Bristol Water has launched a strong defence of its AMP6 Business Plan and a swingeing attack on Ofwat’s rejection of the company proposals, saying that the evidence the regulator used to come to its conclusion calls into question both the robustness of Ofwat’s business models and its ongoing failure to substantiate its criticisms.
The comments come in Bristol Water’s Reply published late yesterday by the Competition and Markets Authority (CMA) to Ofwat’s response in relation to the water company’s Statement of Case (SoC) submitted to the CMA on 25th March.
The Authority is currently reviewing Ofwat’s PR14 Final Determination following the rejection of the wholesale price controls by Bristol Water.
Introducing its lengthy and detailed 177 page Reply, Bristol Water states:
“At the outset it is worth noting that Ofwat states that it stands by its determination…..Similarly, Bristol Water stands by its Business Plan.”…
“In this Reply we address the comments and criticisms made by Ofwat in its Response and demonstrate that, in our opinion, Ofwat has not set out arguments that detract from or counter the position put forward in our SoC.”…
“In relation to the substantive matters at the heart of this redetermination, Ofwat’s Response, Initial Statement and Presentation reiterate the messages from FD14 and conclude that the gap in allowed totex between FD14 and our Business Plan can be explained on the basis that we have “a relatively high cost plan and the scope to make very significant efficiency savings”.
Ofwat grounds are "only as robust as Ofwat's models...we question this robustness"
The Reply says the water company is satisfied that the costs included in the Business Plan include an appropriate efficiency challenge, and it does not agree with Ofwat’s explanation for the totex gap, commenting:
“The only evidence that Ofwat has presented in support of its position is based on the output of its models. It is our understanding that Ofwat has neither carried out a detailed review of each component of our proposed costs, nor carried out an assessment of what it considers operating expenditure should be on a standalone basis with the exception of certain special cost factor claims.”
“The grounds on which it concludes that our plan is relatively high cost are, therefore, only as robust as Ofwat’s models. …we question this robustness.”
In circumstances where there is such a significant gap in the totex estimates it would have been helpful if Ofwat had made more use of engineering assessments to properly understand all the components that contribute to the gap, the Reply says. Ofwat had similarly “neither offered any suggestions as to the nature of the “very significant efficiency savings” it suggests are required, nor whether they would be practicably achievable within the allowed timeframe.”
No indication to date from Ofwat “what strong evidence is or where it can be found”
On Bristol Water’s base costs, the Reply notes that whilst Ofwat has asserted that “there is strong evidence that [its] allowances for costs are consistent with longer-term efficient levels”, the regulator has to date not indicated what that strong evidence is, or where it can be found, despite the water company’s requests to Ofwat for further clarification on 31 March and on 8 April.
Questioning Ofwat’s calculations on wholesale opex, Bristol Water said the regulator has also likewise failed to provide an explanation of how it has calculated the opex amounts, again despite similar requests for clarification. The Reply states:
“Ofwat's assertion that we have not explained or justified our costs is unfounded given the depth and strength of the evidence submitted to Ofwat during the PR14 process. Based on communications with Ofwat, we have concerns that as late as September 2014 Ofwat had not looked at the detail of our plan beyond the cost exclusion cases, indicating that its reliance on its modelled cost thresholds and the cost exclusion process was absolute.”
“Ofwat has characterised our behaviour as intransigent compared to other companies identified as having high cost plans during the process. In particular Ofwat has quoted ways in which United Utilities and Thames Water had closed large totex gaps. We demonstrate however, that such a comparison does not add anything substantive to the current redetermination and is, in any event, misleading. When looked at in detail, the movement by United Utilities and Thames Water can be explained by reference to factors that do not easily translate to Bristol Water’s situation.”
“Given that this appears not to have happened, it is disappointing that Ofwat continues to suggest that we have provided insufficient evidence.”
Cheddar Reservoir Two –postponement “will inevitably lead to increased overall costs”
On Ofwat’s rejection of its case for proceeding with its plans for Cheddar Reservoir Two in AMP6 which used analysis from Jacobs to support its argument, Bristol Water says:
“…it is worth emphasising that the Jacobs analysis is limited in that it was not an assessment of the Cheddar Reservoir Two proposal on its merits, but by reference to the specific assessment criteria applied by Ofwat…….It is also not clear exactly what information Jacobs had access to when carrying out its assessment. There was certainly no interaction between Jacobs and Bristol Water directly.”
The water company says that the reservoir needs to be completed by 2030 in any event and that bearing in mind the need to factor in build time of approximately 10 years, not continuing as planned will inevitably lead to increased overall costs and a delay in the receipt of customer benefits, commenting:
“… it is difficult to understand the justification to postpone commencement of Cheddar Reservoir Two until AMP7. We note that Jacobs concludes that construction of Cheddar Reservoir Two is the optimal solution.”
“Ofwat’s approach to enhancement costs is confused and unduly complex”
Commenting on Ofwat’s approach to cost assessment and its concerns about Bristol Water’s benchmarking and the modelling undertaken by Oxera, the Reply says:
“We also show, supported by evidence from Oxera, that the points raised by Ofwat in respect of Oxera’s modelling are unfounded. In particular we show that Ofwat’s approach to modelling is not consistent with good economic modelling practice.
