The regulator is consulting on a draft PR14 reconciliation rulebook, which aims to claw back up to 2 per cent of regulated capital value from the PR09 capital incentive scheme (CIS).
The issue was first raised by Severn Trent that the established CIS methodology using two different assumptions to calculate the indexation for the regulatory asset base (RAB) adjustment, and that a single method be fixed.
In the draft rulebook, Ofwat acknowledges it could have “taken a different approach to the treatment of indexation in the CIS calculations, which could have resulted in a lower RCV but owing to the timescale and possible last-minute disruption we elected not to do so.”
The change will result in the regulated capital value for the water comapnies falling by around 2 per cent from 2020.
A spokesperson from Ofwat told utility week there “had been issues” at the end of PR09 with and “error with the CIS scheme” and the new proposals “aim to correct that for customers and companies”.
He added that the consultation is being published now “to clarify to customers, companies and wider stakeholders, building trust and confidence in the water sector”.
Ofwat made the sector aware as part of their 2014 price review final determination document that they wanted to engage with companies to consider their approach to making adjustments and the draft rulebook forms part of that engagement.
RBC Capital water analyst Maurice Choy said: “This regulatory asset base indexation fix alone could be taken neutral to slightly negative by the market; neutral because any adjustment from this fix could be outweighed by other adjustments to revenue and RCV from the PR14 reconciliation mechanisms – for example, totex cost sharing.”
The consultation on the reconciliation rulebook closes on 7 May and Ofwat aims to publish its final decision in July.