“We’ve called on Ofwat to avoid being over-generous”
Ofwat has made much of its determination to hold down bills for customers at the 2019 price review. Next month we’ll get our first indication of just how serious the regulator is about realising that ambition, when it publishes its assumption on the cost of capital for 2020 to 2025.
This announcement will be watched closely by water companies, but it should matter to customers, too. Within its five-yearly price determinations, Ofwat makes an assumption of the costs water firms incur to raise finance from investors and lenders. Each 0.1 per cent increase in the cost of capital can add about £2 per year to the average bill.
In the past, the regulator has overestimated this cost at customers’ expense. Since the water industry was privatised in 1989, Ofwat’s generosity has been reflected by the fact the listed water companies have produced returns higher than the average on the FTSE share index. This is despite the relatively low risk of investing in the water industry.
We’ve repeatedly called on Ofwat to avoid being over-generous; the last price review in 2014 was a step in the right direction. But companies’ financial performance since 2015 shows they are still raising finance at a cost lower than the regulator assumed. Outperformance on outcome delivery incentives could add to these returns.
In December, Ofwat has the opportunity to show it is determined to strike a fairer balance between the interests of customers and investors. We’re working hard to make sure it does that.