The Competition & Markets Authority (CMA) appears ready to shift its thinking on setting the cost of capital for the four appealing water companies’ redeterminations due in mid-February.
A consultation document released by the regulatory body indicated the weighted average cost of capital (WACC) will be reduced by around 0.3 per cent compared to its provisional findings published in September.
Anglian, Bristol, Northumbrian and Yorkshire water companies each rejected Ofwat’s PR19 final determination in December 2019 and requested referral to the CMA for their 2020-25 business plans.
The CMA said it has re-evaluated and updated its thinking on the cost of debt and equity. This would impact on the WACC, which was set controversially higher than Ofwat’s and above what companies requested.
On the cost of debt, the CMA is now suggesting an allowance of 2.12 per cent, down from the 2.45 per cent set in the provisional findings. The impact on WACC would be a reduction of c.0.20 per cent.
The cost of equity range will be updated from the provisional findings to reflect the stakeholder responses. It said the point estimate for the cost of equity will be set around 0.25 per cent above the mid-point range.
The CMA will consider responses to the consultation along with other evidence before setting a final figure for the cost of capital.
Household bills are set to fall by 11 per cent compared to 2015-20, which is a greater reduction than in the preliminary findings but not as great as Ofwat’s proposed bill reduction (12.5 per cent).
The CMA noted its approach contrasted with that taken in its draft redetermination when it picked the bottom of the range as the estimate of the cost of embedded debt; the middle of the range as the estimate of the cost and weight of new debt; and a figure between the midpoint and the top of the range as the estimate of the cost of equity.
It said it now considers the risk of setting the cost of equity too low is not as significant as it had implied in its provisional findings and said the right estimate is towards the middle of the range.
Given current market conditions, the CMA considers the risk of capital exiting in AMP7 is relatively low.
The CMA said it will be consulting on two further working papers this month, which it will publish shortly.
The consultation on the cost of equity and debt runs until 27 January, leaving a matter of weeks to finalise its redetermination as it also states it still intends to publish in mid-February.
The regulatory body came under pressure from Ofwat, which accused it of rushing the redetermination and urged the CMA to make full use of the time available.
The CMA pushed back the deadline for its decision from December to February with the statutory deadline of 18 March remaining unchanged.