The Competition and Markets Authority (CMA) has found Pennon’s purchase of Sumisho Osaka Gas Water UK (including its subsidiary Sutton and East Surrey Water), could harm Ofwat’s ability to make comparisons between water companies and carry out its statutory functions.

The fast-track Phase 1 investigation has found that Pennon’s purchase of SES could impact Ofwat’s ability to make comparisons between water companies, as part of its regulation of the supply of water to household customers – by removing SES from Ofwat’s dataset and reducing the number of comparators available for it to estimate cost allowances and set service quality targets.

The merging businesses have conceded that the deal could have a detrimental impact on Ofwat’s ability to make comparisons in order to carry out its statutory functions.

Commenting this morning in an update on the acquisition published this morning in response to the CMA findings, Pennon Group said that during this phase of its review, the CMA has been considering whether there is a realistic prospect that the acquisition of SES Water by Pennon is likely to prejudice Ofwat's ability to make comparisons between water companies, such that a referral for a Phase 2 review may be warranted.

Pennon Group said that throughout the process it has worked transparently and collaboratively with both Ofwat and the CMA to support and expedite their review and will continue to do so.

In the interests of procedural efficiency, and based on its experience of previous merger reviews, Pennon has accepted that the threshold for referral may be met in this case. The CMA has confirmed that it will refer the transaction for a Phase 2 review unless acceptable undertakings in lieu of a reference are offered.

Pennon intends to offer appropriate undertakings to the CMA by 13 May 2024. As with the Group's acquisition of Bristol Water, the proposed undertakings will ensure that the acquisition does not prejudice Ofwat's ability to make comparisons between water companies when carrying out its statutory functions as a regulator, and ensure that the benefits of the acquisition are shared among the Group's stakeholders.

Joel Bamford, Executive Director of Mergers at the CMA, said:

“Water services are vital to our day to day lives, whether at home or in the workplace, and we’re concerned that this deal could impact Ofwat’s ability to make comparisons and carry out its role of regulating the water sector.

“We will now carefully consider the solutions put forward by the companies and seek views from Ofwat to determine whether they address our concerns.”

In line with the CMA's guidance, the CMA will then consider whether to provisionally accept the proposed undertakings. Should those undertakings be provisionally accepted, in line with standard procedure, the CMA would then launch a consultation on those proposals.

Susan Davy, Group CEO, commented:

"We are encouraged by this positive and expedient step forward in the acquisition process. It is important to us that this deal receives the appropriate level of scrutiny so that all of our stakeholders feel reassured of the benefits of the acquisition and have trust in the outcome.

"While the undertakings have not yet been agreed, we have been through this process before with our acquisition of Bristol Water and are confident that we will be able to offer a compelling package of undertakings that will fully address the CMA and Ofwat's concerns, and ensure that the benefits of the acquisition for all customers and stakeholders are delivered."