In its initial submission to the Competition and Markets Authority (CMA) investigation into the takeover, the regulator said the loss of Bournemouth Water as an industry benchmark could affect the modelling it uses and reduce the efficiency challenge it puts on the other companies.
Ofwat said the loss of Bournemouth Water from the outcome delivery incentive “could result in us setting less stringent benchmarks in these areas” potentially costing up to £66 million by 2025.
The removal of the water company from the wholesale cost benchmarking process could have a detrimental impact of £43 million, whilst its loss from the service incentive mechanism (SIM) could have a £10 million detrimental impact by 2025.
The regulator acknowledged there will be some benefits from the merger, such as synergy savings which would be passed on to customers, but added these “do not outweigh” the loss of Bournemouth Water as an exemplar comparator company.
Ofwat said it would need Pennon to put in place remedies to ensure that customers in England and Wales do not suffer from the loss of Bournemouth water as a comparator company.
The regulator’s warning follows similar calls made by the Consumer Council for Water in its submission to the CMA last week that service standards could suffer as a result of the merger.
Pennon defended the deal and its impact on Ofwat’s modelling in its submission to the CMA, saying it would produce net benefits as the newly enlarged company would be more efficient and “a better comparator”.
Pennon said: “Ofwat will be able to set more challenging efficiency targets for the rest of the industry” as a result of the takeover.
The only area where Pennon said there would be any detriment to Ofwat’s modelling was in relation to SIM, although it added this would only be “small”.
Pennon added that the takeover would also benefit South West Water customers and Bournemouth Water customers by combining the retail businesses, delivering synergies in corporate costs and other efficiency savings, and improving customer service.