Pennon's buyout of south-east water firm could harm regulation, says watchdog

Pennon is one of the UKs biggest water and utilities companies

Britain’s competition watchdog has said Pennon’s buyout of Sutton and East Surrey Water (SES) could hurt the regulator’s ability to compare water companies.

The Competition and Markets Authority (CMA), Britain’s competition watchdog, has voiced concerns that Pennon’s acquisition of SES could erode Ofwat’s authority as a water regulator by removing SES from its dataset, thereby reducing the number of comparators available for estimating cost allowances and setting service quality targets, according to a notice issued on May 3.

Pennon was given until May 13 to respond to these concerns, with the CMA stating it would initiate a new, in-depth investigation into the deal unless it accepts Pennon’s response. Pennon, listed on the FTSE 250, purchased Sumisho Osaka Gas Water UK, including its subsidiary SES Water, in January for £380million.

SES Water provides drinking water to south-east England, serving 845,000 customers across East Surrey, West Sussex, west Kent and south London. Pennon also owns South West Water, Bristol Water and Bournemouth Water.This investigation comes during a challenging time for the UK water industry, which has recently been scrutinised over a scandal involving sewage discharges.

Additionally, increases in bills and growing debt piles, coupled with continued rewards for shareholders, have led to a decline in consumer confidence in recent years. Before sealing the SES deal, Pennon reported a pre-tax loss of £8.5million for the year ending March 31, yet it still boosted its dividend to shareholders by a hefty 10.9% to £112million.

Joel Bamford, executive director of mergers at the CMA, said: “Water services are vital to our day-to-day lives, whether at home or in the workplace, and we’re concerned that this deal could impact Ofwat’s ability to make comparisons and carry out its role of regulating the water sector. We will now carefully consider the solutions put forward by the companies and seek views from Ofwat to determine whether they address our concerns.”

Pennon Group’s top boss Susan Davy hailed the update as a “positive and expedient step forward” for the acquisition. It is important to us that this deal receives the appropriate level of scrutiny so that all of our stakeholders feel reassured of the benefits of the acquisition and have trust in the outcome,”.

She added: “While the undertakings have not yet been agreed, we have been through this process before with our acquisition of Bristol Water and are confident that we will be able to offer a compelling package of undertakings that will fully address the CMA and Ofwat’s concerns, and ensure that the benefits of the acquisition for all customers and stakeholders are delivered.”