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Northumbrian Water NWL PR19 CMA REDETERMINATION NON CONFIDENTIAL VERSION PAGE | 1 NWL PR19 CMA REDETERMINATION CONTENTS FOREWORD FROM HEIDI MOTTRAM, CEO NORTHUMBRIAN WATER .................................................... 3 1. INTRODUCTION & KEY QUESTIONS FOR THE CMA ..................................................................... 4 PART A: SUMMARY OF OUR REPLY ............................................................................................................ 6 2. ACHIEVING THE RIGHT PACKAGE IN THE ROUND ....................................................................... 7 PART B: KEY QUESTIONS FOR THE CMA’S REDETERMINATION ......................................................... 22 3. SHOULD THE TWO RESILIENCE SCHEMES THAT WE HAVE HIGHLIGHTED BE FUNDED AS ENHANCEMENT CASES? ................................................................................................................ 23 4. IS THE ADDITIONAL ‘STRETCH’ THAT OFWAT HAS APPLIED APPROPRIATE AND JUSTIFIED? ....................................................................................................................................... 46 5. WHAT IS THE APPROPRIATE INCENTIVE STRUCTURE FOR WATER NETWORK PRICE CONTROLS? ..................................................................................................................................... 76 6. WHAT IS THE APPROPRIATE ALLOWED RETURN?.................................................................... 84 7. IS OFWAT’S FD19 FINANCEABLE? .............................................................................................. 102 PART C: OTHER ISSUES ............................................................................................................................ 122 8. WHAT WEIGHT SHOULD BE PLACED ON CUSTOMER ENGAGEMENT EVIDENCE? ............ 123 9. TAKING ACCOUNT OF NEW INFORMATION ............................................................................... 128 10. OUR VIEWS ON OFWAT’S RESPONSE ........................................................................................ 133 ANNEX 1: MARS ANALYSIS ....................................................................................................................... 141 ANNEX 2: FINANCEABILITY ....................................................................................................................... 142 ANNEX 3: INDEX OF SUPPORTING DOCUMENTS .................................................................................. 145 ANNEX 4: LIST OF TABLES ....................................................................................................................... 154 ANNEX 5: LIST OF FIGURES ...................................................................................................................... 155 PAGE | 2 NWL PR19 CMA REDETERMINATION FOREWORD FROM HEIDI MOTTRAM, CEO NORTHUMBRIAN WATER Northumbrian Water remains committed to a redetermination that delivers the right outcomes, at the right cost, for our customers. As we expressed in our Statement of Case and then subsequently in our presentation to the CMA, our plan was the culmination of several years hard work and thought. It involved the voice of many thousands of customers, rigorous challenge from our Water Forum and other stakeholders, and responded to the strong signals from Defra and Ofwat about what they thought should be addressed in the coming period. The end result was an ambitious and well evidenced package that took us from high performance and amongst the lowest bills in the country, to even higher performance and a sector leading reduction in bills. As we have also said, this resulted in 91% of customers, having understood the package in the 1 round, supporting the plan. Having read Ofwat’s Response, our view remains that the interventions Ofwat made to our plan have resulted in a final determination for PR19 that is unbalanced, gives rise to greater risk and fails to address in full the resilience investments that our customers saw as being so crucial. In responding to our Statement of Case Ofwat has sought to characterise our plan as ‘less for more’. This is clearly erroneous. Our plan offers our customers more (enhanced resilience and improved service levels) for less (we have offered sector-leading bill reductions). Ofwat has also included details which appear irrelevant to the substance of the redetermination, made inaccurate links between our case and the issues that feature in the submissions of the other Referring Companies and on occasion talked about issues in unnecessarily emotive terms. Whilst we strongly support robust regulation, and fully expect to be scrupulously challenged during this redetermination process, we also believe in the importance of maintaining a rigorous and objective evidence-based approach which focuses on the facts. In our Reply we have sought to identify the key points of difference between ourselves and Ofwat and to reiterate why we believe our plan delivers a better outcome, in the round, for our customers, stakeholders, investors and communities. We look forward to further discussion and hearings on these key points, as well as the areas the CMA wishes to explore further to aid its redetermination in due course. 