Leader: Water 2020 has not laid CPI concerns to rest

Water’s “fundamentally pro-market” regulator has unveiled its Water 2020 decision document, setting out its vision for the development of the sector and, importantly, the principles on which it will base the 2019 price review – a full methodology for which will be published next year.

Ofwat enthusiastically described the document as a “milestone” and responses from the market show that water companies largely agree, welcoming more news on the shape of generally popular market solutions to challenges such as affordability, population growth, climate change and water scarcity. Intentions to respond to these macro-problems with new bioresources services and “direct customer procurement” have sparked interest and nods of measured approval.

On one particular element of Water 2020, however, companies are noticeably less positive. The shift from using the retail price index to using the consumer price index (news, p4) as a methodology for indexation of consumer bills is causing some concern among executives keen to preserve investor confidence and keep down their cost of borrowing.

Ofwat is clear about its rationale for this move. It says it plays a central role in its mission to improve consumer trust in the water sector and will provide a more “credible and legitimate” approach to the indexation of bills now that RPI has fallen out of favour with statisticians and economists.

But some water company leaders are unconvinced, especially in relation to the impact an indexation shift will have on regulatory capital value. There’s a feeling that it will constrain asset base inflation, cause gearing to tighten and result in little discernible benefit to customers. Why do it at a time when the industry is in the process of dealing with other big changes – such as market opening and the rest of the Water 2020 package – they ask?

Ofwat has acknowledged these concerns but is confident that its proposed mechanisms for making the RPI-CPI shift will mitigate any adverse effects. Those working for water companies counter that the regulator may have over-estimated investors’ willingness to be reassured. They say the best way to keep customers’ bills low is to maintain firms’ ability to borrow money at the lowest possible rate. Anything that disrupts this ability is unhelpful.