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The Competition Commission has now set price limits for Mid ...
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


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 av

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


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

- Ofwat's assessment on the scope to make efficiency


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 approachfrom 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.


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 DETR 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 av

Mid Kent



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



Determination -19.7 +4.5 +3.2 0 0 -2.8

Sutton & East

Surrey Water


Business Plan +7.0 +34.8 +20.6 -0.6 +3.5 +12.3


Statement of

Case2 +3.0 -1.2 +5.0 -5.8 +6.6 +1.4

Ofwat Final

Determination3 -17.0 -5.0 -2.4 0 0 -5.1



Decision -17.0 +3.8 +2.1 0 0 -2.5

(1) Assumed 12% of customers opt for a meter

(2) New numbers submitted by Sutton and East Surrey Water to

the commission during this enquiry, assumed 7% of

customers opt for a meter

(3) Assumed 2% of customers opt for a meter

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


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