Yorkshire Water has accused Ofwat of resorting to “populist” tactics, with an “unrestrained attack” on foreign investors in the sector.
The company warned that the regulator risks undermining trust in the system and driving away investors.
The accusation comes as part of the latest submissions in the appeals to the Competition & Markets Authority (CMA) over Ofwat’s final determinations for the PR19 price control.
Yorkshire, Anglian, Bristol and Northumbrian have all reacted to Ofwat’s response to the CMA’s preliminary findings, published at the end of September.
In that submission, Ofwat said the preliminary findings undermined its ability to regulate – a claim Yorkshire viewed as “straining the bounds of credibility”.
It charged Ofwat with “repeating or repackaging its arguments” in its submissions and accused the regulator of “alarmist” suggestions that the companies would benefit from windfall gains and excessive dividends to shareholders. It added the CMA’s preliminary findings only closed part of Yorkshire’s “very significant cost gap”.
Both Anglian and Yorkshire expressed disappointment in the way Ofwat had portrayed the process and investors in the media. Yorkshire said the “unrestrained attack on ‘foreigners’ was beneath the regulator” as well as being against the company’s values of inclusivity and tolerance.
“Ofwat cannot seriously be proposing that wholly UK sourced capital should fund the sector in the future, which suggests that Ofwat is simply using foreign ownership as a convenient and populist line of attack.”
It added that “given the international nature of debt and equity markets, this will inevitably call into question the confidence that investors can have in the regulatory regime and inevitably lead to investors over time either seeking higher risk-premia or withholding capital”.
New claims
For its part, Ofwat said the companies’ responses included novel requests for funding allowances and pointed out that the allowed returns are above those in the original business plans. Ofwat said, given that those plans had board approval, it was “surprising” that the disputing companies continued to call the determination challenging.
In July Ofwat and Defra invited water companies to accelerate AMP7 projects and bring forward AMP8 investments to benefit customers as part of the green recovery. The regulator said the response from companies to move up £2 billion of extra spending – including c.£500 million from Northumbrian and Anglian – signalled investment was already attractive enough without raising the WACC.
It also noted the disputing companies had requested new allowances or made representations that were new to Ofwat. These included Anglian, which Ofwat accused of having “shifted its focus to alternative ways to increase totex” to plug a £630 million totex gap with a move towards average instead of upper quartile cost efficiency that would increase its cost allowance by £122 million.
Ofwat said Northumbrian had claimed £234 million more in totex, including £77 million which the regulator said related to “entirely new claims” only made after the CMA published its provisional findings.
Bristol, Ofwat claimed, have been inconsistent in the cost elements that its £30 million gap rely on, including a reduction in the amount it requested for leakage and an increase for service level adjustment.
Meanwhile, it said Yorkshire had asked for £79 million for internal sewer flooding that had not previously been part of the CMA process.
Ofwat accused the appellants of seeking more than they had in their April 2019 business plans, which the regulator said was “inappropriate as a matter of procedure, and undermines the credibility of the claims.”
It urged the CMA to ask why new and reformulated claims are being advanced at this late stage of proceedings and request proof of necessity.
This week the CMA confirmed extra time would be needed to complete the four redeterminations, which will be published in mid-February. The appellants argued the delay was detrimental to customers.