Our submission to the Competition and Markets Authority on five water companies’ requests for price redeterminations

We welcome the opportunity to submit evidence to the Competition and Markets Authority (CMA) on Anglian Water (ANG’s) statement of case, where the company sets out its arguments and evidence in its request for a redetermination of Ofwat’s final determination for 2025-30.

In our submission, we give a consumer’s angle on the statement of case, and we also offer additional evidence and commentary to assist the CMA in its redetermination. This provides important context for the consideration of cost and financing allowances that are central to the dispute between ANG and Ofwat.

Executive Summary

Ofwat’s annual Service Delivery reports (pdf) show that ANG is lagging in several measures of service delivery in the sector and has comparatively average customer satisfaction and trust despite industry-wide challenges (as shown in CCW Water Matters 2024 survey).

The company’s statement of case shows that its business plan for 2025-30 received a high level of customer support. But while 69% of customers found the package of improvements acceptable (pdf), only 19% of customers found the plan affordable.

This is reflected in CCW’s research into customer acceptability and affordability of the Ofwat draft determination in 2024, where 39% of customers raised concerns with the affordability of the proposed bill increases. Average ANG household bills increased by a further 16% in the final determination which will have exacerbated the affordability pressure for many customers.

In this context, the CMA’s assessment of the cost and financing assumptions and associated efficiency challenges applied by Ofwat must not lose sight of evidence of what customers expect to receive as service and environmental improvements in 2025-30 and beyond, because research shows the majority of customers accepted the package. As a significant number of customers will have concerns with the affordability of the associated bill increase, any redetermination must also not constrain the affordability support package the company has set to assist customers at risk of water poverty.

Any increase in cost and financing allowances to address what ANG sees as a £500 million totex gap will increase bills further (an additional 13% across the five years on the average bill if the company’s arguments are accepted). Customers will want to see the redetermination show that costs are fair, efficient and allow the company to deliver on their expectations.

This package is the largest ever investment programme aimed at reducing sewage spills, renewing ageing assets and improving resilience. As a result, customers will expect to see tangible improvements in return for bill increases. CCW wants to see any funding increases in the redeterminations clearly linked to measurable improvements in service reliability and environmental protection, rather than just providing additional funds without clear benefits.

Our submission

Cost allowances

CCW cannot assess the technical merits of either ANG’s or Ofwat’s approaches to asset maintenance cost benchmarking and modelling. However, from a customer perspective, customers would expect the CMA to remove any poorly evidenced expenditure, inefficient costs and any proposed costs for activities that have been previously funded.

Customers should be assured that the latest evidence on asset deterioration, climate risks and independent cost assessments will inform decisions on efficient costs they need to pay to ensure delivery of a reliable service.

Evidence that ANG customers prioritise service reliability comes from multiple sources, including:

• ANG’s customer research (pdf) – ANG’s engagement activities to inform the PR24 business plan (pdf), such as surveys (qualitative and quantitative) and focus groups, show that customers place high importance on a safe, reliable water supply.
• Independent consumer research – CCW reports also indicate strong customer demand for asset reliability.

Based on CCW’s engagement with the company and our scrutiny of the customer engagement that informed its business plan, ANG’s research was robust and met the requirements and guidelines set by us and Ofwat.

Together, these sources suggest that ANG customers see asset reliability as essential to their everyday service, making it a critical factor in investment and regulatory decisions over the next several years.

To align with customer priorities, the CMA should assess whether Ofwat’s cost modelling reflects the actual and future costs of asset maintenance. This assessment should ensure that the real costs and challenges of maintaining these assets are identified and that an appropriate efficiency incentive is applied.

Any additional funding should directly correspond to measurable improvements in service reliability – customers need to see the value and benefits of what any additional funding will deliver.

While there is evidence of ANG overspending in wholesale water expenditure in this price control period (see Ofwat’s Service and Delivery Report 2023-24 (pdf)) (though there is a small underspend on wholesale wastewater), it is important to recognise that if companies overspend, then the costs are shared between company and customers.

Related Performance Commitments and Outcome Delivery Incentives (ODIs)

Any proposed increase in bills must be justified by clear, measurable improvements in service reliability and environmental outcomes. At present, ANG is lagging behind the rest of the sector on leakage reduction, water supply interruptions and internal sewer flooding (see pages 14, 18, and 22 in Ofwat’s Service and Delivery Report 2023-24 (pdf)), but states that the associated penalties for failure are disproportionate and would penalise the company even if it is performing at an industry-leading level.

Price Control Deliverables

CCW supports PCDs as a way of giving customers and stakeholders transparency in what investment companies will deliver, when and at what cost. PCDs should expose failure, delays or under/over performance and allow bodies such as CCW to scrutinise and challenge delivery. They also act as an incentive for companies to deliver what is a significantly large investment programme in 2025-30. PCDs should be retained.

CCW would support some flexibility to prioritise investments where they are most needed. The regulatory regime for PCDs should allow companies to produce new compelling evidence of any risks or possible alternative solutions that were not available at the time determinations are made, that justifies a change to PCDs. This will help ensure customers’ money returns value, by addressing the highest risks, while retaining transparency and a strong incentive to deliver.

True-ups and cost uncertainties

The redetermination must ensure that external cost uncertainties are not shifted onto customers without careful consideration. ANG (and indeed all companies) should absorb some of these risks through improved operational efficiency and prudent risk management. Uncertain cost allowances must not automatically pass on to customer bills, especially during a price control period that is already placing a heavy burden on customers’ bills.

A balance should be established so that customers are not overpaying for what are cost uncertainties during 2025-30, while avoiding a potential ‘bill spike’ for customers in 2030-31 due to an excessive number of upward cost true-ups.

Resilience and risks with extreme weather events

ANG has been allowed £81 million in its final determination (pdf) to increase the resilience of its assets, including from the effects of power outages and extreme flooding.

The Ofwat final determination should not be increased in a way that transfers the full financial burden of extreme weather risks to customers, when effective asset management measures could mitigate some of these risks. The assumed rate of return also incorporates risks to the business from penalties and other financial sanctions if failure occurs, including those associated with extreme weather events.

However, CCW would value an assessment of whether Ofwat has made the right balance between serving the needs of customers now and in the future as part of the appeals process. Customers should not bear the higher long-term costs resulting from deferred investments.

Financeability

The Weighed Average Cost of Capital (WaCC) directly impacts how much water companies can recover through revenues, and it is a key driver of bills. Given the recent path of economic indicators, including interest rates and inflation, the CMA’s redetermination presents an opportune time to review Ofwat’s WaCC methodology, assumptions and potential impacts.

To inform the CMA’s assessment, CCW has commissioned an independent report from MCC Economics (included as an appendix with our submissions). The report analyses whether Ofwat’s view of the WaCC is a reasonable central estimate in the context of the overall risk/return framework. MCC’s report considers (a) the methodology adopted (b) the data used and (c) the regulatory judgement applied.

Key findings in the report:

• Ofwat’s PR24 final determinations lean toward the upper bounds of WaCC components. This may overstate the returns required for a notionally efficient water company.
• Ofwat’s principle that companies bear the risk of deviating from the notional structure was not consistently applied. Risk has arguably been shifted from shareholders to customers.
• Ofwat included data from companies with high gearing and low credit ratings. These conditions stem from shareholder decisions, not market pressures.
• With embedded debt, Ofwat relied on actual debt issuance, including inefficiently financed companies. For new debt, Ofwat added a 30bps benchmark adjustment without sufficient justification.
• Ofwat’s beta values may be overstated. MCC advocates for lower beta values and suggests using alternative models better volatility representation.

Based on this analysis and evidence, MCC Economics recommends:

• Setting a lower WaCC consistent with market evidence and notional company efficiency. MCC estimates the WaCC could have been 1.08% lower, saving £5.4 billion over 5 years, or £41 per household per year.
• Allocating risks to companies rather than customers to avoid rewarding inefficient financial structures at customer’s expense.

Gearing

High gearing increases companies’ financial risk and ultimately exposes customers to higher costs. As of 31 March 2024, ANG’s hearing at 68.9% (Anglian’s Annual Performance Report 2023-24 (pdf)) is substantially higher than Ofwat’s notional benchmark of 55% for PR24.

As part of its redetermination, the CMA should assess whether ANG’s gearing is sustainable in the long term. CCW questions whether a more balanced approach to capital financing would protect customers from the risks of volatile borrowing costs, particularly in the current uncertain economic outlook.