“We note that the Response has not demonstrated that Ofwat has taken a broad approach to cost assessment and that it has not satisfactorily addressed the comments we made in the SoC about the shortcomings in the model approach…..
“In addition, we show that the comments in the Response relating to asset age and upstream assets are not well founded. The Response confirms that Ofwat’s approach to enhancement costs is confused and unduly complex and that enhancement costs should have been excluded from the modelling.”
Bristol Water says that in relation to the Response Oxera agrees and states:
“Oxera’s overall conclusion is that Ofwat’s points do not raise any material issues. The issues we have identified with Ofwat’s models in our earlier reports remain relevant. We therefore still consider that Ofwat’s models are not sufficiently robust, while Oxera’s model provides more robust estimates for Bristol Water’s efficient cost level.”
In Bristol Water’s view, “given the weaknesses in Ofwat’s approach….. the CMA should not rely on it in their redetermination.”
“Ofwat's contention that we are a "sub-optimal operation" is extremely mis-placed”
Commenting on Ofwat’s statement in its Response that management action could be taken to avoid a small company premium which implies Bristol Water should be restructured, the water company says that based on Ofwat's duties, the regulator should not consider an approach other than Bristol Water’s current scale being maintained.
“We have set out our good historic performance and high customer satisfaction, so consider Ofwat's contention that we are a "sub-optimal operation" is extremely mis-placed.”, the Reply says.
The Reply also raises concerns around issues relating to the opening of the competitive market in 2017. While Bristol Water’s Board has accepted the Retail Non-Household price control, the Reply says that Ofwat has continued to assert in its Response that exclusion of input price pressure from allowed Retail Non-Household costs is reasonable, and that it has made sufficient allowance for the costs of competitive market opening. Bristol Water states:
“This Reply provides further details as to why we consider such an approach is contrary to available evidence on inflationary pressure, and may adversely impact new entrants to the competitive market.”
Ofwat must provide analysis of operating costs and PAYG used to inform financeability assessment
On financeability , the Reply says that Bristol Water does not consider that the Final Determination 14 PAYG ratio is appropriate, but does not have visibility of the analysis Ofwat has performed. The water company is asking Ofwat to provide its analysis of operating costs and PAYG that has informed its assessment, saying that Ofwat has been selective in its Response and has misinterpreted the comments of Rating Agencies. “Our conclusion that we are not financeable under FD14 remains valid”, Bristol Water says.
Ofwat assertions that third party reports deliberately withheld by Bristol are unfounded
The water company also strongly rejects a number of Ofwat’s criticisms of its PR14 business planning process, in particular a suggestion that Bristol deliberately withheld third party reports and that Ofwat had had to request such reports repeatedly, commenting:
“Ofwat’s assertions are unfounded. Third party reports were not deliberately withheld from Ofwat, and information requests were dealt with promptly. The selective use of summaries of elements of these reports, without taking into account the broader context, does not support Ofwat’s argument regarding the quality of our process.”
The Reply also says that Bristol Water is disappointed by Ofwat’s allegations regarding its conduct which suggested that the company had been factually inaccurate, glossed over evidence which might not support its case, been inconsistent in its approach and that its business planning process does not reflect good practice. Bristol Water goes on to cite a number of specific instances which demonstrate that the allegations are unfounded.
Ofwat’s reliance on fact that 17 of 18 water companies accepted FD “simplistic”
The water company also makes detailed comments on Ofwat’s reliance on the fact that 17 of 18 of the water companies accepted the Final Determation decisions and that Bristol Water was the only one to have rejected it, commenting:
“We continue to believe that this redetermination should focus on achieving the right result for Bristol Water’s customers, rather than being side-tracked by a debate about the process…
“In the Response, Ofwat draws some comfort from the fact that 17 of 18 companies accepted FD14, and Bristol Water is the only company that has rejected it. Ofwat’s Response relies on this as support for the robustness of its cost assessment and other components of FD14, and implies that Bristol Water is alone in having any objections to the underlying methodologies, etc.
“As we explain in detail ..however, this approach is simplistic and does not accurately reflect the complexity of the decision that each company will have made when assessing whether to accept or reject each of the price controls. For instance, companies will have assessed FD14 as a package, looking at each of the price controls and balancing ‘losses’ in some areas with ‘gains’ in others. Some companies have, for instance, gained from Ofwat’s modelling approach.”
“ If Ofwat’s position in the “Consultation on the PR14 reconciliation rulebook” is accurate, others have been able to balance cost allowance reductions against the benefits from the CIS RCV adjustment. It should not, therefore, be assumed that all companies are wholly satisfied with the individual components that make up FD14.”
Next steps in the CMA review process are as follows:
- May 2015 Main party hearings
- 29 May 2015 Deadline for representations before provisional determination
- June 2015 Publish provisional determination
- July 2015 Further main party hearings
- 31 July 2015 Final deadline for representations
- 3 September 2015 Deadline for determination to be sent by CMA to Ofwat
Click here to download Bristol Water's Reply to Ofwat's Response to Bristol Water's Statement of Case