Summarising the CMA's redetermination approach

Published on 19 June 2025

The Competition and Markets Authority (CMA) is taking a proportionate approach to its redetermination of PR24. Many issues have been raised, and the timeframe is very short.

Base costs

The CMA will attempt a focused and proportionate approach to reviewing base cost allowances. Ofwat wanted to deprioritise base modelling, whereas several companies wanted a full reassessment.

The request to use bottom-up evidence has been deprioritised, and the CMA will take an econometric-focused approach to model review (dropping variables with the lowest explanatory power). Cost adjustment claims will be considered individually, and adjustments will be made to the base models if they are successful. It does mention that, to reflect the limited reliability of econometric models, catch-up and frontier efficiency may be lessened, and favourable PCL adjustments may be made.

The CMA will consider sector-wide adjustments on asset-health focused mains renewal, meter replacement and network reinforcement, but it will not consider wider issues of asset health. It will evaluate the companies’ major individual claims.

It will also re-evaluate Ofwat’s approach to frontier shift.

Finally, many less material areas are being deprioritised including household retail, business rates, NI changes, Ofwat license fee, and the Environment Agency levy.

Enhancement costs

The CMA will review Ofwat’s approach to P-removal, water supply interconnectors and bioresources Industrial Emissions Directive. It will fix the errors already agreed by Ofwat for several models (identified by Northumbrian Water) such as CA55 storm overflows.

It will deprioritise many smaller elements of the enhancement proposals, but all other claims will be assessed individually (approximately 20 but the exact number is unclear) across wastewater monitoring, water supply and quality, security and resilience, and environmental schemes.

The CMA’s approach will be based on the quality of arguments and supporting evidence. Its tests will be the same as PR24 (need, best option, cost efficiency, and customer protection). Importantly, all the individual assessments will apply to the single company only – there won’t be any all-company adjustments.

The CMA will include reviews of Ofwat’s use of uncertainty and adjustment mechanisms.

Outcomes

The CMA will reconsider several companies' specific issues relating to outcome delivery incentives (ODIs), however any changes will apply to the individual company.

Concerning price control deliverables (PCDs), the CMA will reconsider the following general issues:

A perceived lack of PCD flexibility to exacerbate delivery risks and impact incentives
Any negative skew to returns resulting from PCDs
The potential for overlapping penalties
Unnecessary administrative and regulatory burden

On specific PCD approaches, it will look at mains replacement, metering, lead, cyber, storm overflows, P-removal, and time-incentive PCDs.

Risk and return

The CMA will reassess the weighted average cost of capital and use a cut-off at 30 June for market data to do so. It will also reassess the design of the aggregate sharing mechanism and outturn adjustment mechanism as part of the overall balance of risk and return.

Use of new evidence

The CMA intend to use additional and updated information, provided it is complete and robust. However, the most recent performance data from 2024/25 will not be allowed as it is unavailable before August.

Next steps

The CMA will hold company, regulator, and third-party party hearings over 3 weeks in late June and early July. They anticipate publishing provisional conclusions mid-September and a final report before 17 March 2026 (but they are aiming for mid-December).

Expectations

The CMA has had to take a narrower view than most of the appealing companies wanted due to the wide variation in views, with several wanting an entirely redetermined price control. On the face of it, the CMA has done a pretty good job of taking as many of the companies’ claims into account as possible while reflecting on Ofwat’s and other stakeholders’ views.

There is an argument that the CMA has still gone too wide as it is trying to review a huge amount of information in a very short space of time. It has agreed to reassess many individual claims across base, enhancement, and ODIs, as well as redetermine on all the big issues. The CMA’s reviews may therefore be lighter touch than the companies would like: it could opine that Ofwat got it right enough in a lot of areas.

In its final determinations, Ofwat gave companies most of what they asked for. The main areas all companies are contesting are a too-low weighted average cost of capital and the downside risks of large penalties for underperformance.

Companies with a more individual assessment may feel in a slightly stronger position as these areas may have a higher chance of a company getting an improved result (or at least be in no worse a position). The 'all-company' adjustments are the major ones, which are a roll of the dice (weighted average cost of capital, base modelling, asset health, frontier shift) and could see cross-company swings in allowed revenue, financial impact and bills.

In the past, most companies have 'won' modestly by going to the CMA (arguably because generally they had the biggest cuts from the main process). This time is less certain because of the large bill increases for everyone and Ofwat has, in the round, given companies much of what they asked for. The outcome for the CMA-appealing companies may well end up looking much like PR24. Certainly the size of bill increases and overall investment allowances are unlikely to appear much different on the face of it.

Success this time around may look like a similar-sized investment allowance, a slightly higher cost of capital, and a slightly improved balance of rewards and penalties. September’s initial findings are not far away, and it will be very interesting to see which way the CMA swings.