Wales and West Utilities (WWU) has argued the Competition and Markets Authority (CMA)’s final decision on the PR19 appeals by water companies has “no material bearing” on its grounds for appeal against Ofgem’s final determinations for the RIIO2 price controls.
The company made the statement in a supplemental submission to the CMA following the ruling, which was not issued until after the transmission and gas distribution networks announced they would all appeal their final determinations.
WWU said the CMA’s redetermination “may sometimes provide a useful guide but they never constitute binding precedent”.
“In determining every case that comes before it, the CMA makes what it considers to be the most appropriate decision in the particular context, having regard to all the specific circumstances of that case,” the company stated. “It rarely, if ever, seeks to establish general rules of universal application.”
It said the legal framework governing the PR19 redetermination is “fundamentally different” to the one that applies to the RIIO2 appeals: “The CMA was required to substitute its own judgment for that of Ofwat, applying the same statutory duties but using its discretion as an expert body to achieve what it considered to be the right balance of features across the price control as a whole.”
By contrast, WWU said the role of the CMA in the RIIO2 appeals is to “establish whether Ofgem made a decision that was ‘wrong’ on one or more statutory grounds… It acts in the role of appellate tribunal, not as a regulator remaking a decision in its entirety.”
Furthermore, the company said the legal and regulatory framework, industry structure and circumstances of the water and energy sectors are “different in fundamental respects.”
It said gas distribution networks do not carry out an “end-to-end” role in the supply of customers as is the case for water companies. Whilst the main challenge for the energy sector is achieving the government’s target of achieving net zero emissions by 2050, the equivalent challenge for the water sector is ensuring the resilience of water networks, including in the face of climate change.
WWU also said the arguments being made to the CMA as part of the RIIO2 appeals are “materially different” to those presented in the PR19 appeals meaning “it is often difficult for any direct read across to be made”.
With regards to its appeal on the cost of debt, WWU said none of the water companies argued that “the manner in which Ofwat had chosen to calculate the cost of debt was discriminatory”, adding: “The CMA was therefore not required to provide a ruling on these questions and, consequently, any decision reached on PR19 could not provide a template for this appeal.”
The company’s submission was in stark contrast to those of the other appellants, all of which cited the CMA’s redetermination for PR19 as supporting their arguments. Scottish and Southern Electricity Networks said Ofgem’s decision on the cost of equity is “untenable in the light of the CMA’s findings”.
For example, all of the other submissions quoted the CMA’s conclusions that index-linked gilts are “unlikely to be a perfect proxy” for the risk-free rate of return which is “likely to be above to be above this level”.
They all also cited the CMA’s decision to “aim up” from the mid-point estimate when setting the cost of equity for the water sector to avoid the risks of underinvestment. National Grid said each of the CMA’s reasons for doing so “apply at least equally, and in some cases to a greater extent, in the energy sector.”
The CMA granted permission to energy networks to appeal their final determinations at the beginning of April on the condition that some of the common grounds of appeal are joined across appellants. Later in the month, the body pushed back the deadline for its decision by one month to the end of October.