Competition Comm. Decision

RNS Number:1301P
OFWAT
8 August 2000



OFWAT ANNOUNCES COMPETITION COMMISSION DECISIONS FOLLOWING COMPANIES' APPEALS 
AGAINST PRICE LIMITS


The Competition Commission has now set price limits for Mid Kent Water and 
Sutton and East Surrey Water for five years from April 2000. These two small 
water only companies had asked Ofwat, under the terms of their licences, to 
refer the price limits set in November 1999, following the Periodic Review, 
to the Commission. All the other 23 companies accepted Ofwat's 
determinations.

The new price limits, which will affect the water bills of customers of these 
two companies from 1 April 2001, are announced today. The Commission's full 
reports, containing reasons for the decisions, remain confidential until 
publication in mid September.  

The following table sets out the Commission's determinations:


                 2000-01 2001-02 2002-03 2003-04 2004-05  Five year
                                                           average

Mid Kent Water    -19.7    +4.5    +3.2     0        0       -2.8

Sutton & East 
Surrey Water      -17.0    +3.8    +2.1     0        0       -2.5

This independent appeal mechanism is an important part of the price review 
process. The Commission looked in depth at the companies' affairs and 
considered evidence from Ofwat, the companies and other interested parties. 
The Commission made its own decisions on prices and reached its own 
judgements on all matters that it considered relevant. 

The Commission endorsed the Director's approach to setting price limits based 
on comparing the performance of all companies.

Among the issues endorsed by the Commission were:  

* Ofwat's approach and conclusions on the cost of capital and the immediate   
  adjustment to prices to reflect this;
* Ofwat's approach to companies' capital values; and
* Ofwat's assessment on the scope to make efficiency savings.

The Commission recommended that more work be done in the industry to broaden 
the understanding of the relationship between serviceability and asset 
condition. Ofwat is already seeking a better understanding of the economic 
case for the appropriate level of capital maintenance (MD161).

The Commission determined that a number of company specific factors affected 
both the costs allowed and the scope for efficiencies. The Commission has 
also taken a different approach from Ofwat on the treatment of depreciation, 
the scope for efficiencies in capital programmes and the number of customers 
opting for a meter.

In addition, the Commission included in the price limits of the two companies 
the costs and fees of the enquiry itself.

When the price limits were announced in November 1999, a licence modification 
was proposed by Ofwat to allow all the companies to ask for their price 
limits to be reset if specified changes affected their revenue by more than 
one per cent. This proposal had also been submitted to the Commission for 
these two companies. The Commission has recommended, for these two companies, 
that this modification should go ahead subject to certain clarifications.

The Commission took a different approach from Ofwat on what could the trigger 
changes to price limits between Periodic Reviews for these two companies. Its 
approach allows the Director (as well as the company) to reopen price limits 
if the out-turn is materially different from that assumed by the Commission, 
in certain specific respects.

Notes to the Editor

1. On 25 November 1999, Ofwat issued the new price limits for the water 
companies of England and Wales.  23 companies accepted these price limits.  
Mid Kent Water and Sutton and East Surrey Water requested that their price 
limits be referred to the Competition Commission.

2. On 7 February 2000 Ofwat made references to the Commission in respect of 
these two companies, under section 12 and section 14 of the Water Industry 
Act 1991.  The section 12 reference requires the Commission to determine 
the adjustment factor, K, and the standard amount for the water 
infrastructure charge, for the five years from 1 April 2000 up to and 
including the year ending 31 March 2005.  The section 14 reference requires 
the Commission to report on whether continuation of the companies' licences 
without modification in relation to Notified Items operates or may be 
expected to operate against the public interest.

3. The price limits announced today only affect the water bills for Mid Kent 
Water and Sutton and East Surrey Water customers.  The water customers of 
Mid Kent Water and Sutton and East Surrey Water receive their sewerage 
service from Southern Water and Thames Water respectively.

4. Following the completion of these referrals, there is a period now when 
the Secretary of State for the Department of Environment, Transport and the 
Regions can direct that excisions be made from the full document of 
confidential information. The final report will therefore be published in mid 
September.

5. The price limits set by the Commission come into immediate effect.  The 
Commission has re-determined price limits over the whole of the 2000-05 
period.  In practice, there will be no revision to the 2000-01 price limit.  
The Commission's price limits will affect customers' bills from 1 April 
2001.

6. The Commission confirmed the Infrastructure Charge set by Ofwat in the 
Final Determination.

7. The following tables set out the Commission's determinations for Mid Kent 
Water and Sutton and East Surrey Water:



                 2000-01  2001-02  2002-03  2003-04  2004-05 Five year
                                                              average
Mid Kent Water

Company 
Business Plan     +2.8      +3.7     +3.7    +3.7      +3.7     +3.5

Ofwat Final 
Determination    -19.7        0        0       0        1.6     -4.0

Competition 
Commission 
Determination    -19.7      +4.5      +3.2     0         0      -2.8


Sutton & East 
Surrey Water 

Company 
Business Plan     +7.0     +34.8      +20.6   -0.6     +3.5    +12.3
Company 
Statement of 
Case              +3.0      -1.2       +5.0   -5.8     +6.6     +1.4

Ofwat Final 
Determination    -17.0      -5.0       -2.4    0         0      -5.1

Competition 
Commission 
Determination    -17.0      +3.8       +2.1    0         0      -2.5

Note-New numbers submitted by Sutton and East Surrey Water to the Commission
during this enquiry.

8. Interim Determination of K: Condition B of the licence allows the Director 
to make adjustments to the price limit in any year for certain relevant 
changes of circumstances or in respect of a Notified Item, provided that 
these are material.


MEDIA ENQUIRIES TO OFWAT PRESS OFFICE ON:
0121 625 1442/1416/1425/1450
OUT OF HOURS CALLS TO PAGER 0345 345500 WATER 509

Ofwat's publications, including press releases can be found on our website 
at: http://www.open.gov.uk/ofwat/
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