While the other water companies have played it safe and swallowed what Ofwat has given them in the final determinations, Bristol has turned up its nose and rejected the regulator’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 that 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 said they could. This was still less than half the 6 per cent increase the water company was aiming for in its PR09 business plan.
The CC also took with one hand as it gave with the other, cutting the cost of capital down to 5 per cent, which was lower than the figures proposed by Ofwat (5.5 per cent) and Bristol Water (6.7 per cent).
Whilst glad it got something, Bristol still complained that its service levels and investment would suffer as a result. “This is not a good deal for our customers” it said in a statement in 2010. But the company managed to get through the AMP5 period, although investment in infrastructure was scaled back to fit the much reduced budget.
It is the owners of Bristol Water – Capstone Infrastructure Corporation (50 per cent) from Canada; Sociedad General de Aguas de Barcelona S.A. (Agbar) (30 per cent) of Spain; and Itochu Corporation of Japan (20 per cent) – who face taking the financial hit of any PR14 shortfall, as they did after the last price review.
The impact of the CC amended PR09 determination, limited the return that shareholders were able to make, with dividends paid to Capstone Infrastructure Corporation falling 19 per cent during AMP5. The achieved regulated 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. An outlier from the very beginning – alongside 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.
The gap between the two parties is, according to analyst Nigel Hawkins, “a veritable chasm”. Ofwat calculates 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 a formidable 23 per cent over the coming five-year regulatory period compared with just 4.5 per cent as calculated by Bristol (based on 2012/13 prices).
The regulator has also ruled that the proposed second Cheddar reservoir is not necessary and would be one way of dramatically cutting costs.
Chief executive Luis Garcia rejects this stance, 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 customers told us they wanted, for now and in the future.”
The company has stated that “flawed modelling” at Ofwat is behind the significant discrepancy between their business plan and the final determination – and why Bristol Water remained such a significant outlier when all the other companies where in the right financial region with their business plans.
Garcia also states that 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.”
Despite Garcia’s confidence that “there is clearly a discrepancy in calculations,” 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 and result for the company.
Aside from Bristol Water last time out, the CC 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 the year 2000 saw both Mid Kent Water (now part of South East Water) and South Staffs Water fail to gain any significant ground compared to what Ofwat set out.
The 1994 case – the first test of the then new-regulator’s first price determinations was more clear cut. South West Water, in the words of Sir Ian Byatt – the then director general of Ofwat – came away “with a bloody nose” after the Competition Commission made it final determination.
In its decision on the 1994 price control, the CC said “there is scope for substantially lower expenditures” then those set out by South West Water, and it subsequently cuts its K factor – the amount it can increase its bills – from 1.1 set out by the regulator to 1.
This decision has haunted the industry ever since, and usually dissuades companies from trying to take on the regulator.
Analyst Anastasiou adds that the CMA will have no set agenda: it won’t slap down Bristol for questioning Ofwat, nor will it automatically award it with a more favourable determination. “It is a tricky one that can go either way,” he said.
He told Utility Week that rejecting the Ofwat price control “opens them up” to changes in other areas of the determination where they may be happy.
He said: “There has been over the years been a mix of outcomes, but South West Water was hammered in their price review . It is a big step for Bristol Water.”
A number of sector analysts expect a similar outcome as to what Bristol Water received last time. There could be some gains around how much bills are cut to consumers – Ofwat has set this at 23 per cent – but Bristol could lose out elsewhere.
Whatever happens, Bristol Water seems unlikely to get what it is asking for in its business plan – history tells us that much. 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 investment during AMP6.