1 We note that Ofwat has referred to CCWater’s research at DD19 which showed 90% support for the plan (Ofwat Response Northumbrian Water, REP022, para. 2.29, p. 23). In its submission to the CMA CCWater states that only 86% of customers found DD19 to be acceptable on an informed basis (CCWater Submission to the CMA – Northumbrian Water Limited’s statement of case, “CCWater Submission to the CMA”, , 11 May 2020, REP080). The CCWater research was only in relation to bills and service levels and did not explain the reduction in resilience investment. This is not, therefore, a like for like comparison to our research. PAGE | 3 NWL PR19 CMA REDETERMINATION 1. INTRODUCTION & KEY QUESTIONS FOR THE CMA 1.1. INTRODUCTION (1) This is Northumbrian Water Limited’s (NWL) reply (the Reply) to Ofwat’s Response to our Statement of Case (SoC) as submitted to the CMA on 4 May 2020 (Ofwat’s Response). Ofwat’s Response incorporates not just its views on our SoC, but also its position in relation to the other three companies that have sought a redetermination – Anglian Water (AW), Bristol Water (BW) and Yorkshire Water (YW) (collectively, with ourselves, the Referring Companies). These views are expressed in individual papers targeted at each company, as well as a series of papers that address issues Ofwat has presented as common and/or cross-cutting. (2) This Reply addresses issues raised across all the documents comprising Ofwat’s Response. Where appropriate, it also responds to issues raised in the statements of case submitted by the other Referring Companies as well as other materials received by the CMA in the course of this process to date. (3) In this Reply we address the comments and criticisms made by Ofwat in its Response, without repeating the arguments presented in our SoC. As explained below, Ofwat has not set out any evidence or arguments that detract from or counter the grounds that we have advanced before the CMA. We therefore maintain our position on all those grounds. 1.2. KEY QUESTIONS FOR THE CMA REDETERMINATION (4) We consider that a redetermination in the round means ensuring that there is an appropriate balance in the round in both the short and longer-term, with respect to the interests of our consumers, the efficiency of our costs, the resilience of our operations, the level of returns and the financeability of our business. Ofwat’s FD19 does not achieve that balance. (5) In our Reply we highlight six key questions that the CMA will need to consider in its redetermination which underpin our concern about the balance of the package in the round. We consider that they represent the most material issues for this redetermination: Should the two resilience schemes that we have highlighted be funded as enhancement cases? We maintain that they should, Ofwat maintains that they should not; Is the additional ‘stretch’ that Ofwat has applied appropriate and justified? We maintain that this additional efficiency challenge was unjustified, Ofwat does not; What is the appropriate incentive structure for water price controls? We maintain that the incentive structure in previous control periods in the water sector has delivered significant benefits for customers. Ofwat is seeking to replace that incentive framework with a substantially more asymmetric framework with weaker incentives for outperformance; What should the allowed return be? We maintain that a long-term ‘through the cycle’ approach is most appropriate. Ofwat disagrees; Is Ofwat’s FD19 financeable? We maintain that Ofwat’s approach at PR19 is not consistent with a reasonable interpretation of the Financing Duty. Ofwat maintains that FD19 is financeable; and What weight should be placed on customer engagement evidence in a price control setting process? We maintain that more weight could and should have been placed on this evidence in the PR19 process, Ofwat rejects this view. (6) Part A of this Reply provides a summary of our views on each of these questions and the key points for the CMA’s redetermination. (7) In Part B of this Reply, we address the first five questions in more detail by reference to our position in the SoC and the points raised in Ofwat’s Response and provide additional analysis where appropriate. (8) In Part C of this Reply, we set out: a more detailed response to the sixth question regarding the
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