Customer engagement – evidence of priorities and expectations

Household water customers cannot switch suppliers if they’re unhappy with their bills or the service they receive. In a competitive market, customers finding either of these things unacceptable would simply move to a different supplier and water companies would lose customers. Therefore, giving customers the opportunity to have their say on areas such as customer priorities, service improvements, acceptability and affordability of business plans provides insight into whether the plans have got it right for customers.

Based on CCW’s engagement with the company and our scrutiny of the customer engagement it used to inform the business plan, the overall standard of ANG’s research is good. It set research objectives and used research materials suitable for customers and consumers without expert knowledge of the company and industry. We saw good evidence of accepting feedback from both us and the company’s Independent Challenge Group on proposed research materials.

Overall, we are happy that ANG’s business plan reflected the priorities of its customers and wish to see the CMA’s redeterminations drive outcomes that address this. We were disappointed that it was not possible to understand how customer preferences were considered in Ofwat’s decisions.

Customer acceptability and affordability

CCW commissioned quantitative research (pdf) to test the package of bill changes, service improvements and investments in Ofwat’s draft determination for customer acceptability and affordability. This included surveys with a sample of 488 of ANG’s household customers.

Our research revealed:

• 39% of customers found the draft determinations’ proposed bill increases unaffordable.
• 75% found the package of investment and service delivery improvements to be acceptable.
• After being reminded of the bill increase, customers were asked again if they found the package acceptable, and this figure dropped to 59%.

The average household customers’ bill increased by a further 10% before inflation between the Draft and final determination, so this will have added greater pressure in customer affordability.

While customers will find a further bill increase above the final determination difficult to afford, they broadly support what the package should deliver. In this context, whatever changes are made to address cost allowances, the CMA’s redeterminations must retain most of the service and environmental improvements that the final determination set. We set out in paragraphs 3.31 to 3.33 where we want to see more stretching targets.

ANG plans to increase the number of households receiving affordability support from 104,000 to 230,000 (through increased cross subsidy to its social tariff to £12) by 2030, along with the new Medical Needs Discount, funded by shareholders. The affordability support must be also retained, whatever the outcome of the redeterminations. We would like to see the company align with other companies with an aim to eliminate water poverty, as per the public interest commitment in made by Water UK (pdf) in 2019.

Other issues

Phosphorus

In its final determination (pdf), Ofwat deemed ANG’s requested allowance for reducing phosphorus levels to be more efficient than the regulator’s benchmark estimate. As a result, it awarded the company £952 million – £458 million more than ANG had originally requested.

We find it concerning that Ofwat has intervened to increase costs despite ANG’s plan demonstrating that it can deliver the required outputs and improvements more efficiently. CCW requests that the CMA review this decision. If ANG can reliably meet these statutory requirements at a lower cost to customers, its position should be accepted and reflected in the redetermination.

Supply interruptions

CCW wants to see the company’s business plan targets for water supply interruptions accepted in the CMA’s redetermination. A safe and reliable supply of water has consistently been customers’ number one ask (see paragraph 3.3).

Business water use

The business water use reduction target is not as large as the company put forward in their business plan. Given the water-stressed status of the region, CCW wants to see the company’s targets accepted in the CMA’s review.

Customer Experience (C-MeX) measures

CCW is disappointed that, despite extensive engagement with Ofwat, an additional metric to measure customer complaint volumes is not part of the proposed range of C-MeX components in the final determination or set as a standalone metric.

Our annual complaints reports show a continued increase in customer complaints across the sector in the last three years. High volumes of complaints are evidence of a poor experience by many customers and can be an indicator of more fundamental problems.

Measures of customer satisfaction alone may not adequately incentivise companies to resolve customer issues first time to prevent complaints and address the causes of complaints.

Ofwat has shown how companies C-MeX performance has worsened over the current price control period. The CMA’s redetermination is an opportunity for the Authority to add a separate performance commitment and ODI on the volume of complaints.

We welcome the opportunity to submit evidence to the Competition and Markets Authority (CMA) on Northumbrian Water (NWG’s) statement of case, setting out the company’s arguments and evidence in its request for a redetermination of Ofwat’s final determination for 2025-30.

In our submission, we also offer additional evidence and commentary to assist the CMA in its redetermination and to provide important context for the consideration of cost and financing allowances that are central to the dispute between NWG and Ofwat.

Executive Summary

Ofwat’s annual Service Delivery reports (pdf) show that NWG has a track record as one of the top performers in the sector and has comparatively higher customer satisfaction and trust despite industry-wide challenges (as shown in CCW Water Matters 2024 survey).

The company’s statement of case (pdf) shows that its business plan for 2025-30 received a high level of customer support3. We reviewed and were satisfied with this evidence based on our engagement with the company.

This customer sentiment is reflected in the 77% customer acceptability of the Ofwat draft determination in 2024 for NWG (see CCW Draft Determination testing research (pdf)). This is despite 31% of NWG’s customers raising concerns with the affordability of the proposed bill rises. The average bill increased by a further 10% in the final determination, which will have exacerbated the affordability pressure for many customers.

In this context, the CMA’s assessment of the cost and financing assumptions and associated efficiency challenges applied by Ofwat:

• Must account for what customers expect to receive as service and environmental improvements in 2025-30 and beyond
• Must not constrain the affordability support package the company has set to assist customers at risk of water poverty

CCW expects any redeterminations to show customers that costs are fair, efficient and allow the company to deliver customer expectations. NWG’s final determination package had broad support from customers, so they will expect to see tangible improvements in return for any further bill increases.

Any increase in cost and financing allowances will increase bills further by up to £35 across the five years on the average bill if the company’s arguments are accepted (see page 17 of Northumbrian’s statement of case (pdf)). CCW wants to see any funding increases in the redeterminations clearly linked to measurable improvements in service reliability and environmental protection, rather than just providing additional funds without clear benefits.

Our submission

Asset risk management and associated cost allowances

NWG argues that the final determination allowance is insufficient to keep pace with asset maintenance needs. To support this, NWG cites evidence of past overspending, which it believes highlights flaws in Ofwat’s comparative benchmarking of asset maintenance costs, particularly for service reservoirs and mains renewals.

However, Ofwat’s Service Delivery Report (pdf) shows only a comparatively minor net overspend in water and wastewater combined totex, with a cumulative overspend of 15% in wholesale water in 2020 to 2024, but a cumulative underspend in wholesale wastewater of 10% in the same period.

CCW cannot assess the technical merits of either NWG’s or Ofwat’s approaches to asset maintenance cost benchmarking and modelling. But customers must be assured that the CMA has removed any poorly evidenced expenditure, inefficient costs and any proposed costs for activities that have been funded previously.

Customers should also be assured that the latest evidence on asset deterioration, climate risks and independent cost assessments inform decisions on efficient costs they need to pay to ensure delivery of a reliable service.

Evidence that NWG’s customers prioritise reliability for the 2025-30 period comes from multiple sources:

• The company’s customer research – NWG’s engagement activities, such as surveys and focus groups, consistently show that customers place high importance on a reliable water supply, particularly in light of aging infrastructure and climate change concerns. CCW is satisfied with the quality of the research.
• Independent consumer research – CCW reports also indicate strong customer demand for asset reliability.

Together, these sources suggest that NWG’s customers see reliability as essential to their everyday service, making it a critical factor in investment and regulatory decisions over the next several years.

The CMA’s review should explicitly link the adequacy of asset maintenance funding to the service reliability and drinking water quality priorities that matter most to customers. Any additional funding should directly correspond to measurable improvements in service quality. Customers need to see the value and benefits of what any additional funding will deliver.

While there is evidence of NWG overspending its wholesale water cost allowances (As shown in Ofwat’s Service and Delivery Report 2023-24 (pdf). Page 30 shows significant overspend compared to Ofwat’s PR19 water totex allowance), it is important to recognise that if companies overspend then the costs are shared between company and customers.

Any proposed increase in bills must be justified by clear, measurable improvements in service reliability and environmental outcomes. CCW was disappointed to see Ofwat decrease the ambition of the Performance Commitment level for water supply interruptions applied to NWG in the final determination (Set at average 5mins lost per customer by 2030, compared to 4mins in the company business plan) as this relates to an area of service customers clearly said is a priority.

