“That’s brave, minister.” Sir Humphrey’s immortal words of warning to Jim Hacker could have been uttered to any of the chief executives who commissioned KPMG to write a report attacking the financial assumptions that underlie Ofwat’s framework for the next price review. In the polite, conservative world of UK water, that’s a fairly big step.
This tells us that the water companies – and their investors – are getting antsy. And small wonder: Ofwat has made little secret of its plans for PR19. The regulator is convinced that the “lower for longer” interest rate environment will continue, with the cost of both debt and equity at historic lows, and is determined that customers, rather than investors, should benefit this time round. It argues that, in this unique macro-economic environment, basing estimates around the cost of finance on historical data is misleading, to the detriment of customers. Companies beg to differ, asking, reasonably enough, if you can’t base your assumptions on what’s happened in the past, what can you base them on? Not PwC’s numbers, according to a rival report produced for Affinity, Anglian and Northumbrian Water, which talks sniffily of the “shortcomings” of the original analysis.
The fightback has begun. With the odd outlier, the companies have co-existed peacefully with their regulator since the Section 13 debacle and the conclusion of PR14. Customers were happy, in the main; investors were happy, in the main; and all the political and media scrutiny was focused on energy. Not any more. Ofwat is determined that this price review will crack the problem of monopoly companies benefitting from historically cheap finance, while the companies fear falling returns will send their investors running for the hills.
Ultimately, Ofwat has the final say – but the KPMG report, and other consultation responses including CC Water’s – will make uncomfortable reading in Bloomsbury Street.