said Bristol Water has not demonstrated "appropriately" the cause of the marked increase in algae. It awarded the company £1 million to undertake additional investigation with the caveat that should the new evidence show the water treatment works is required, Ofwat should make an appropriate allowance. Approved: Southern Resilience Scheme (£22.2m) This has been approved by the CMA as it will improve resilience of supplies and pro- vide relief to the Cheddar reservoir. However, the CMA trimmed £6 million from Bristol's costs of £28.2 million because the case for the service reservoir had not been made. The Big Numbers: Wholesale totex allowance BW: £537m Ofwat: £409m CMA: £429m Wholesale cost of capital BW: 4.37% Ofwat: 3.6% CMA: 3.65% Base expenditure BW: £385m Ofwat: £318m CMA: £346m Consumer bills (2015-20 average) BW: £187 Ofwat: £155 CMA: £159 Decrease in consumer bills BW: 6% Ofwat: 19% CMA: 17% That's debatable: calling it for customers "We provisionally rejected sev- eral projects proposed by Bristol which would have increased its expenditure – and ultimately bills – because we did not con- sider them fully justified and in the interests of customers." "We will continue until the conclusion of the process on 3 September to ensure we can deliver what our customers want – a reliable and quality water supply – at an appropriate bill level." CMA inquiry group chairman Anne Lambert Bristol Water chief executive Luis Garcia Bristol Water CMA fallout A hard-fought appeal to the competition authorities against Ofwat's PR14 determination has gleaned small rewards for Bristol Water, says Mathew Beech.

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