CCWater condemns Ofwat for scrapping rewards cap

The Consumer Council for Water (CCWater) has slammed Ofwat’s decision to scrap a cap on the financial rewards available to water companies for beating their performance targets, saying it could “open the door to bill instability”.

In its PR19 methodology, Ofwat said it will not cap the total amount a company can earn from outcome delivery incentives (ODIs).

“We are setting an indicative range of +/-1 per cent to +/-3 per cent of RoRE [the return on regulated equity] for financial ODIs,” said the regulator.

CCWater chief executive Tony Smith hailed the record-low cost of capital set by the regulator, saying the decision was “positive news for customers”.

He added: “Ofwat has been over-generous to water companies in the past at the expense of customers – a point we have repeated publicly many times and has been echoed by the National Audit Office and the Public Accounts Committee. This lower cost of financing is an important step in keeping future water bills as low as possible.”

However, he warned that the decision to remove the rewards cap would “hand companies an opportunity to claw back some of the money they would be unable to get through lower financing costs”, leading to higher customer bills.

In its PR14 price review period, Ofwat set an aggregate cap at +/-2 per cent. The regulator said it had opted to remove the cap to give companies an opportunity to propose higher outperformance and underperformance payments in their business plans, “where customers support this”.

CCWater had previously warned that Ofwat’s price review plans could lead to bill hikes. In September, it commented: “There is a risk of a negative customer reaction, particularly if ODI rewards drive bill increases and inflation also rises.”

Water companies including Severn Trent, which made £46.7 million from outperformance rewards in 2016-17, have argued for an enhanced role for ODIs.

Ofwat declined to comment.