A KPMG director has questioned whether Ofwat has set its allowed return on capital too low.
Speaking at the Westminster Energy Environment and Transport Forum on England’s Water Market Andrew Beaver said lessons could be learnt from the PR19 process including simplifying the price control procedure.
Beaver commended the reduction to weighted average cost of capital (WACC) that was seen in PR19 and the gradual reduction across three successive price controls.
“The investors in the water sector will wake up on the first day of the new AMP and the allowed base return will have halved or there abouts. The fat cats will get a lot skinnier.”
He added: “We have an incredibly low cost of capital, lowest ever. And there are some questions about whether it’s a bit too low, whether the cost of capital is being set in a way that that follows regulatory precedent.”
With more than 1,000 documents published as part of the recently completed price review process, Beaver said: “It’s a laudably transparent process that answers every question and challenge raised by companies, but there must be a better way.”
Beaver said: “The level of complexity has got a bit difficult and that impacts on the timeline and on the incentive properties. They need to be simple.”
He praised the “big success” of fast-tracking and the effort companies went to to submit the best possible solutions. “As an advisor I saw companies were really driven to put their best possible solution and that made Ofwat’s job a lot easier in terms of what companies put forward and we need to preserve that going in to PR24.”
Beaver said the levels of step change in service performance being sought in this price review were “pretty impressive” but questioned the use of comparative benchmarking employed by Ofwat.
“Is it really comparable to measure one company’s level of supply interruptions with another or are there factors that aren’t in control of management, which mean one company has a more difficult job than another?”
Benchmarking was used as opposed to the customer opinions that were gathered by companies during the writing of their business plans.
More than five million customers were engaged with the price review – up from the 250,000 involved with PR14, showing the shift in focus to include consumers.
Beaver said the amount of benchmarking used suggested the customer information was not utilised sufficiently.
“There’s an open question about the extent to which Ofwat has taken enough account of that customer engagement. And that’s potentially something to think about for the next control.”