The CMA specified the standard of review to be applied to statutory appeals under the 2017 Regulations, drawing in particular on case law arising from regulatory appeals to the CMA in the energy sector, and this may be drawn upon by way of analogy in relation to other regulators' approaches to decision-making. Among other things, the CMA noted that:

• First, the CMA's role goes further than the traditional judicial review grounds as the CMA is required to consider the merits of the decision under appeal

• Second, the merits of the decision are to be considered by reference to the specific errors alleged by the appellant and within the confines of the prescribed statutory appeal grounds as pleaded

• Third, a consideration of the merits does not involve a re-run of the original investigation or a fresh re-hearing of all the evidence. The key question in this case was whether Ofwat made a decision that was 'wrong', on one or more prescribed statutory grounds, and

• Fourth, it was not the CMA's role to substitute their judgment for that of Ofwat simply on the basis that it would have taken a different view of the matter if it were the regulator. Where the exercise of regulatory judgement is involved, Ofwat will have a margin of appreciation as an expert regulator, which will be at its greatest where all that is impugned is an overall value judgement based upon competing considerations in the context of a public policy decision. Conversely, no margin of appreciation will be afforded to Ofwat in assessing whether it properly had regard to its duties.

Background

Castle Water is a retail water company that supplies over 250,000 business customers in the non-household market, primarily in and around London and southern England.

Ofwat is the economic regulator for the whole of the water sector in England and Wales, including the non-household market, and it is also the licensing authority for the non-household market.

In the non-household market, retail water companies usually buy water supply and sewerage services from water wholesalers and sell these services directly to customers. The arrangements for this market are set out in the Wholesale Retail Code ("WRC"), a statutory code issued by Ofwat. Under the WRC, when a retailer wishes to pay in arrears, it is required to provide and maintain a certain level of credit support in favour of the wholesaler, which may be drawn upon by the wholesaler under conditions which are defined in the WRC.

Castle Water proposed a change to the WRC to relieve retailers of the obligation to provide credit support to a wholesaler where, and for so long as, that wholesaler does not have a stable credit rating above a certain level. The proposal contended that it would redress a perceived imbalance of risk in the contractual relationship between retailers and wholesalers.

Ofwat rejected Castle Water's proposal on the basis that it would neither: protect and promote the interests of existing and future non-household market customers (a key principle of the WRC), nor be consistent with Ofwat’s statutory duties to protect customers. Among other things, Ofwat determined that the evidence it had reviewed was insufficient to conclude that a wholesaler's financial position (or a perception of the wholesaler's financial position) has a direct impact on a retailer's availability and cost of financing.

The appeal

Castle Water appealed Ofwat's decision to the CMA on two main grounds:

1. Ofwat failed properly to have regard to and/or failed to give the appropriate weight to the objective to protect the interests of consumers wherever appropriate by promoting effective competition, and

2. Ofwat was wrong in its findings about the response of financial institutions to wholesaler financial distress

Decision of the CMA

The CMA rejected both grounds of appeal:

• On Ground 1, the CMA did not agree with Castle Water's contention that Ofwat had no regard to the objective to protect consumers, including the promotion of competition element. It was satisfied that Ofwat took sufficient steps to comply with the duty to act in the manner it considered best calculated to further that objective.

• On Ground 2, the CMA found that while Ofwat had made some non-material errors of fact in its analysis: (a) Castle Water had failed to provide sufficient evidence of a causal relationship between their increased cost of credit support and a wholesalers' financial position; and (b) Ofwat had been right to find that there was insufficient evidence to conclude that a wholesaler's financial position (or perception of the wholesaler's financial position) has a direct impact on a retailer's cost of credit support.

Ofwat instructed Darryn Hale and Nico Tilche of DAC Beachcroft and Ivan Hare KC and Femi Adekoya of Blackstone Chambers.

A copy of the CMA determination can be found here.