COMMENT
The CC’s decision in the Bristol Water case must also be set against the publication by Ofwat only a few days earlier on 30 July 2010 of a paper considering how prices for regulated water and sewerage services should be regulated in the future. The paper sets out three hypothetical scenarios against which price setting options can be tested, depending on the level of reform in the sector (that is, in terms of unbundling of the different functions of a water company).
The development of competition in the water
sector raises significant issues about what degree of legal, business and accounting separation will be required over time. If extensive changes are finally adopted, it is assumed that Ofwat will operate separate price controls at different stages in the value chain (such as resources, treatment, network and retail). This raises important questions in relation to the longer term implications of a price control and how regulatory capital will be allocated across different business activities as the industry embarks on the next period of regulatory development. In that context, the issues that regulated companies face in terms of an expanding population, scarcity of water, climate change, meeting customer expectations and an uncertain economic climate will no doubt be revisited. ■■■
Regulatory context
Water and sewerage charges are capped under regulated water companies’ conditions of appointment. A limit is set on charges, which is the percentage calculated according to the formula “RPI+K+U”. In simple terms this equates to: (i) the percentage change in the retail price index (RPI) in the year to November from the preceding November; (ii) plus the relevant Adjustment Factor, “’K”; (iii) plus unused price charges carried forward, “U”. Ofwat determines, every five years and
following a review, whether the Adjustment Factor K should be revised. Ofwat made a final determination on future water and sewerage charges for the period 2010 - 2015 on 26 November 2009. Ofwat met with opposition from across the industry during its review process but only Bristol Water challenged the regulator’s final decision before the CC. Ofwat originally considered that
Bristol Water could impose an average 1.7% price increase each year, after inflation, between 2010 and 2015. Bristol Water sought to bring the determination closer to a 6% increase. Bristol Water
submitted that it was seeking to replace essential pipes and that, in light of the growing Bristol population, it was eager to ensure it had enough water and system capacity available to meet increasing demand at the lowest cost. The CC was required to re-determine the
value of K, having regard to various regulatory principles, namely the duties to: (i) Further the interests of both existing and
future water consumers (ii) Secure that water companies properly
carry out their functions (iii) Secure that water companies are able to finance those functions, in particular, by securing reasonable returns on their capital (iv) Promote economy and efficiency on the
part of water companies (v) Secure that there is no undue preference
or discrimination in the fixing of charges (vi) Contribute to the achievement of sustainable development. The CC must also have regard to principles of best regulatory practice. ■■■
Suzanne Rab (left) is Hogan Lovells’ counsel in the Antitrust, Competition & Economic Regulation practice
September 2010 Water & Wastewater Treatment 13
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