Yorkshire Water has asked the Competition and Markets Authority (CMA) and Ofwat to consider the impacts of coronavirus on the business and requested a speedy conclusion “in the national interest”.
Ofwat’s final determination, Yorkshire argued, would be “harmful to customers, damage resilience significantly and was based on “flawed methodologies”. The company questioned Ofwat’s benchmarking as unrealistic and said the regulator’s view of the plan posed risks for future customers.
The company was the only appellant to focus on the pandemic in its statement of case to the CMA and outline the risks that all companies are exposed to in the preface for its statement.
While each referred to the crisis, Yorkshire explicitly noted the different challenges and obstacles being faced now compared to when it first requested the appeal.
It said the challenges to resilience in Ofwat’s final determination for the next five years were unacceptable under “normal operating conditions” and said the pandemic was likely to affect performance commitments.
Yorkshire said the statement of case does not take the current environment into account but outlined the impacts as including the likely increase in debt from consumers and businesses unable to pay bills; changes to activities due to reallocation of resources; the delay in capital schemes for the early part of the AMP7 cycle, as well as the delivery of performance commitments .
The company said its finances will likely be impacted by the ongoing issues and requested that the CMA and Ofwat consider the likely impacts of the virus when making its decisions.
“Whilst Yorkshire Water stands by the case it makes in this document, it would seem appropriate that in the current climate there are measures that either Ofwat or the CMA could take to adjust the final determination and bring this redetermination to a timely conclusion in the national interest.”
The case it goes on to present is anchored around the company operating efficiently in the previous AMP cycle having outperformed by 5 per cent on the efficient cost benchmark in water and deemed “efficient in wastewater services”.
It argued this achievement was significant to contextualise Ofwat requesting greater efficiencies across the sector and noted its PR19 plan was costed at £800 million below what it would have cost in the previous AMP cycle.
Yorkshire’s plan is based around a long-term strategy to provide a tailored service to customers, deliver security of water supply in the long term, make a positive impact on the environment, ensure affordable bills, and set high standards for transparency and openness.
The plan included 25 per cent leakage reduction, which Ofwat countered with a 15 per cent target, as well as a 9 per cent cut to per capita consumption (PCC) of water.
A bespoke target to decrease internal sewer flooding incidents by 41 per cent was challenged by Yorkshire, which argued its situation was related to the high numbers of basements and cellars in the county, which are naturally prone to flooding.
The company’s plan was widely accepted by customers, gaining an 86 per cent approval rating for its performance levels, incentives and billing. Those customers are at the heart of Yorkshire’s proposition for inter-generational work to ensure future water supply resilience. However, Yorkshire argued that the costs for resilience are wrongly being delayed.
It said Ofwat’s plan “creates inter-generational unfairness as it pushes the cost of resilience and climate change on to future customers. By deferring the cost, it also increases it.” Yorkshire argued to be allowed to invest now to guarantee and improve services for the next generation.
Correcting the “flaws” in the determination to enable the company to create a “long-term, sustainable, resilient and efficient business, which delivers the lowest bills for customers” would have a positive impact for customers now and in the future AMP cycles, Yorkshire argued.
Yorkshire said these “flaws” included the methodology that determined what an efficient company looked like, a sentiment echoed by others in the sector – not only appealing companies.
Further it said insufficient costs were allowed for – the regulator set wholesale totex costs at £4.165 billion – £142.7 million higher than in the draft determination, but £370 million lower than Yorkshire proposed. The gap was second only to Anglian’s £744 million difference.
It questioned Ofwat’s benchmarking as “inappropriate” with a lack of cogent evidential support. It added that Ofwat’s modelling posed significant uncertainty for the business, which Yorkshire said would impact cost predictions.
The case called the approach to incentives and rewards “skewed to the downside” that meant the company would face significant penalty exposure and “encourages the avoidance of penalty rather than service improvement.”
Each of the appealing companies cited the too-low cost of capital within their cases as a factor making the overall plan unfinanceable. Yorkshire said the WACC did not reflect the risks the company faces.
Yorkshire was the first to put its head above the parapet by rejecting Ofwat’s plan in February but had expressed its “surprise and disappointment” at Ofwat’s plans in the draft determinations last summer.
The company offered early interactions with both the CMA and Ofwat to adjust the final determination to ensure the redetermination was brought to a “timely conclusion”.