Past performance should limit PR19 fast-track status, says CCW

The past performance of a water company should be able to limit whether it gains fast-track status in the next price review period, according to the Consumer Council for Water (CCW).

In its assessment of the last price review (PR14), the water watchdog says the performance of a company in delivering its business plan and its levels of customer service should be taken into account before the regulator awards it with an enhanced status for PR19.

CCW says awarding this status “might appear perverse to customers if companies with comparatively poor service or complaint performance receives this status”.

In the PR14 process, South West Water and Affinity Water were the only companies to be awarded enhanced status by Ofwat. This means they are benefitting from a weighted average cost of capital (Wacc) of 3.85 per cent rather than the lower 3.74 per cent as set out for the other companies, as a result of the “do no harm” principle adopted by the regulator.

In its review, CCW adds that the Wacc should be set “based on demonstrable market evidence”, stating that the risk level for PR14 has been “overestimated” and this could lead to companies “being more profitable than appropriate”.

The review states a lower level of risk should be factored in, allowing the Wacc to be lower, and therefore the returns for the water companies and customer bills.

The watchdog also slammed the use of outcome delivery incentives (ODIs), saying limits should continue to be put in place to restrict the financial rewards companies can receive if they perform well over the five-year PR14 period.

It says: “Customer do not support the principle of incentivising what is seen as basic service delivery through the introduction of ODIs.”