NWG’s ambition for this measure in its business plan should be applied in the redetermination, as the company’s current performance for supply interruptions is lagging (Ofwat Service and Delivery Report 2023-24 (pdf) page 18 shows that NWG are poorer than their current Performance Commitment level. Page 19 shows that they only achieved under 5.00mins in 2020-21. Their 2023-24 performance was 5.32mins versus the target of 5.23 mins.).

Price Control Deliverables (PCDs) and Outcome Delivery Incentives (ODIs)

In principle, CCW supports PCDs as a way of giving customers and stakeholders transparency in what investment companies will deliver, when and at what cost. PCDs should expose failure, delays or under/over performance and allow bodies such as CCW to scrutinise and challenge delivery. They should also act as an incentive for companies to deliver what is a significantly large investment programme in 2025-30. On this basis PCDs should be retained.

CCW supports some flexibility to prioritise investments where they are most needed. The regulatory regime for PCDs should allow companies to produce new compelling evidence of any risks or possible alternative solutions that were not available at the time determinations were made that justify a change to PCDs. This will help ensure customers’ money returns value, by addressing the highest risks, while retaining transparency and a strong incentive to deliver.

Performance Commitment levels and their associated ODIs should incentivise companies to invest in both immediate service improvements and long-term infrastructure resilience. They should also be challenging to achieve if financial rewards are to be paid by customers, reflect evidence of customers’ priorities and address comparative poor performance. Overall, CCW considers that the ODI downside risk is justified as it should drive the right improvements.

True-ups and cost uncertainties

The redetermination must ensure that external cost uncertainties are not shifted onto customers without careful consideration. NWG (and indeed all companies) should absorb some of these risks through improved operational efficiency and prudent risk management. Uncertain cost allowances must not automatically pass on to customer bills, especially during a price control period that is already placing a heavy burden on customers’ bills.

The CMA’s redetermination should establish a balance, so that customers are not overpaying in bills now for what are cost uncertainties during 2025-30, while avoiding a potential ‘bill spike’ for customers in 2030-31 due to an excessive number of upward cost true-ups at the end of 2025-30.

Resilience and risks with extreme weather events

NWG has been allowed £199 million in its final determination (pdf) to increase the resilience of its assets, including from the effects of power outages and extreme flooding.

The Ofwat final determination should not be increased in a way that transfers the full financial burden of extreme weather risks to customers, when effective asset management measures could mitigate some of these risks. However, we would value an assessment of whether Ofwat has made the right balance between serving the needs of customers now and in the future as part of the appeals process. Customers should not bear the higher long-term costs resulting from deferred investments.

NWG’s submission document highlights that climate change forecasts predict more frequent and intense extreme weather events. For example, it cites Storm Eowyn in January 2025, which resulted in significant power outages and 29 pollution incidents in the North-East. This underscores the vulnerability of the water network to extreme weather.

NWG points out that the regulatory framework currently allocates the full risk of severe weather events to the companies themselves (paragraph 35 in Northumbrian’s statement of case (pdf)). However, this does not acknowledge:

• The allowance already made in the Ofwat final determination for asset resilience, which includes protecting assets from extreme weather events
• How the assumed rate of return incorporates risks to the business from penalties and other financial sanctions if failure occurs, including those associated with extreme weather events

Financeability

The Weighed Average Cost of Capital (WaCC) directly impacts how much water companies can recover through revenues, and it is a key driver of bills. Given the recent path of economic indicators, including interest rates and inflation, the CMA’s redetermination presents an opportune time to review Ofwat’s WaCC methodology, assumptions and potential impacts.

To inform the CMA’s assessment, CCW has commissioned an independent report from MCC Economics (included as an appendix with our submissions). The report analyses whether Ofwat’s view of the WaCC is a reasonable central estimate in the context of the overall risk/return framework. MCC’s report considers (a) the methodology adopted (b) the data used and (c) the regulatory judgement applied.

Key findings in the report:

• Ofwat’s PR24 final determinations lean toward the upper bounds of WaCC components. This may overstate the returns required for a notionally efficient water company.
• Ofwat’s principle that companies bear the risk of deviating from the notional structure was not consistently applied. Risk has arguably been shifted from shareholders to customers.
• Ofwat included data from companies with high gearing and low credit ratings. These conditions stem from shareholder decisions, not market pressures.
• With embedded debt, Ofwat relied on actual debt issuance, including inefficiently financed companies. For new debt, Ofwat added a 30bps benchmark adjustment without sufficient justification.
• Ofwat’s beta values may be overstated. MCC advocates for lower beta values and suggests using alternative models for better volatility representation.

Based on this analysis and evidence, MCC Economics recommends:

• Setting a lower WaCC consistent with market evidence and notional company efficiency. MCC estimates the WaCC could have been 1.08% lower, saving £5.4 billion over 5 years, or £41 per household per year.
• Allocating risks to companies rather than customers to avoid rewarding inefficient financial structures at customer’s expense.

Gearing

High gearing increases companies’ financial risk and ultimately exposes customers to higher costs. As of 31 March 2024, NWG’s hearing at 70% (page 11 of Northumbrian’s Annual Performance Report 2023-24 (pdf)) is substantially higher than Ofwat’s notional benchmark of 55% for PR24. The company is also categorised as ‘elevated concern’ in Ofwat’s assessment of financial resilience (pdf) and has a negative credit rating outlook.

As part of its redetermination, the CMA should assess whether NWG’s gearing is sustainable in the long term. CCW questions whether a more balanced approach to capital financing would protect customers from the risks of volatile borrowing costs particularly in the current uncertain economic outlook good. The CMA should have confidence that the company’s evidence of customers’ priorities and expectations is sound. We explain this in our assessment of the company’s business plans and the evidence used to support them. There was also clear evidence of NWG using customer views (pdf) in its business plan (pdf).

Overall, CCW is happy that NWG’s business plan reflected the priorities of its customers. We want any CMA redeterminations to drive outcomes that address this.

NWG’s customer research shows that customers support what its Water Industry National Environment Programme (WINEP) will deliver. Customer evidence shows support for NWG’s use of some nature-based and partnership solutions rather than traditionally engineered solutions, as a more sustainable approach.

CCW’s own research (pdf) shows that where potential benefits to customers and the environment of nature-based solutions can be clearly shown, there was customer strong support for them, even if it meant waiting longer or paying more.

The final determination has provided no new evidence to convince CCW how much Ofwat took customer’s views into consideration in its decisions. In CCW’s response to Ofwat’s draft determination, we noted that:

• Outside the brief mention within the quality assessment summary there was little explanation of how much Ofwat has assessed the level of customer engagement and challenge of the business plan, or how it may have influenced its determinations.
• In the main Delivering Outcomes for Customers and the Environment document (pdf) the only mention of customer engagement having any influence is where it states that customer support may be used in support of a bespoke performance commitment.
• There is also a line in Your Water Your Say report (pdf) that suggests that a larger suite of evidence has been considered: “Evidence from ‘Your water, your say’ survey forms part of the suite of evidence of customers’ and stakeholders’ views that we have considered for our draft determination”. However, CCW cannot find the larger suite of evidence in the supporting published documents.
• Ofwat’s comments on NWG’s specific engagement is limited to four lines, stating that it is “broadly in line with our minimum expectations” but commenting that while research materials were published, some could have been more neutral.

Given the scale of research and engagement that took place to inform the company’s business plan, including the work of the Customer Engagement Panel in pushing the company to go further, summarising this effort in a few lines sends a signal that customers’ views have not been adequately considered by Ofwat.

The CMA’s redetermination should be more explicit in how evidence from customers has been considered. This will help restore trust in the industry and can contribute to perceptions of fairness and value for money.

Customer acceptability and affordability

CCW commissioned quantitative research (pdf) to test the package of bill changes, service improvements and investments in Ofwat’s draft determination for customer acceptability and affordability. This included surveys with a sample of 504 of Northumbrian’s household customers.

31% of customers found the draft determinations’ proposed bill increases unaffordable, though 77% found the package of investment and service delivery improvements to be acceptable. After being reminded of the bill increase, customers were asked again if they found the package acceptable, and this figure dropped to 62%.

The average household customers’ bill increased by a further 10% before inflation between the Draft and final determination. CCW’s research shows that while a high proportion of customers will find a further bill increase above the final determination difficult to afford, they broadly support what the package should deliver.

In this context, whatever changes are made to address cost allowances, the CMA’s redeterminations must retain the outputs for customers and the environment that the final determination set.

