Mixed news for Bristol Water on Competition Commission ruling

Photo source: Bristol Water

Bristol Water will be disappointed by the Competition Commission (CC) provisional ruling. They failed to convince the Competition Commission that Bristol Water needs a much higher tarriff than Ofwat allowed in last November’s Final determination.

The CC ruled that Bristol Water should be allowed to increase bills by 2.3 % (after inflation) up to 2014/15. This is higher than Ofwat’s original determination of 1.7% but much less than the 6% that Bristol Water sought.

Bristol Water was the only water company to appeal to the CC. While the CC did agree that Bristol Water should be allowed some additional money to replace water mains and reduce leakage it rejected the other major projects that Bristol Water had proposed. Worse, it also reduced the cost of capital allowed from the 5.5% proposed by Ofwat to 5% (Bristol Water sought an unrealistic 6.7%). This is not surprising given the lower cost of capital agreed for other utilities by Ofgem.

The blog highlighted the risk that the cost of capital might be reduced in its article back in January.  This ruling, if confirmed, will certainly deter future appeals. Water companies are in a privileged position compared to most companies in being monopolies with their income totally protected. The water companies need to focus on delivery and not get distracted.

All Water Companies accept price limits except Bristol Water

All the water companies except Bristol Water have accepted the Final Decision. Why was this when early signals were that number including Thames and Southern were very unhappy with the Draft and Final Determination?

The step change came in December when Ofgem published its decision on pricing in the electricity and gas market called Distribution Price Control Review 5. This allowed a cost of capital going forward of 4% post tax compared with the 4.5% allowed by Ofwat. The blog understands that this was the major factor in influencing the water companies to accept Ofwat’s Final Determination. None except Bristol were willing to risk the Competition Commission and the chance it might say the cost of capital should be reduced! 

Bristol Water are appealing because they believe the risk to customers implicit in the Ofwat determination is too high. They are particularly concerned at the low level of asset replacement equating to a water main life of 300 years. The other major factor is the fallout from the loss of water supply for 2 weeks in Gloucester after the 2007 floods. For several major population centres Bristol Water is dependent on a single source of supply and is consequently concerned about the impact on customers of a major failure.

Most Water Companies accept Ofwat Final Decision on price limits

To date only one water only company – Bristol Water - has announced it will be referring Ofwat’s Final Decision on water pricing to the Competition Commission. Eight out of the ten water and sewage companies have accepted as well but the two outstanding Thames Water and Southern Water had some of the toughest decisions. Companies have until Tuesday 26^th January if they want to appeal.