The Competition and Markets Authority has cleared the merger of Sutton and East Surrey Water with South West Water, following the acquisition by Pennon Group announced on 10 January 2024.

The CMA has been investigating the completed acquisition by Pennon Group Plc of Sumisho Osaka Gas Water UK Ltd (including its subsidiary Sutton and East Surrey Water Plc) under the Water Industry Act 1991.

Pennon Group, the owners of South West Water (SBB)  and Bristol Water (BRL), acquired the company in January 2024. 

Since then the CMA has been considering whether to refer the transaction for a Phase 2 investigatio under the Water Industry Act (WIA91) to assess whether the merger has or has not prejudiced, and is not likely to prejudice, Ofwat’s ability to make comparisons between water companies in carrying out its statutory functions. The assessment also covers whether any potential prejudice is outweighed by relevant customer benefits relating to the merger.

Under section 33D of the WIA91, the CMA also has the option of accepting undertakings from Pennon Group which are appropriate to remedy, mitigate or prevent the prejudicial effect of the acquisition on Ofwat’s ability in carrying out its functions.

The CMA has now decided to accept the undertakings given by Pennon, including:

• Pennon acknowledges that the undertakings will continue to apply - notwithstanding any subsequent modification to the Instruments of Appointment of South West Water (referred to in the decision document as SBB) and/or SES Water.
• Pennon undertakes to share half of the forecast merger-specific cost efficiencies, with a minimum to be shared of £(redacted), with all customers of SBB and SES as soon as reasonably practicable and no later than 31 March 2030, which would be undertaken via Pennon’s WaterShare+ Scheme.
• Pennon undertakes and confirms that it will ensure that SBB and SES (or any Successor Entity) provide Ofwat with separate historical and forecast cost, cost driver and performance information and any other reporting of information with respect to each of the SWB Wholesale Water Activities, the BRL Wholesale Water Activities and the SES Wholesale Water Activities as may be required by Ofwat for the proper exercise of its regulatory functions including for the maintenance of separate price controls for each of the SWB Wholesale Water Activities, the BRL Wholesale Water Activities and the SES Wholesale Water Activities and to comply and be consistent with the requirements of Ofwat’s price review process and methodology from time to time.
• Pennon confirms that SBB and SES (or any Successor Entity) will provide separate historical and forecast cost, cost driver and performance information and any other reporting of information with respect to each of the SWB Retail Activities, BRL Retail Activities and SES Retail Activities as may be required by Ofwat for the proper exercise of its regulatory functions, including to set a combined retail price control for the SBB and SES regions.
• Pennon undertakes that the SES region will be represented at the WaterShare+ Customer Advisory Panel.

Pennon has also acknowledged that Ofwat will be involved in monitoring Pennon’s compliance with the undertakings and may provide recommendations or opinions to the CMA on compliance issues.

At every price review, as part of Pennon’s routine assurance reporting, alongside the submission to Ofwat of its business plan, Pennon will also provide to the CMA and Ofwat an assurance statement from the Board of Pennon that it has complied with the provisions of the undertakings.

In circumstances where the CMA and/or Ofwat has serious concerns about Pennon’s compliance with the undertakings, the CMA may, if it considers it appropriate following consultation with Ofwat, require Pennon to appoint or instruct an external auditor (at Pennon’s expense and to be approved by the CMA) to review Pennon’s compliance with these undertakings and make recommendations to ensure effective future compliance.

Pennon Group plc said it is pleased that the proposed undertakings in relation to the separate reporting of SES Water's costs and performance have now been accepted.

Click here to download the decision document in full

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