We are also supportive of the affordability plan that NWG has put in place for 2025-30 and its commitment to end water poverty which will see no customer spending more than 5% of their income on water and wastewater bills by 2030. This must be also retained, whatever the outcome of the redeterminations.

Bill profile

CCW knows from the engagement (pdf) NWG carried out with its customers for its business plan that they prefer a smooth bill profile. So we would like this applied in the redetermination, with any increase equalised across the reminder of the price control period.

Other issues

Customer Experience (C-MeX) measures

CCW is disappointed that, despite extensive engagement with Ofwat, an additional metric to measure customer complaint volumes is not part of the proposed range of C-MeX components in the final determination or set as a standalone metric.

CCW’s annual complaints reports show a continued increase in customer complaints across the sector in the last three years. High volumes of complaints are evidence of a poor experience by many customers and can be an indicator of more fundamental problems. Yet there is no regulatory financial incentive to reduce complaint volumes.

Measures of customer satisfaction alone may not adequately incentivise companies to resolve customer issues first time to prevent complaints and address the causes of complaints.

Ofwat has shown how companies’ C-MeX performance has worsened over the current price control period. The CMA’s redetermination is an opportunity to either expand C-MeX to include complaint volumes or add a separate performance commitment and ODI on the volume of complaints.

We welcome the opportunity to submit evidence to the Competition and Markets Authority (CMA) on South East Water’s (SEW’s) statement of case, setting out the company’s arguments and evidence in its request for a redetermination of Ofwat’s Final Determination for 2025-30.

In our submission, we also offer additional evidence and commentary to assist the CMA in its redetermination and to provide important context for the consideration of cost and financing allowances that are central to the dispute between SEW and Ofwat.

Executive Summary

Ofwat’s annual Service Delivery Reports (pdf) show that SEW has a comparatively poor track record for water supply interruptions and leakage reduction. CCW’s annual tracking survey, Water Matters, shows it has comparatively lower than average customer satisfaction and trust. Any redetermination of the company’s 2025-30 price settlement must deliver improvements to help turn around these declining trends.

The company’s 2025-30 business plan received 89% acceptability from customers, while only 20% found the proposed bill increase to be affordable (see South East Water Business Plan 2025-30 (pdf).

When CCW tested the acceptability and affordability of Ofwat’s draft determination for SEW (pdf), we found:

• the acceptability of the plan had decreased (to 67%)
• an increased percentage found Ofwat’s prices affordable (32%)
• a significant 38% of customers raised concerns with the affordability of the proposed bill rises in the draft determination
• acceptability of the package dropped further to 55% when customers were reminded of the bill increase

The average SEW bill saw a higher increase of £55 increase (water only and before inflation) from 2024-25 in the Final determination, which will have increased the number of SEW customers who will find the 2025-30 bill prices unaffordable.

In this context, the CMA’s assessment of the cost and financing assumptions and associated efficiency challenges applied by Ofwat must not lose sight of evidence of what customers expect to receive as service and environmental improvements in 2025-30 and beyond. Also, it must not constrain the affordability support package the company has set to assist customers at risk of water poverty.

Any increase in cost and financing allowances to address what SEW sees as a £356 million funding gap will increase bills further (an additional £54 across the five years on the average bill if the company’s arguments are accepted). Customers will want to see the redetermination show that costs are fair, encourage efficiency and allow the company to deliver on their expectations.

Customers will also expect to see tangible improvements in return for bill increases. CCW wants to see any funding increases in the redeterminations clearly linked to measurable improvements in service reliability and environmental protection, rather than just providing additional funds without clear benefits.

Our submission

Asset risk management and associated cost allowances

SEW disputes Ofwat’s base cost allowances, arguing that inconsistencies in calculations and flaws in comparative benchmarking and the resulting expenditure allowances in the Final determination are insufficient to deliver the resilience and reliability improvements its customers want to see.

CCW cannot assess the technical merits of either SEW’s or Ofwat’s approaches to asset maintenance cost benchmarking and modelling. However, from a customer perspective, customers would expect the CMA to remove any poorly evidenced expenditure, inefficient costs and any proposed costs for activities that have been previously funded.

Customers should be assured that the latest evidence on asset deterioration, climate risks and independent cost assessments inform decisions on efficient costs. They must not pay twice to fund improvements that should have been delivered in the past.

Evidence that SEW customers prioritise a reliable water supply for the 2025-30 period comes from the company and CCW’s research:

• Company customer research – SEW’s business plan (page 12 (pdf)) and related documents (chapter 11, pdf) detail the range of sources of evidence which set ‘reliable water supply’ with the highest-ranking status in customers’ order of priorities5
• Independent consumer research – CCW reports also indicate strong customer demand for asset reliability.
• It places leakage as the 3rd highest priority. CCW and Ofwat research on customer preferences for PR24 (April 2022) placed water supply interruptions as one of the highest priorities, with leakage ranked ‘medium’.

Together, these sources suggest that SEW customers see asset reliability as essential to their everyday service, making it a critical factor in investment and regulatory decisions over the next several years.

To align with customer priorities, the CMA should assess whether Ofwat’s cost modelling reflects the actual and future costs of asset maintenance. This assessment should ensure that the real costs and challenges of maintaining these assets are identified and that an appropriate efficiency incentive is applied.

Any additional funding should directly correspond to measurable improvements in service reliability – customers need to see the value and benefits of what any additional funding will deliver.

While there is evidence of SEW overspending in wholesale water expenditure in this price control period (see Ofwat Service and Delivery Report 2023-24, page 30 (pdf)), it is important to recognise that if companies overspend then the costs are shared between company and customers.

Related Performance Commitments (PCs)

Any proposed increase in bills must be justified by clear, measurable improvements in service reliability and environmental outcomes.

SEW’s statement challenges the PC target for water supply interruptions, an area of service where SEW has been a consistently poor performer (page 8, pdf). As noted previously, reliable water supply is a top priority, so customers would expect an ambitious target to drive tangible improvement in return for the bill increase. It should be noted that the five-minute target is the same for all water companies, so achieving it is in line with achieving industry-wide expectation. Delivery of this is made more pertinent if the cost allowance to deliver it is increased.

Similarly, if the base cost allowance for asset maintenance is to increase in the redetermination, there needs to be clear correlation between the allowance given and the level of ambition in the company’s related PCs, including leakage reduction, where the company is also lagging behind (see Ofwat Service and Delivery Report 2023-24, page 14 (pdf)).

SEW argues that Outcome Delivery Incentives (ODIs) have created a situation where companies face substantial penalties when they fail to meet stringent performance targets and highlight the downside risk of the ODI applied to water supply interruptions.

However, the company should be challenged and sufficiently incentivised to improve in an area of service where they are comparatively poor performers and where customers place a high level of priority. New Guaranteed Standards Scheme payments for service failure to customers should further incentivise the company to improve delivery.

SEW also challenges how Ofwat has set targets for its Customer Experience (C-MeX) incentive, arguing that the methodology for these measures contains regional biases that disadvantage the company.

SEW is currently below average in its C-MeX performance. SEW’s very poor performance on water supply interruptions would have influenced customer experience negatively, and it is the company’s job to turn this situation round. There should be no change in the company’s target on customer service experience, as every company has circumstances that are unique to it and give it a disadvantage in some way.

True-ups and cost uncertainties

The redetermination must ensure that external cost uncertainties are not shifted onto customers without careful consideration. SEW (and indeed all companies) should absorb some of these risks through improved operational efficiency and prudent risk management. Uncertain cost allowances must not automatically pass on to customer bills, especially during a price control period that is already placing a heavy burden on customers’ bills.

A balance should be established so that customers are not over-paying for what are cost uncertainties during 2025-30, while avoiding a potential ‘bill spike’ for customers in 2030-31 due to an excessive number of upward cost true-ups.

Resilience and risks with extreme weather events

SEW has been allowed £266 million in its final determination to increase the resilience of its assets, including from the effects of power outages and extreme flooding (see South East Water’s PR24 Final Determination, page 12 (pdf)).

The Ofwat Final determination should not be increased in a way that transfers the full financial burden of extreme weather risks to customers, when effective asset management measures could mitigate some of these risks. The assumed rate of return also incorporates risks to the business from penalties and other financial sanctions if failure occurs, including those associated with extreme weather events.

However, as part of the appeals process, CCW would value an assessment of whether Ofwat has made the right balance between serving the needs of customers now and in the future. Customers should not bear the higher long-term costs resulting from deferred investments.

