Our response to CMA’s consultation as part of the Pennon / Sumisho Osaka Gas Water UK merger inquiry

We welcome the opportunity to comment on this stage of the Competition and Markets Authority (CMA’s) Pennon/Sumisho Osaka Gad Water UK merger inquiry.

Executive Summary

In summary, CCW agrees with the undertakings the CMA has proposed, specifically:

• For Ofwat to maintain separate cost and performance information for SES Water, so the regulator can continue to make comparisons and to allow for transparency for consumers and stakeholders. It is important that Ofwat has a range of comparators to enable it to benchmark and set challenging performance and cost efficiency targets and incentives and that consumers can see the performance improvements their water provider is making with their money.
• For Pennon to share cost efficiencies with customers across the Pennon group by 2030
• To disapply a small company premium on the assumed cost of capital financing for 2025-30, as the new ownership should resolve any financing restrictions SES Water may have otherwise faced. A small company premium under the new ownership could add additional cost to customers.

Detailed Response

We are pleased to see that the CMA’s assessment in Phase 1 took into consideration CCW’s concerns about the potential loss of regulatory comparators to assess the companies’ performance and costs following the merger between Pennon and SES Water.

We support the proposal for the undertakings to commit to maintain separate cost and performance information. Separate performance targets must be applied for at least the remainder of this price control (2020-25) and the next one (2025-30). There are areas where there is significant differences in performance between SES Water and other Pennon companies. For example, SES Water is company that performs well on leakage, while South West Water’s performance is below average.

Ofwat also requires separate reporting on both wholesale and retail activities and costs. We agree that this is necessary for it to set separate wholesale price controls across the regions, but that it is not necessary to retain separate retail price controls. Again this provides added transparency for consumers and stakeholders.

We agree that Pennon should share a proportion of cost efficiencies achieved as a result of the merger with customers across the Pennon group. We will engage with the companies and Ofwat to examine the efficiency benefits achieved in the next price control period (2025-30) and what level of efficiency gains should be shared and in what way (price reduction, greater affordability support for more vulnerable customers or additional investment).

Finally, we agree that, as the ownership of the company has changed, the case for a small company premium added to Ofwat’s assumption of the cost for capital financing for 2025-30 is no longer relevant. The addition of such as premium could increase bills for customers for a company that should no longer face the financing restrictions that would justify such a premium. We agree that in the event of Ofwat allowing such a premium in its price determinations, this should be waived or disapplied by Pennon.

Appendix A

For information – comparisons of some of the performance indicators of relevant companies are listed below:

• There were substantial differences in 2022-23 for leakage performance with SES Water’s 76.2 litres/property/day compared to South West Water’s 103 litres/property/day. Keeping these comparators allows companies to seek to learn lessons from companies who are performing better than them.
• South West Water also performs poorly on water supply interruptions with 8:42 minutes lost compared to SES Water’s 3:51 minutes.
• For the customer experience measure (C-MeX)¹, maintaining a comparator with Bristol Water is helpful as SES Water had a score of 76.03 (in 13th place out of 17), versus Bristol Water achieving 6th place with a score of 80.68. There appear to be lessons that can be transferred from Bristol Water (also a water only company) to SES Water to help improve its customer satisfaction score.
• Customer complaints is another area where SES Water can learn from Bristol Water. During 2022-23, Bristol Water was one of the top performers in terms of complaints with 23.94 complaints per 10,000 connections where SES Water had 41.02 complaints per 10,000 connections.

¹CMeX – the Customer Measure of Experience is an incentive developed by Ofwat to measure the quality of the service provided by all water companies in England and Wales. It is scored out of 100, the higher the score, the better. More information can be found on the DiscoverWater website.