Further guidance from Ofwat targets 3.85 per cent WACC

Ofwat has said it expects water companies’ weighted average cost of capital (WACC) to be no higher than 3.85 per cent.

In additional guidance on risk and reward published by the regulator today, Ofwat said that the WACC proposed by water companies in their business plans exceeded market evidence on required returns.

Ofwat has issued the further guidance after it came to the view that company proposals on risk and reward were not in line with its expectations.

The regulator will ‘pre-qualify’ companies in March that have outstanding business plans which pass its tests for outcomes, costs and affordability, and which have demonstrated robust board assurance.

Companies that ‘pre-qualify’ can then choose to adopt Ofwat’s risk and reward guidance which will enable them to benefit from a fast-track approval process.

In April, Ofwat’s Board will announce its decision on the quality of all other companies’ plans. Business plans requiring some intervention, will go through a standard process, while any company whose plan has significant shortcomings will be asked to resubmit its plans.

According to the guidance, wholesale WACC also exceeded market evidence and there was a wide variation in estimated retail margins,” broadly in line with regulatory precedents”.

Ofwat also said it expects companies to provide greater transparency around pain and gain and how this is shared between customers and other stakeholders.

In addition, it said companies should reconsider the overall scope for outperformance from cost.

Cathryn Ross, Ofwat’s chief executive, said: “Our role is to protect customers and ensure that efficient companies are able to   finance their functions.

“We have already seen companies responding to our calls to listen to their customers. The guidance that we issued today offers a further opportunity for companies to secure the best possible outcome for their customers.”

Ofwat is due to make final decision on prices by January 2015.