Water industry regulator Ofwat has been criticised by Bristol Water’s local customer challenge group the Local Engagement Forum in its evidence to the current review by the Competition and Markets Authority of the water company’s appeal against Ofwat’s PR14 price determination.

The LEF has told the CMA that the finance model adopted by Ofwat was “sophisticated but had weaknesses and was untrusted in some regards.” The LEF thought the principal weakness was that the models used lacked any significant bespoke elements and was not sophisticated enough to reflect differences in the operating circumstances of different water companies.

One example cited of an area of the model that did not reflect Bristol Water’s particular operating challenges was the absence of a ‘demand dynamic’.  The LEF said it had attempted to gain an understanding of Ofwat’s modelling approach, but considered that a full understanding of the modelling was beyond its combined expertise.

It also noted that Ofwat did not consider it sufficient for Bristol Water’s (and other companies’) engineering consultants to state that a particular engineering solution was appropriate without being subject to Ofwat scrutiny.

It also said it was difficult to reconcile Bristol Water being classed as inefficient with statistics on Bristol Water’s costs that showed it to be significantly cheaper than the industry average. The LEF said that the Competition Commission had not found Bristol Water to be inefficient in the previous price review, and, on the basis of there being no major systematic changes since then, it did not understand why Ofwat did now.

The LEF also expressed concern that Ofwat’s process and challenge of business plans would lead to expenditure being unnecessarily delayed into future planning reviews to avoid difficult messaging of price increases necessary to deal with issues in the present period.

The LEF was surprised that Ofwat considered that there were weaknesses in the customer engagement supporting Bristol Water’s business plan because the LEF had received positive feedback from Ofwat on its processes and had regular engagement to ensure it was discharging its duties effectively.

The LEF felt that Ofwat chose not to give more proactive feedback or challenge to avoid the risk of being seen to interfere with the process. The LEF said that the Bristol Water Business Plan had a 92% customer approval rating, which was the highest out of all water companies, which “posed a difficult question as to why Ofwat was challenging Bristol Water to such an extent.”

The evidence also expressed concerns about payments for outperformance, saying that Ofwat had sought to offer companies a bonus for exceeding targets and a penalty for failing to meet those targets. The LEF was concerned that companies should not be rewarded for ‘doing their day job’, taking the view that no company would seek to award themselves such a bonus given the reputational damage of seeking to be additionally rewarded for achieving the minimum service level.

The LEF wrote to Ofwat highlighting its concern that customers would not be happy based on survey data and that Bristol Water itself was not in favour of a reward), pointing out that despite opposition to the performance reward, Ofwat had retained it in the price control. In separate evidence to the CMA, the Consumer Council for Water said Bristol Water had conducted some research in 2013 into what customers thought about companies being rewarded for outperforming and customers had reacted strongly against such a proposal. As such, Bristol Water did not include financial rewards in its December 2013 business plan. However, it had been instructed to include them by Ofwat.

Concerns were also expressed over a number of late interventions by Ofwat in the final determination. The LEF said that because of the timing and scale of Ofwat’s intervention that went against the proposals that the LEF had found that customers had supported, it had concluded that “Ofwat did not adequately weight or value the views that customers had expressed. “