Ofgem, the Office of Gas and Electricity Markets regulator, has urged the Competition and Markets Authority to make it clear that its findings in the price determination concern the CMA’s particular statutory role in relation to water and focus only on the water industry.

Writing to Kip Meek, the CMA Inquiry Chair, to provide Ofgem's response to the CMA’s Preliminary Findings 9PFs) on the appeals by four water companies, Akshay Kaul Director Networks said:

“We are…. keen to ensure that the CMA’s findings in this price determination are not treated as making broader assessments beyond the present and specific context of PR19 in the water sector, particularly in circumstances where subsequent regulatory decisions could end up being the subject of consideration by the CMA in future.”

Commenting on the CMA’s role in energy licence modification in the RIIO-ED1 price control appeals to Ofgem in the context of the Ofwat appeals, he explained:

“….we are concerned that certain findings made in this re-determination process, as currently expressed, may be relied upon by our stakeholders to attempt to influence or challenge the RIIO-2 regulatory process.

“We have concerns, in particular, that the Panel’s decision to find in water companies’ favour in its estimation of cost of capital parameters, and subsequently to aim up on the cost of equity, could be perceived as altering the balance of risk and return in UK regulated sectors, in favour of investors, to a level beyond what is reasonable based on market evidence.

“The result is likely to be a substantial transfer of value from consumers to investors in the water sector, without clear benefits in terms of deliverable outputs and standards of service.”

Ofgem is "keen to ensure" that the CMA’s findings are not treated as making broader assessments beyond the present and specific context of PR19 in the water sector, particularly in circumstances where subsequent regulatory decisions could end up being the subject of consideration by the CMA in future.

The letter says that Ofgem recognises that there are important differences between the water and the energy sectors. However, it emphasises that differences in outcome in the regulatory process may result not only from differences in the industries in question but also by reason of the fact that different regulatory judgments may be made in relation to similar issues.

The energy sector regulator is asking the CMA Panel to take into account the potential broader impact its decisions could have on future regulatory predictability and certainty

Akshay Kaul also suggests that it would be of assistance to all regulated industries (and their regulators) if it were able to emphasise the following clearly in its final decision:

• the decisions and judgments in this case concern its particular statutory role in relation to water and focus only on the water industry;
• the nature of the decisions and judgements it is making here pursuant to its particular statutory role are of the sort which other regulators might reasonably reach differently where these are a reasonable and logical reflection of the evidence and circumstances pertaining to those sectors.

The letter warns that in Ofgem’s view if CMA’s PFs are maintained at its Final Determinations, this would “provide the relevant disputing water companies with return allowances that are out of line with market comparators and international returns, risking legitimacy and market distortion.”

Click here to download Ofgem’s response in full to the CMA’s Preliminary Findings.