Water redeterminations - Provisional decision

Provisional redeterminations on water price controls issued

·    Group rejects nearly 80% of increases sought by companies.

·    Average additional increase in customer bills of 3% expected.

·    Extra money to fund more resilient supply, reduce pollution and reflect increased financing costs.

An Independent Group of experts appointed by the UK Competition and Markets Authority ('the Group') has released its provisional redeterminations on the price controls of the 5 water companies that disputed Ofwat's determinations.

Background to the redetermination

A price control sets the amount of revenue companies are allowed to recover from customer bills. In December 2024, Ofwat published its decisions on PR24 - the price control for each of the 16 regulated monopoly companies covering the period 2025 to 2030 - a decision they said would lead to average bill increases of £157 (36%) over the next 5 years.

Five companies - Anglian Water, Northumbrian Water, South East Water, Southern Water, and Wessex Water - argued that Ofwat's decision left them unable to meet the regulatory requirements set out for them. Each of these companies chose to exercise its legal right to request a redetermination of Ofwat's decision by an Independent Group of experts within the CMA. The disputing companies serve over 7 million household and business customers and have a combined annual revenue of around £4 billion.

This process takes place during a period of extensive debate and potential change for the water sector and how it is regulated. The Independent Water Commission recently concluded that the sector "requires fundamental reform on all sides". The Commission's final report contains 88 wide ranging recommendations for a complete "reset". The UK government response stated that the current system is "failing the environment, customers and investors"; and that government "will now act quickly, turning the page on a broken system with root and branch reform".

The Group is required by law to undertake redeterminations under the current regulatory system, with more fundamental decisions about the water sector necessarily reserved for government. A maximum of 12 months is allowed for this complex process, compared to the 4 years in which Ofwat conducts its price control.

The provisional redetermination

Over the last 7 months, the Group scrutinised extensive evidence from the disputing companies, Ofwat, and over 40 third parties (including representatives of investors, environmental and consumer groups).

In its provisional decisions, the Group has balanced minimising the impact on people's bills with the need for companies to have enough funding. This includes funding to meet their environmental and drinking water quality legal obligations, and for investor returns to reflect the risks involved - so companies can raise the money to deliver better outcomes for current and future customers.

The Group has provisionally decided to allow 21% - an additional £556 million in revenue - of the total £2.7 billion the 5 firms requested. This extra funding is expected to result in an average increase of 3% in bills for customers of the disputing companies, which is in addition to the 24% increase for customers of these companies expected as part of Ofwat's original determination.

The additional funds should allow the companies to meet new legal requirements and to fund delivery in critical areas, like supply resilience and pollution reduction. The Group also accepted the need for slightly higher investor returns than allowed by Ofwat. This is in part because the cost of equity has increased due to rising interest rates over the last year which is making investment more costly to secure.

The Group has decided to largely reject companies' funding requests for new activities and projects beyond the significant increases already allowed by Ofwat. Some exceptions were made where the Group found that more spending was needed to deliver benefits to consumers, or that companies' ability to invest had been underfunded.

The Group has also tied funding to defined outputs and required levels of performance, making clear that customers should benefit from bill increases they are bearing and that companies should be penalised when they do not deliver.

The Group made changes to Ofwat's economic modelling so that allowances more accurately reflect differences in operating environments between companies, while applying a stretching efficiency challenge so that customers served by inefficient companies do not pay for poor operational performance.

Chair of the Independent Group Kirstin Baker said:

"We've found that water companies' requests for significant bill increases, on top of those allowed by Ofwat, are largely unjustified. We understand the real pressure on household budgets and have worked to keep increases to a minimum, while still ensuring there is funding to deliver essential improvements at reasonable cost."

Indicative impact of our provisional determinations on annual customer bills

The CMA will now consult on the provisional decision. For more information on the provisional decision or to submit a response to the consultation, visit the CMA's case page.

Notes to editors:

·    The table contains forecasts of average water bills - actual bills will vary according to factors such as average customer water consumption and company performance. The prices have been adjusted for inflation using the consumer prices index including owner occupiers' housing costs for 2022/23. Water bills for South East Water do not include the cost of wastewater services as it is a water-only company. 

·    For media enquiries, please contact the CMA press office on 020 3738 6460 or press@cma.gov.uk.