Financeability

The Weighed Average Cost of Capital (WaCC) directly impacts how much water companies can recover through revenues, and it is a key driver of bills. Given the recent path of economic indicators, including interest rates and inflation, the CMA’s redetermination presents an opportune time to review Ofwat’s WaCC methodology, assumptions and potential impacts.

To inform the CMA’s assessment, CCW has commissioned an independent report from MCC Economics (included as an appendix with our submissions). The report analyses whether Ofwat’s view of the WaCC is a reasonable central estimate in the context of the overall risk/return framework. MCC’s report considers (a) the methodology adopted (b) the data used and (c) the regulatory judgement applied.

Key findings in the report:

• Ofwat’s PR24 final determinations lean toward the upper bounds of WaCC components. This may overstate the returns required for a notionally efficient water company.
• Ofwat’s principle that companies bear the risk of deviating from the notional structure was not consistently applied. Risk has been shifted from shareholders to customers.
• Ofwat included data from companies with high gearing and low credit ratings. These conditions stem from shareholder decisions, not market pressures.
• Regarding embedded debt, Ofwat relied on actual debt issuance, including inefficiently financed companies. For new debt, Ofwat added a 30bps benchmark adjustment without sufficient justification.
• Ofwat’s beta values may be overstated. MCC advocates for lower beta values and suggests using alternative models better volatility representation.

Based on this analysis and evidence, MCC Economics recommends:

• Setting a lower WaCC consistent with market evidence and notional company efficiency. MCC estimates the WaCC could have been 1.08% lower, saving £5.4 billion over 5 years – that’s £41 per household per year.
• Allocating risks to companies rather than customers to avoid rewarding inefficient financial structures at customers’ expense.

Gearing

High gearing increases companies’ financial risk and ultimately exposes customers to higher costs. As of 31 March 2024, SEW’s hearing at 79% (SEW annual performance report 2023-24, page 50 (pdf)) is substantially higher than Ofwat’s notional benchmark of 55% for PR24. The company is also categorised needing increased financial monitoring in Ofwat’s assessment of financial resilience.

As part of its redetermination, the CMA should assess whether SEW’s gearing is sustainable in the long term. CCW questions whether a more balanced approach to capital financing would protect customers from the risks of volatile borrowing costs particularly in the current uncertain economic outlook

Customer engagement – evidence of priorities and expectations

Household water customers cannot switch suppliers if they’re unhappy with their bills or the service they receive. In a competitive market, customers finding either of these things unacceptable would simply move to a different supplier and water companies would lose customers. Therefore, giving customers the opportunity to have their say on areas such as customer priorities, service improvements, acceptability and affordability of business plans provides insight into whether the plans have got it right for customers.

CCW was unable to provide assurance on the quality of the customer engagement or how the company used its customer engagement evidence to inform its business plan. This is reflected in the company‘s Independent Challenge Group’s (ICG) challenge log (C25 and C26) (pdf). We also noted how Ofwat’s quality assessment showed SEW’s engagement with its customers did not meet minimum expectations in 2 of the 5 areas that were analysed.

Although we were not given an opportunity to fully assure the evidence, SEW produced a document (pdf) drawing a line of sight between what it had heard from customers and how it had amended its plans based on what it learned to reflect the customer feedback.

In this context, SEW’s business plan appears to have reflected the priorities of its customers. Based on this and our limited scrutiny of what the company provided to CCW and the ICG, we wish to see the CMA’s redeterminations drive outcomes that deliver customers’ priorities. We were disappointed that it was not possible to understand how customer preferences were considered in Ofwat’s decisions.

Customer acceptability and affordability

CCW commissioned quantitative research (pdf) to test the package of bill changes, service improvements and investments in Ofwat’s draft determination for customer acceptability and affordability. This included surveys with a sample of 520 of SEW’s household customers.

The survey revealed that:

• 38% of customers found the proposed bill increase (£16 on the average bill before inflation 2025-30) unaffordable.
• 67% found the package of investment and service delivery improvements to be acceptable.
• After being reminded of the bill increase, customers were asked again if they found the package acceptable, and this figure dropped to 55%.

The average household customers’ bill increased by a further £39 before inflation between the Draft and Final Determination, so this will have added greater pressure in customer affordability.

While customers will find a further bill increase above the Final Determination difficult to afford, they broadly support what the package should deliver. In this context, whatever changes are made to address cost allowances, the CMA’s redeterminations must retain the service and environmental improvements that the Final Determination set.

Any increase in costs and bills will need an increase in the affordability support for customers that SEW should offer. SEW’s water poverty scheme for 2025-30 aims to ensure customers are not paying more than 2.5% of their household income on water bills.

CCW supports the company’s plans to increase the social tariff provision (pdf) from 6% of households in 2020-25 to 10% by 2030. This financial support must be retained in the CMA’s redetermination.

Other issues

Customer Experience (C-MeX) measures

We are disappointed that, despite extensive engagement with Ofwat, an additional metric to measure customer complaint volumes is not part of the proposed range of C-MeX components in the final determination or set as a standalone metric.

Our annual complaints reports show a continued increase in customer complaints across the sector in the last three years. High volumes of complaints are evidence of a poor experience by many customers and can be an indicator of more fundamental problems.

Measures of customer satisfaction alone may not adequately incentivise companies to resolve customer issues first time to prevent complaints and address the causes of complaints.

Ofwat has shown how companies C-MeX performance (shows NWG ‘s scores have dropped from 85.76 points in 2020-21 to 81.4 in 2023-24. While NWG have consistently been top 3 performers in C-MeX, this illustrates a general downward trend with many companies’ performance) has worsened over the current price control period. The CMA’s redetermination is an opportunity for the Authority to add a separate performance commitment and ODI on the volume of complaints.

We welcome the opportunity to submit evidence to the Competition and Markets Authority (CMA) on Southern Water (SRN’s) statement of case which sets out the company’s arguments and evidence in its request for a redetermination of Ofwat’s final determination for 2025-30.

In this submission we also offer additional evidence and commentary to assist the CMA in its redetermination and to provide important context for the consideration of cost and financing allowances that are central to the dispute between SRN and Ofwat.

Executive Summary

SRN argues that it is facing unprecedented investment requirements, notably a proposed £8.5 billion capital programme (including over £3 billion for environmental projects) over 2025–30. This is framed as a generational opportunity to improve environmental outcomes (eg reducing river abstraction, enhancing wastewater treatment and cutting storm overflows and pollution) while meeting statutory and performance obligations.

However, Ofwat’s annual Service Delivery reports (pdf) show that SRN has consistently been one of the poorest performers in the sector and CCW’s Water Matters research shows it has the second lowest level of customer trust and satisfaction in the sector.

CCW’s Customer Contact Matters research also shows that SRN customers has the lowest level of satisfaction with customer service (by customers who’d contacted Southern Water in the last 12 months) and with aspects of sewerage service. SRN is also among the lowest in terms of customer satisfaction with the fairness and affordability of water and wastewater charges. Any redetermination by the CMA needs to deliver outcomes that will help turn around the company’s poor performance and negative customer opinion.

The company’s business plan for 2025-30 also received the lowest level of household customer acceptability (44%) and only 11% of customers found SRN’s proposed bill increase to be affordable. This research has not been published by Southern Water but is available to the CMA on request.

Any increase in bills on top of the 53% (before inflation) already allowed for in Ofwat’s FD will place additional pressure on customers already struggling to pay and will certainly further reduce customers’ trust and satisfaction with the company if there are no additional tangible outcomes.

In the context of any increase, the CMA’s assessment must account for what customers expect to receive as service and environmental improvements in 2025-30 and beyond. It must also increase the affordability support the company offers to assist customers at risk of water poverty. CCW expects the CMA to ensure the redeterminations show customers that costs are fair, are efficient and allow the company to deliver customer expectations.

Any bill increases resulting from the redeterminations must be clearly linked to measurable improvements in service reliability and environmental protection, rather than just providing additional funds without clear benefits.

Our submission

Base costs

Although CCW cannot assess the technical merits of either SRN’s or Ofwat’s approaches to base cost benchmarking and modelling, we believe there is a customer-focused context that the CMA must consider in its assessment of this dispute. In its redeterminations, customers would expect the CMA to remove any poorly evidenced expenditure, inefficient costs and any proposed costs for activities that have been funded previously.

