Investigation into Wessex Water's compliance with its transfer pricing obligations
| Date | 01 July 2021 |
In Wessex Water’s PR19 final determination we concluded that its proposals for 2020-25 appeared to include making an inappropriately low charge for the supply of biogas to an associate company. As a result, as part of our PR19 Final Determinations, we intervened to reduce the amount of revenue Wessex Water could raise through customer bills by £8.5 million over the period, to ensure that customers were protected from paying more for their wastewater charges than they should. Our final determination said we would consider if any further action was required to satisfy us that Wessex Water’s costs and charging arrangements for bioresources comply with its transfer pricing obligations.
In February 2020 we opened an investigation to look further into this issue – specifically the arrangements between Wessex Water and its associate, Wessex Water Enterprises Ltd (WWE). Wessex Water sells biogas and, until April 2020 had sold biosolids, to WWE. It buys electricity, some of which is generated by the biogas, from WWE in return and is also provided with free heat by WWE. Both biogas and biosolids are by-products of Wessex Water’s sludge treatment process.
During our investigation, Wessex Water took steps to address our concerns about its approach to setting transfer prices. In particular to ensure that it more clearly assesses the value of the product or service being transferred to avoid the risk of cross-subsidy, which would disadvantage its customers. In June 2021 we decided to close our investigation.
Summary of Ofwat’s decision to close the caseOur investigation identified improvements required to Wessex Water’s internal processes and controls relating to its transfer pricing arrangements for biogas and related services. This is relevant to its compliance with the relevant parts of Condition I of its licence and the Regulatory Accounting Guidelines (RAGs). These obligations are there to protect customers by ensuring that there is no inappropriate cross-subsidy between the regulated water company and any of its associated businesses.
Within the framework of RAG 5.07 (Guideline for transfer pricing in the water and sewerage sectors) companies should pay and receive a fair price for services and products. Companies are also required to develop and maintain processes and procedures to ensure compliance; these processes and procedures should meet their own specific circumstances and ensure that transactions are supported and documented.
Specifically, we...
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