Our response to Ofwat’s statement of intent on water company merges and acquisitions

We welcome the opportunity to comment on to Ofwat’s revised approach and statement of intent on company mergers.

Our response

Approach to Assessing Mergers

Since 2015, there have been significant changes in price-setting methodologies, retail markets, and broader sector regulations. In this context, we believe Ofwat’s revision of its approach and its statement of intent regarding mergers is both timely and necessary.

While mergers can deliver benefits to consumers through greater efficiencies and improved service quality, the loss of a comparator poses challenges for Ofwat’s ability to regulate effectively. This is particularly true for benchmark-driven assessments of costs and performance targets.

We support the requirement for any merger to be subject to the Competition and Markets Authority’s (CMA) special merger regime. We also endorse Ofwat’s focus on two key aspects:

• The extent to which a proposed merger may impair its ability to regulate effectively; and
• Whether the potential detriment is outweighed by the consumer benefits arising from the merger.

We agree with the four criteria outlined in Ofwat’s statement, which provide a comprehensive framework for assessing how regulatory decisions may be affected by the loss of a comparator.

Ofwat’s assessments must ensure that consumers remain confident in its ability to:

• Set precise cost-efficiency challenges;
• Develop ambitious but achievable performance commitments;
• Make sound financeability decisions; and
• Evaluate investment proposals using benchmark data from diverse sources, particularly during a price review.

We also support the application of these criteria in the context of both current regulatory frameworks and potential future implications.

It is essential that proposed mergers deliver tangible benefits to consumers, such as lower prices and improved service quality. We therefore endorse the statement of intent’s emphasis on assessing these benefits comprehensively.

Since 2015, the opening of the non-household retail market in England has expanded the definition of “relevant customers.” We support the revised approach, which now includes retailers and non-household customers receiving water and/or wastewater services.

The statement of intent highlights that Ofwat will require compelling evidence of merger benefits and a clear timeline for their realisation. This information should also be effectively communicated to CCW and consumers.

Mitigating the Regulatory Impact of Mergers

Under the CMA’s merger regime, parties can be required to implement remedies to address any regulatory challenges arising from the loss of a comparator. We note that this approach remains consistent in Ofwat’s updated statement of intent.

We support Ofwat’s intention to ensure that any remedies provide clear solutions, such as requiring companies to report performance metrics separately or establishing distinct price controls (e.g., as applied to Bristol Water following the Pennon merger).

It is crucial that Ofwat clearly communicates to consumers that:

1. Remedies will safeguard its ability to regulate effectively; and
2. Consumers will receive evidence of merger benefits and an expected timeline for their delivery.

We have no concerns regarding the proposed timelines for Phases 1 and 2 of Ofwat’s role in the CMA’s merger assessments. However, we expect Ofwat to maintain transparency and actively engage with CCW and other stakeholders throughout the process.