Customers should be assured that the latest evidence on asset deterioration, climate risks, and independent cost assessments inform decisions on efficient costs they need to pay to ensure delivery of services that will improve and become more reliable, turning around the company’s poor performance.

Evidence that SRN customers prioritise the asset reliability that base cost allowances should deliver comes from multiple sources, including:

• The company’s customer research – SRN’s engagement activities, such as a long-term customer panel, surveys and focus groups, when triangulated, consistently show that customers place high importance on a reliable water supply. See Southern Waters business plan 2025-30 (page 48, pdf) and annex (pdf)
• Independent consumer research – CCW reports also indicate strong customer demand for asset reliability. It places leakage as the 3rd highest priority. CCW and Ofwat research on customer preferences for PR24 (April 2022) placed water supply interruptions as one of the highest priorities, with leakage ranked ‘medium’.

Together, these sources suggest that SRN customers see asset reliability as essential to their everyday service, making it a critical factor in investment and regulatory decisions over the next several years.

Customers should have confidence that the allowances set through the CMA’s redetermination sufficiently mitigate operational risks – such as service failures – while balancing costs fairly between current and future customers. Addressing asset health now is crucial to preventing higher costs for customers in the long run. To align with customer priorities, it should explicitly link the adequacy of asset maintenance funding to the outcomes that matter most to customers particularly service reliability.

Enhancement costs

CCW cannot assess the relative merits of either Ofwat’s or SRN’s approach to enhancement cost modelling, but the CMA should recognise that customers support what the enhancement costs should deliver in its redetermination. The business plan (pdf) shows that the two overwhelming priorities for customers (based on a triangulation of various sources of evidence) are service resilience and reducing pollution. These are the two main outcomes the enhancement programme should deliver.

Past cost allowances

SRN claims there has been chronic underfunding allowed over decades, which has led to the need to invest an extra £585 million above the allowed base cost to maintain its wholesale water asset base.

While there is evidence of overspending since 2020 (See 2023-24 Ofwat Service Delivery report, page 30-31, (pdf)), it is important to recognise that if companies overspend, then the costs are shared between company and customers.

It is not necessarily the failure to allow adequate cost allowances that has led to the company’s poor performance because:

• The reasons for some of the overspend in the more recent years are related to energy costs and input prices following wider economic events, as Ofwat’s reports confirm (See 2023-24 Ofwat Service Delivery report, page 29, (pdf)).
• Ofwat’s approach is based on a notional efficient company model using industry median performance. SRN’s higher spending could partly be due to internal inefficiencies rather than genuine regulatory underfunding.

Performance Commitments and Outcome Delivery Incentives (ODIs)

CCW considers the set of Performance Commitments in the final determination to be a fair reflection of where the company needs to improve and reflect customer priorities. We disagree that this represents an overly harsh downside risk as the associated targets need to incentivise companies to invest in both immediate service improvements and long-term infrastructure resilience to meet customer expectations.

Price Control Deliverables (PCD)

In principle, CCW supports PCDs as a way of giving customers and stakeholders transparency in what companies will deliver, when and at what cost. PCDs should expose failure, delays or under/over performance and allow bodies such as CCW, customers and stakeholders to scrutinise and challenge companies’ delivery. PCDs will act as an incentive for 12 See 2023-24 Ofwat Service Delivery Report page 30, which shows 60% cumulative overspend in wholesale water expenditure since 2020, while page 31 shows a 32% cumulative overspend in wholesale wastewater expenditure. 13 See 2023-24 Ofwat Service Delivery Report page 29 5 companies to deliver what is a significantly large investment programme in 2025-30. On this basis PCDs should be retained.

However, we would support some flexibility to prioritise investments where they are most needed. The regulatory regime for PCDs should allow companies to produce new compelling evidence of any risks or possible alternative solutions that were not available at the time determinations are made, that justifies a modification to PCDs. This will help ensure customers’ money returns value, by addressing the highest risks, while retaining transparency and a strong incentive to deliver.

True-ups and cost uncertainties

The redetermination must ensure that external cost uncertainties are not shifted onto customers without careful consideration. SRN (and indeed all companies) should absorb some of these risks through improved operational efficiency and prudent risk management, and not automatically pass uncertain cost allowances on to customer bills, especially during a price control period that is already placing a heavy burden on customers’ bills.

A balance needs to be established so that customers are not overpaying for what are cost uncertainties during 2025-30, while avoiding a potential ‘bill spike’ for customers in 2030-31 due to an excessive number of upward costs true-ups.

Resilience and risks with extreme weather events

SRN has been allowed £627 million in its final determination to increase the resilience of its assets, including from the effects of power outages and extreme flooding (see page 17 of Southern Water’s PR24 determinations (pdf)) .

The Ofwat final determination should not be increased in a way that transfers the full financial burden of extreme weather risks to customers, when effective asset management measures could mitigate some of these risks. However, as part of the appeals process, CCW would value an assessment of whether Ofwat has made the right balance between serving the needs of customers now and in the future. Customers should not bear the higher long-term costs resulting from deferred investments.

Financeability

The Weighed Average Cost of Capital (WaCC) directly impacts how much water companies can recover through revenues, and it is a key driver of bills. Given the recent path of economic indicators, including interest rates and inflation, the CMA’s redetermination presents an opportune time to review Ofwat’s WaCC methodology, assumptions and potential impacts.

To inform the CMA’s assessment, CCW has commissioned an independent report from MCC Economics (included as an appendix with our submissions). The report analyses whether Ofwat’s view of the WaCC is a reasonable central estimate in the context of the overall risk/return framework. MCC’s report considers (a) the methodology adopted (b) the data used and (c) the regulatory judgement applied.

Key findings in the report:

• Ofwat’s PR24 final determinations lean toward the upper bounds of WaCC components. This may overstate the returns required for a notionally efficient water company.
• Ofwat’s principle that companies bear the risk of deviating from the notional structure was not consistently applied. Risk has been shifted from shareholders to customers.
• Ofwat included data from companies with high gearing and low credit ratings. These conditions stem from shareholder decisions, not market pressures.
• Regarding embedded debt, Ofwat relied on actual debt issuance, including inefficiently financed companies. For new debt, Ofwat added a 30bps benchmark adjustment without sufficient justification.
• Ofwat’s beta values may be overstated. MCC advocates for lower beta values and suggests using alternative models better volatility representation.

Based on this analysis and evidence, MCC Economics recommends:

• Setting a lower WaCC consistent with market evidence and notional company efficiency. MCC estimates the WaCC could have been 1.08% lower, saving £5.4 billion over 5 years – that’s £41 per household per year.
• Allocating risks to companies rather than customers to avoid rewarding inefficient financial structures at customers’ expense.

Gearing

High gearing increases companies’ financial risk and ultimately exposes customers to higher costs. As of 31 March 2024, SRN’s hearing at 72% is substantially higher than Ofwat’s notional benchmark of 55% for PR24 (see page 27 of Southern Water’s PR24 determinations (pdf)). The company is also categorised as needing a higher level of financial monitoring in Ofwat’s assessment of financial resilience (pdf).

As part of its redetermination, the CMA should assess whether SRN’s gearing is sustainable in the long term. CCW questions whether a more balanced approach to capital financing would protect customers from the risks of volatile borrowing costs particularly in the current uncertain economic outlook

Customer engagement – evidence of priorities and expectations

SRN carried out a substantial amount of research and customer engagement to support the development of its business plan. CCW is satisfied that the company carried out good quality research that considered a balance of informed and uninformed views and included representation of different customer groups by drawing together different kinds of samples and triangulating the results.

Overall, CCW is satisfied that SRN’s business plan reflected the priorities of its customers, and we wish to see the CMA’s redeterminations drive outcomes that address this.

However, Ofwat’s price determinations have not been explicit in how it used customer evidence in its decisions. In our response to Ofwat’s draft determination we noted that:

• Outside of the brief mention within the quality assessment summary, there was little explanation of the extent to which Ofwat has assessed the level of customer engagement and challenge of the business plan, or how it may have influenced its draft determinations.
• Given the scale of research and engagement that took place to inform the
  company’s business plan, summarising this effort in a few lines sends a signal that customers’ views have not been adequately considered by Ofwat.

The final determination did not provide any new evidence to convince us how Ofwat took into consideration customer’s views. The CMA’s redetermination should be more explicit in how evidence from customers has influenced decisions.

Customer acceptability and affordability

CCW commissioned quantitative research (pdf) to test the package of bill changes, service improvements and investments in Ofwat’s draft determination for customer acceptability and affordability. This included surveys with a sample of 488 of SRN’s household customers.

