Pennon’s south-east England water firm deal could harm regulation, says watchdog

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) said the deal could undermine Ofwat’s authority as water regulator, by wiping SES from its dataset.

This would reduce the number of comparators available for it to estimate cost allowances and set service quality targets, it said in a May 3 notice.

Pennon was given until May 13 to respond to the concerns. The CMA said it will start a new, in-depth investigation into the deal unless it accepts Pennon’s response.

FTSE 250-listed Pennon bought Sumisho Osaka Gas Water UK, including its subsidiary SES Water, in January for £380 million.

SES Water supplies drinking water to south-east England, with 845,000 customers across East Surrey, West Sussex, west Kent and south London.

Pennon also owns South West Water, Bristol Water and Bournemouth Water.

The investigation comes amid a torrid period for the UK water industry, which has seen operators put under the microscope in a scandal over sewage discharges in recent months.

Meanwhile, hikes in bills and swelling debt piles combined with continued rewards for shareholders has led to declines in consumer confidence in recent years.

Before the SES deal closed, Pennon reported a pre-tax loss of £8.5 million for the year ending March 31. At the same time, it hiked its dividend to shareholders to £112 million, an increase of 10.9%.

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.”

Susan Davy, Pennon Group chief executive, said the update was a “positive and expedient step forward” for the deal.

“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 said.

“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.”