In our statement of methods for future water sector merger evaluations, we committed to publish sample spreadsheets to illustrate the type of analysis we expect may be undertaken in future merger investigations. This note is a guide to the spreadsheets we have published that were used in the Pennon / Bournemouth Water merger. The Competition and Markets Authority (CMA)’s findings and Ofwat’s submissions to the CMA in the that merger investigation are available on the CMA’s website.
The spreadsheets illustrate the methodology and calculations that are aligned with the methodologies set out in the Statement of methods and the accompanying Europe Economics report “Valuing the impact of mergers in the water and sewerage sectors and identifying undertakings in lieu”. For simplicity, the spreadsheets reflect the central case assessment in our final submission to the CMA (with two exceptions), although Ofwat’s submissions to the CMA took account of a range of modelling assumptions.
The benchmark spreadsheets include:
The assessment of impacts is slightly different to the final submissions made to the CMA for ODIs and retail spreadsheets. The differences relate to a correction in the discounting calculation in the ODI spreadsheet and to the assumptions made in respect of convergence assumptions for retail.
When carrying out their impact assessment, merger parties will want to make their own assumptions about company performance and to be able to justify them. The spreadsheets therefore provide the option to customise the assumptions made in South West / Bournemouth merger assessment.
We also present several spreadsheets on precision:
We note that the specific and the bootstrapping approaches are less relevant when the models are complex (as they were at PR14) than they had been in previous merger investigations. Although all of these are methods that have been used by the Competition Commission in the past, the CMA only relied on the General Approach in the Pennon / Bournemouth merger inquiry and we therefore consider it most relevant to focus on the General Approach in future investigations if the models are of similar complexity to the PR14 models.
However, for completeness, we have provided the specific and bootstrapping spreadsheets (as those are also set out in the Europe Economics report). We consider that merging parties should use them with care and when proportionate and take into account the following limitations.
- Specific approach CI spreadsheet: estimates the change in confidence intervals after simulating the merger and the impact is not decomposed between precision and benchmark.
- Specific approach spreadsheet: calculates the total impact on the benchmark and precision, so decomposition assumptions need to be applied to separate out the pure precision impact.
- Bootstrapping spreadsheet: run at the variable level and therefore requires assumptions about the aggregation of the impact to the model level and the implications of multicollinearity.