This revealed that:

• 49% of customers found the draft determinations’ proposed bill increases
  unaffordable.
• 65% found the package of investment and service delivery improvements were acceptable.
• After being reminded of the bill increase, customers were asked again if they found the package acceptable, and this figure dropped to 47%.

There is a +9% difference in the average bill increase between the Draft and final determinations, so it is likely that a higher proportion of customers will find the revised bill difficult to afford. This would be exacerbated further by the impact of any further bill increase in a redetermination. Despite this, it is likely that they would still broadly support what the package should deliver.

In this context, whatever changes are made to address cost allowances, the CMA’s
redeterminations must retain the outputs for customers and the environment that the final determination set to ensure customers can see tangible benefits from bill increases.

SRN’s business plan says that customers are willing to pay up to £7 more cross subsidy to support a social tariff (£20 per year in total), which means they can maintain support for the 158,000 customers that will be receiving the tariff by 2025.

Overall, the scale of the bill increases (the largest in the sector) and the very low level of customers who found the plan affordable means that the proposed increase in affordability support is inadequate. SRN’s business plan (data table tab SUP15 (excel)) shows estimated that 152,000 customers will be left in water poverty by 203018. That was based on a 2030 average bill of £681 – the Ofwat final determination is a bill of £642 before inflation.

At the time of the revised business plan (February 2024) the company estimate of those expected to remain in water poverty at 2030 was 199,000. This is more than the 158,000 the company forecasts will receive support by 2030. As the statement of case proposes a further bill increase, the volume of customers in water poverty will increase if this is approved, so the support proposed will not be sufficient. The CMA has an opportunity to require the company to go further to support people struggling to pay their bills.

CCW supports companies funding (or ‘topping up’) funds for affordability support from shareholders or parent companies and would welcome Southern doing so to align with other companies that provide this (eg Severn Trent, United Utilities).

We do not agree with SRN’s argument that additional social tariff funding should be provided from future ODI penalties. ODIs are designed as performance incentives, so redirecting penalties to other purposes could:

• Dilute the deterrent effect of penalties
• Reduce accountability for delivering service standards

This could be seen as helping the vulnerable at the expense of holding the company to account for poor performance. Directing ODI penalties to the social tariff is, in effect, adding to the cross subsidy as wider customers will not see any benefit in terms of a reduced bill or additional work – and this is done without them agreeing it.

This could set a precedent leading to companies becoming indifferent to penalties, knowing they can reallocate the funds to socially “acceptable” uses. It also would keep the funding in the business, and potentially reduce debt costs, causing a further deterrent to performing well.

The increased bills that SRN seeks carries a risk of more SRN customers falling below the water poverty threshold by 2030. The plan does not sufficiently show how the company will address this risk as the social tariff support is unlikely to meet the potential demand for assistance significantly.

In CCW’s engagement with the company, it signalled its aim to be proactive at identifying customers who are struggling to pay. While this is a positive move, it needs to offer better assistance given the proposed bills and water poverty forecast.

Other issues

Customer Experience (C-MeX) measures

CCW is disappointed that, despite extensive engagement with Ofwat, an additional metric to measure customer complaint volumes is not part of the proposed range of C-MeX components in the final determination or set as a standalone metric.

Our annual complaints report show a continued increase in customer complaints across the sector in the last three years. High volumes of complaints are evidence of a poor experience by many customers and can be an indicator of more fundamental problems.

Measures of customer satisfaction alone may not adequately incentivise companies to resolve customer issues first time to prevent complaints and address the causes of complaints.

Ofwat has shown how companies’ C-MeX performance has worsened over the current price control period. Ofwat’s annual C-MeX reports show SRN’s performance has declined from 74.6 points in 2020-21 to 66.87 points in 2023-24. As such, the CMA’s redetermination is an opportunity for the Authority to include a separate performance commitment and ODI on the volume of complaints.

We welcome the opportunity to submit evidence to the Competition and Markets Authority (CMA) on Wessex Water (WSX’s) statement of case, setting out the company’s arguments and evidence in its request for a redetermination of Ofwat’s Final determination for 2025-30.

In our submission, we also offer additional evidence and commentary to assist the CMA in its redetermination and to provide important context for the consideration of cost and financing allowances that are central to the dispute between WSX and Ofwat.

Executive Summary

Ofwat’s annual Service Delivery reports (pdf, see page 6) show that WSX has a slightly above average track record for service delivery in the sector, at or better than their Performance Commitment levels in 7 out of 12 regulatory measure¹. However, as with many other companies in the sector, WSX has seen a reduction in levels of customer satisfaction and trust in recent years in the context of industry-wide challenges. As shown in CCW 2024 Water Matters survey.

The company’s statement of case shows that its business plan for 2025-30 was informed by evidence of customers’ priorities and expectations from a wide range of sources. 58% of customers found the company’s business plan to be acceptable and only 16% said the company’s proposed bill increase (36% before inflation on the average bill) was affordable. See WSX Affordability and Acceptability Testing report (pdf). This was just below average customer acceptability and affordability of business plans across the England and Wales sector. This ranged from 44% to 84% acceptability and 11% to 25% affordability.

Throughout the PR24 process, WSX engaged well with its independent Challenge Group and with CCW on its customer research and engagement and how it was used to inform the business plan. This evidence was gathered and interpreted to our satisfaction.

In this context, the CMA’s assessment of the cost and financing assumptions and associated efficiency challenges applied by Ofwat must not lose sight of evidence of what customers expect to receive as service and environmental improvements in 2025-30 and beyond. Also, it must not constrain the affordability support package the company has set to assist customers at risk of water poverty.

Any increase in cost and financing allowances will increase bills further (up to 9% more than the final determination across the five years on the average bill if the company’s arguments are accepted). CCW expects the CMA to ensure the redeterminations show customers that costs are fair, efficient and allow the company to deliver customer expectations on service and the environment.

This package is its largest ever investment programme the company has had to deliver. Customers will expect to see tangible improvements in return for bill increases. CCW wants to see any funding increases in the redeterminations clearly linked to measurable improvements in service reliability and environmental protection, rather than just providing additional funds without clear benefits.

Our submission

Expenditure allowances

While CCW cannot assess the technical merits of either WSX’s or Ofwat’s approaches to base and enhancement cost benchmarking and modelling, customers must be assured that the CMA has removed any poorly evidenced expenditure, inefficient costs and any proposed costs for activities that have been funded previously.

Customers should be assured that the latest evidence on asset deterioration, climate risks and independent cost assessments inform decisions on efficient costs they need to pay to ensure delivery of a reliable service.

CCW recognises the importance of increased asset maintenance for reliable service delivery, but there needs to be transparency and accountability in how the additional funds are spent. Any higher spending allowed by the CMA should directly translate into improved service quality and long-term resilience, without passing excessive costs on to consumers.

While there is evidence of WSX overspending its expenditure allowances since 2020, it is important to recognise that if companies overspend, then the costs are shared between company and customers. Ofwat’s 2023-24 Service and Delivery Report (pdf) shows a cumulative overspend since 2020 of 18% for wholesale water and 5% for wholesale wastewater (pages 30 and 31)

Performance Commitments, Price Control Deliverables and Incentives

Any proposed increase in bills must be justified by clear, measurable improvements in service reliability and environmental outcomes.

Performance Commitments and their associated Outcome Delivery Incentives (ODIs) should incentivise companies to invest in both immediate service improvements and long-term infrastructure resilience. They should also be challenging to achieve if financial rewards are to be paid by customers, reflect evidence of customers’ priorities and address comparative poor performance.

CCW believes that the package of Performance Commitments in WSX’s final determination addresses both poor performance in areas of service (Five metrics (leakage, per capita consumption, water supply interruptions, internal sewer flooding and pollution incidents) as shown in Ofwat’s 2023-24 Service and Delivery Report page 6, pdf) and customers’ priorities (summarised on page 179 of WSX PR24 Business Plans, pdf).

WSX’s Statement of Case highlights that some Performance Commitment levels come with severe downside risks in the associated ODIs, meaning that even a small deviation from target levels could result in substantial financial penalties. However, CCW believes that the downside risk is justified as it should drive improvements in comparatively poor performance and customer priorities.

