Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
The Competition and Markets Authority (CMA) will shortly be consulting on new appeal rules and guidance for non-price control licence modifications in the water sector. This follows the significant change brought about by the Environment Act 2021, pursuant to which the CMA will hear non-price control licence modifications by way of appeal rather than redetermination. Given strong sector parallels, the CMA’s proposed rules and guidance are likely to be based heavily on the equivalent documents in the energy sector.
We set out below some thoughts and practical tips for water companies based on our experience of energy licence modification appeals, including the recent RIIO-T2 and GD2 appeals.
The shift away from a redetermination regime in the water sector has been foreshadowed for some time, and forms part of a broader movement towards harmonising the appeal processes across the regulated sectors (see further below). Therefore, whilst not a surprise in itself, it is noteworthy that the CMA is under pressure to get rules and guidance in place for the water sector quickly. This is because there are a number of important non-price control licence modification decisions on the horizon for Ofwat. For example, there are those which fall under the broad headings of board leadership, transparency, governance and resilience. These include: changes to improve financial resilience (e.g. “the need to align the licence to [Ofwat’s] broader expectations for dividend policy” and a requirement for additional board assurance statements, among others), potentially some of the requirements around long-term delivery strategies (see our earlier Regulatory Trends article on this), and transparency, monitoring and audit requirements more generally (noting recent enforcement cases concerning the adequacy and management of resources, how boards satisfy themselves before signing the adequacy certificate, and also the new unpermitted sewage discharges investigation). Clearly, such licence modifications may be highly contentious and result in multiple applications to appeal.
The change from redetermination to appeal is significant for water companies for a number of practical reasons. First, Ofwat no longer needs to secure company agreement in order to make a non-price control licence modification. It can now make such modification unilaterally, subject to the company’s right of appeal. Second, an appeal – as distinct from a redetermination where the CMA considers the matter afresh – requires the water company to identify specific legal grounds on which Ofwat’s decision was “wrong”, i.e. failure to have regard to or give appropriate weight to its statutory duties or strategic priorities, error of fact or law, procedural failing(s), failure to achieve stated effect. It is therefore a more limited process, and necessarily ‘front-loaded’ in terms of submission of argument and evidence by the appellant. Third, despite this ‘front-loaded’ process, the time limit for bringing an appeal is very short – just twenty (20) working days from the first working day after Ofwat’s licence modification decision is published. This is extremely challenging – as is the timescale for the appeal process more generally. The CMA must determine an appeal within four (4) months beginning with the date permission to appeal is granted (extendable to a maximum of five (5) months only if there are “special reasons” to do so). Meeting these timescales will require a substantial amount of pre-appeal preparation and planning on the part of a water company, and a flexible but robust process on the part of the CMA.
With regard to the latter, the CMA has already carried out an early stage consultation on the rules and guidance that it should adopt for its non-price control licence modification appeal function in the water sector. This focused – sensibly in our view – on areas where a mixture of experience (including recent experience of multiple, linked appeals in the RIIO-T2 and GD2 appeals) and technological advances indicate that the energy model can be improved, and also on identifying any sector-specific features which might require different provision. Our response to that consultation can be found here. Whilst we must wait and see the CMA’s proposals coming out of this consultation, it seems reasonable to assume that its draft rules and guidance for the water sector will be based on, and continue to bear a striking similarity to, the energy sector versions. With this in mind, we set out below some top tips for water companies based on our energy experience.
The CMA intends to consult on drafts of its new appeal rules and guidance for non-price control licence modifications in the water sector this month, which will provide water companies with an opportunity to review and provide input from a practical perspective and with the benefit of their sector insight. We do not anticipate that the consultation period will be lengthy, as the CMA is keen to have final versions in place by Easter if possible. Companies should therefore be ready to review and respond to the drafts promptly.
Looking to the bigger picture, the redetermination regime now remains in place only for water and sewerage price control licence modifications and rail licence modifications – but the recent BEIS ‘Economic Regulation Policy Paper’ (January 2022) indicates that these outliers may also be in jeopardy. Specifically, that policy paper notes that current differences in the appeal regimes are “typically a by-product of sectoral policy development, rather than cross-sectoral design” and increased consistency will make it easier for investors involved in multiple sectors to navigate the process and make the UK “a more attractive prospect for investment”. It is therefore worth bearing in mind that the rules and guidance put in place for non-price control licence modifications in water sector may acquire greater scope and importance in due course, so companies should engage now to help influence the shape of the appeal process going forward.
Finally, we note that the government proposes to consult on “a package of measures designed to ensure the UK model of economic regulation fits the need of the modern age” later this year, and will provide an update on developments when that occurs.
The corporate taxation of cross-border groups is at the brink of significant change. In 2021, after years of discussions, the members of the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting agreed a blueprint to impose new taxing rights in respect of low-taxed income of large multi-national enterprises (MNEs).
© Norton Rose Fulbright LLP 2021