The Competition and Markets Authority (CMA) has this morning announced its decision to refer Pennon Group’s acquisition of Bristol Water for a phase 2 investigation.

On 3 June 2021, Pennon acquired the entire share capital of Bristol Water Holdings UK Ltd and its subsidiaries, including Bristol Water plc.

The CMA is investigating the completed acquisition by Pennon Group plc of Bristol Water Holdings UK Limited under the provisions of the Enterprise Act 2002 and the Water Industry Act 1991.

The CMA launched its merger inquiry under the merger provisions of the Enterprise Act 2002 on 17 September 2021 and cleared the completed acquisition on 5 November 2021 in a separate phase 1 decision. The CMA had considered whether the transaction had resulted in the creation of a relevant merger situation under the 2002 Act and, if so, whether the creation had resulted, or could be expected to result, in “a substantial lessening of competition” within any market or markets in the United Kingdom for goods or services.

On 27 October 2021 the CMA separately announced the launch of its merger inquiry under the Water Industry Act 1991.

In reaching its decision on whether a water merger "has prejudiced or is likely to prejudice Ofwat’s ability to comparatively regulate the water industry, the CMA must request and consider Ofwat’s opinion on:

"whether the merger has prejudiced or is likely to prejudice its ability, in carrying out its functions, to make comparisons between water enterprises; and, if so, whether the prejudice is outweighed by relevant customer benefits (RCBs)."

In reaching its decision, the CMA said it had placed significant weight on Ofwat’s opinion on whether the merger is likely to prejudice its ability, in carrying out its functions, to make comparisons between water enterprises. Ofwat submitted that it believed the merger was likely to prejudice its ability to make comparisons between water enterprises, and provided the CMA with detailed reasons to support this conclusion.

Pennon had submitted to the CMA that in light of a detriment to Ofwat’s ability to make comparisons, as a result of the merger, Ofwat should be able to amend its approach to reduce the impact of the loss of a comparator.

The CMA summary decision paper states:

“Pennon submitted that it is possible for Ofwat to regulate effectively with a far smaller number of comparators than are currently available for water services. Given the level of prejudice to Ofwat’s ability to make comparisons … that may be brought about by the merger, the CMA did not consider it credible that Ofwat could plausibly switch to an alternative approach absent a substantial reevaluation of its methodology.”

“The CMA believes that both Pennon and Bristol Water are water enterprises and that, as a result of the merger, have ceased to be distinct. Accordingly, a water merger has taken place.”

The competition regulator has decided, on the information currently available to it, that “it is or may be the case that the… merger has prejudiced or is likely to prejudice Ofwat’s ability, in carrying out its functions, to make comparisons between water enterprises under the Water Industry Act 1991.”

On the basis of its review of the evidence and the submissions made by Pennon and Ofwat, the CMA finds that the merger is “likely to have an adverse impact on Ofwat’s ability to regulate wholesale base water costs for water companies.”

The merger will now be referred for a phase 2 investigation unless both parties offer acceptable undertakings to address the adverse impact of the merger on Ofwat’s system of comparative regulation.

Pennon now has until 31 December 2021 to offer an undertaking to the CMA that might be accepted by the CMA.

To assist in its assessment, the CMA is now inviting comments on the transaction from any interested party.

Written representations about any competition or public interest to should be sent to James McGarrachan at the Competition and Markets Authority – email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Click here to download the CMA's summary decision document