Price Control Deliverables (PCDs)

CCW supports PCDs as a way of giving customers and stakeholders transparency in what investment companies will deliver, when and at what cost. PCDs should expose failure, delays or under/over performance and allow bodies such as CCW to scrutinise and challenge delivery. They should also act as an incentive for companies to deliver what is a significantly large investment programme in 2025-30. On this basis PCDs should be retained.

However, CCW would support some flexibility to prioritise investments where they are most needed. The regulatory regime for PCDs should allow companies to produce new compelling evidence of any risks or possible alternative solutions that were not available at the time determinations are made, that justifies a change to PCDs. This will help ensure customers’ money returns value, by addressing the highest risks, while retaining transparency and a strong incentive to deliver.

Additional funding

Specific additional allowances are requested – £47 million for new disinfection improvements and £178 million for bioresources health and safety measures – alongside a broader increase in wholesale water base costs and phosphorus removal allowances.

CCW accepts that WSX has obligations to upgrade disinfection at water treatment centres and remove phosphorus, driven by expectations from the Drinking Water Inspectorate (DWI) and the Water Industry National Environment Programme (WINEP). In the current regulatory framework, the costs associated with moving away from marginal chlorination (which is inadequate under new standards) toward a more robust disinfection process are not included in Ofwat’s base cost models.

CCW believes there should be scrutiny on the health and safety expenditure requirements to ensure that customers are not paying for:

• Issues that may already be factored into the Final determination cost allowances
• For standards that the company should have met at its treatment centres in the past within cost allowances it had previously received.

As it determines an efficient cost for these additional improvements, the CMA should assure customers any new investment commitments are necessary and cost-effective. This should also be incentivised through PCDs that will ensure accountability and transparency in how these funds are deployed to protect water quality.

True-ups and cost uncertainties

The redetermination must ensure that external cost uncertainties are not shifted onto customers without careful consideration. WSX (and indeed all companies) should absorb some of these risks through improved operational efficiency and prudent risk management.

Uncertain cost allowances must not automatically pass on to customer bills, especially during a price control period that is already placing a heavy burden on customers’ bills.

A balance should be established so that customers are not over-paying in bills now for what are cost uncertainties during 2025-30, while avoiding a potential ‘bill spike’ for customers in 2030-31 due to an excessive number of upward cost true-ups at the end of 2025-30

External risk factors

WSX has been allowed £35 million in its final determination to increase the resilience of its assets, including from the effects of power outages and extreme flooding. See page 15 of Wessex Water’s PR24 Final determinations (pdf).

The Ofwat Final determination should not be increased in a way that transfers the full financial burden of extreme weather risks to customers, when effective asset management measures could mitigate some of these risks. The assumed rate of return also incorporates risks to the business from penalties and other financial sanctions if failure occurs, including those associated with extreme weather events.

However, as part of the appeals process, CCW would value an assessment of whether Ofwat has made the right balance between serving the needs of customers now and in the future. Customers should not bear the higher long-term costs resulting from deferred investments.

Financeability

The Weighed Average Cost of Capital (WaCC) directly impacts how much water companies can recover through revenues, and it is a key driver of bills. Given the recent path of economic indicators, including interest rates and inflation, the CMA’s redetermination presents an opportune time to review Ofwat’s WaCC methodology, assumptions and potential impacts.

To inform the CMA’s assessment, CCW has commissioned an independent report from MCC Economics (included as an appendix with our submissions). The report analyses whether Ofwat’s view of the WaCC is a reasonable central estimate in the context of the overall risk/return framework. MCC’s report considers (a) the methodology adopted (b) the data used and (c) the regulatory judgement applied.

Key findings in the report:

• Ofwat’s PR24 final determinations lean toward the upper bounds of WaCC components. This may overstate the returns required for a notionally efficient water company.
• Ofwat’s principle that companies bear the risk of deviating from the notional structure was not consistently applied. Risk has arguably been shifted from shareholders to customers.
• Ofwat included data from companies with high gearing and low credit ratings. These conditions stem from shareholder decisions, not market pressures.
• With embedded debt, Ofwat relied on actual debt issuance, including inefficiently financed companies. For new debt, Ofwat added a 30bps benchmark adjustment without sufficient justification.
• Ofwat’s beta values may be overstated. MCC advocates for lower beta values and suggests using alternative models better volatility representation.

Based on this analysis and evidence, MCC Economics recommends:

• Setting a lower WaCC consistent with market evidence and notional company efficiency. MCC estimates the WaCC could have been 1.08% lower, saving £5.4 billion over 5 years, or £41 per household per year.
• Allocating risks to companies rather than customers to avoid rewarding inefficient financial structures at customer’s expense.

Gearing

High gearing increases companies’ financial risk and ultimately exposes customers to higher costs. As of 31 March 2024, WSX’s hearing at 69% (Page 24 of Wessex’s Annual Performance Report 2023-24 (pdf)) is substantially higher than Ofwat’s notional benchmark of 55% for PR24. The company is also categorised as ‘elevated concern’ in Ofwat’s assessment of financial resilience, as per Ofwat’s 2023-24 ‘Monitoring Financial Resilience Report (pdf)’.

As part of its redetermination, the CMA should assess whether WSX’s gearing is sustainable in the long term. CCW questions whether a more balanced approach to capital financing would protect customers from the risks of volatile borrowing costs particularly in the current uncertain economic outlook.

Customer engagement – evidence of priorities and expectations

Household water customers cannot switch suppliers if they’re unhappy with their bills or the service they receive. In a competitive market, customers finding either of these things unacceptable would simply move to a different supplier and water companies would lose customers.

Therefore, giving customers the opportunity to have their say on areas such as customer priorities, service improvements, acceptability and affordability of business plans provides insight into whether the plans have got it right for customers.

Based on CCW’s engagement with the company and our scrutiny of the customer engagement it did to inform the business plan, the overall standard of WSX’s research was good.

Both the company’s research objectives and research materials were suitable for
customers and consumers without expert knowledge of the company and industry.

The CMA should have confidence that the company’s evidence of customers’ priorities and expectations is sound. This is explained in our assessment of the company’s business plans and the evidence used to support them. There was also clear evidence of WSX using customer views in their business plan.

While it is unclear to what extent customer engagement evidence impacted on Ofwat’s decision making in its determinations, CCW is happy that WSX’s business plan reflected the priorities of its customers and we want to see the CMA’s redeterminations drive outcomes that address this.

Customer acceptability and affordability

CCW commissioned quantitative research (pdf) to test the package of bill changes, service improvements and investments in Ofwat’s Draft determination for customer acceptability and affordability. This included surveys with a sample of 501 of WSX’s household customers.

The survey revealed that 32% of customers found the Draft determinations’ proposed bill increases unaffordable, while 79% found the package of investment and service delivery improvements to be acceptable. However, there is significant difference between the proposed change to the average bill in the draft determination (a reduction of -2% before inflation) and the final determination (an increase of +21%). In this context, it is not unreasonable to assume that the volume of customers that would have difficulties affording the 2025-30 bills would be considerably greater, at either a 21% or a 30% bill increase – as the company wants.

In this context, whatever changes are made to address cost allowances, the CMA’s redeterminations must retain the outputs for customers and the environment that the Final determination set. As they broadly reflect the same outputs as the draft determination, evidence shows customers find the improvements to be acceptable (if not affordable).

CCW is also supportive of the affordability plan that WSX has put in place for 2025-30 and its commitment to end water poverty, so that no customer is spending more than 5% of their income on water and wastewater bills by 2030. This must be also retained, whatever the outcome of the redeterminations.

Other issues

Customer Experience (C-MeX) measures

CCW is disappointed that, despite extensive engagement with Ofwat, an additional metric to measure customer complaint volumes is not part of the proposed range of C-MeX components in the final determination or set as a standalone metric.

Our annual complaints report shows a continued increase in customer complaints in the overall sector in the last three years. High volumes of complaints are evidence of a poor experience by many customers and can be an indicator of more fundamental problems.

Measures of customer satisfaction alone may not adequately incentivise companies to resolve customer issues first time to prevent complaints and address the causes of complaints.

Ofwat has shown how companies’ C-MeX performance has worsened over the current price control period. Ofwat’s annual C-MeX reports show NWG ‘s scores have dropped from 85.76 points in 2020-21 to 81.4 in 2023-24. While NWG have consistently been top 3 performers in C-MeX, this illustrates a general downward trend with many companies’ performance.

The CMA’s redetermination is an opportunity to add a separate performance commitment and ODI on the volume of complaints.