CMA water decision could cost consumers £3.7bn and sets dangerous precedent
UK consumers could lose out by £3.7bn (£113.50 per household) over the next five years, if the Competition and Markets Authority (CMA) sticks with its provisional decision to back four water companies' appeal against Ofwat’s next price control. This is according to new analysis released today by Citizens Advice.
The analysis is released alongside the charity’s response to the CMA’s provisional findings in which it raises serious concerns about the competition watchdog’s decision. Citizens Advice believes some decisions by the CMA are poorly evidenced and could set a costly precedent for other regulated sectors to appeal price controls, including energy networks.
A precedent that could cost consumers billions
Citizens Advice analysis shows that the CMA’s decision in relation to Ofwat’s price control for water companies could cost customers of the four firms appealing the water regulator’s decision £500 million (approximately £50 per household) over the next five years.
The charity believes that if the CMA upholds its provisional decision, it would set a dangerous precedent for energy networks to appeal against Ofgem’s next set of price controls (RIIO-2).
If this was to happen, and the same decisions are applied, consumers would lose out by around a further £3.2bn (£63.50 per household) over a five year period.
A missed opportunity to protect consumers interests
In its response to the CMA’s provisional decision, Citizens Advice highlights a number of problems with the competition watchdog’s current position on the ‘cost of capital’ (the returns company’s make on their investments). The charity’s concerns include:
Inflated profit levels - Citizens Advice rejects the CMA’s position that a higher cost of capital is necessary to protect incentives to invest. The charity believes it will further inflate existing profits at the expense of consumers.
Lack of evidence - Citizens Advice does not believe the CMA has provided sufficient evidence to support their decision on the key issue of the cost of capital.
Consumer evidence ignored - the CMA has leaned heavily on evidence from organisations who argued Ofwat had set the cost of capital too low. The CMA makes little reference to the evidence provided by organisations like Citizens Advice who argued the cost of capital was too high. The charity believes this approach runs counter to Ofwat’s statutory consumer objectives.
Alistair Cromwell, Acting Chief Executive of Citizens Advice, said:
“This decision is not only poorly evidenced, but also sets a dangerous precedent for other price controls, like energy, where billions of pounds of people’s money is at stake.
“Both Ofwat and Ofgem have made progress towards delivering fairer deals for water and energy consumers. While our evidence shows these two regulators could have gone even further in cutting the excess profits of water and energy network companies, the CMA’s decision risks undermining that progress.”
“At a time when many households are struggling financially, the CMA’s decision risks handing billions to shareholders at consumers’ expense.”
Notes to editors
- £3.7bn figure taken from Citizens Advice policy note.
- Citizens Advice response to CMA PR19 appeal provisional findings.
- In December 2019, Ofwat set the price control for water companies for the next 5 years (PR-19). Four companies Anglian Water, Bristol Water, Northumbrian Water and Yorkshire Water appealed Ofwat’s decision to the CMA. In September the CMA announced that it while agreed with Ofwat in many areas “water companies need to be provided with more revenue to secure continued investment in the sector”.
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