Ofwat could find it hard to justify Thames Water deductions

Ofwat may find it difficult to argue that Thames Water has been the only water company to benefit from favourable economic conditions if the regulator was to go ahead with its proposed move to "claw back gains", according to an industry analyst.

Speaking to Utility Week, Stefanie Voelz, water industry analyst at Moody’s, said Thames Water was likely to go to the Competition Commission if the regulator decided to make a claim through the ‘substantial favourable effect’ mechanism.

Having formally rejected Thames’ application to increase bill prices for 2014-15 through an interim determination last week, Ofwat has also conducted a separate consultation on whether it could deduct gains from the water company due to it benefitting from “wider economic circumstances beyond its control”.

The consultation has now closed and Ofwat has yet to announce whether it will deduct additional gains from Thames due to “formula effects which could have resulted in significant net financial benefit … not arisen as a result of management action”.

However, Voelz said that all the water companies had benefitted from the effects of lower market costs of finance, which have been below those Ofwat had assumed when setting price limits for 2010-15.

“It is a bit hard for Ofwat to justify that only Thames has benefited. They have linked it to the Idok saying the other companies haven’t asked for more money but it may be very hard for Ofwat to justify in front of the Competition Commission that it is a Thames-specific aspect,” she said.

“Thames would definitely consider going to the Competition Commission, which would be time-consuming process and distract Ofwat from its pressing priorities to get the price review done,” added Voelz.