Ofwat: CMA’s rate of return would cost billpayers £2bn

The allowed cost of capital set by the Competition and Markets Authority in its interim determination would cost billpayers more than £2 billion in the next five years if applied across the wider water sector, Ofwat has warned.

That was according to David Black, speaking at a Westminster Forum on the implementation of PR19, at which he expressed the regulator’s concern at a proposed new cost of capital 20 per cent above that requested by the appellant companies in their business plans.

Following an appeal by Anglian, Bristol, Northumbrian and Yorkshire for their 2020-25 business plans, the CMA surprised everyone when it set the allowed rate of return significantly above Ofwat’s in its redetermination last month.

Black, senior director at Ofwat, previously spoke to Utility Week about the regulator’s concerns that higher returns could mean a transfer from customers to investors without benefitting the former.  He said Ofwat was preparing its response to the interim determination for early next week.

On the tough targets set in PR19, Black said the 7 per cent reduction in leakage achieved in 2019/20 was proof the challenge was effective after years of stagnation. He added the outcomes-based focus of the methodology meant there had been less of a “slump” at the end of the final year of AMP6 compared to previous price review cycles.

Looking ahead to the next price review period, Black said smart networks and nature-based solutions should be the default approach in business plans. He also encouraged companies to take a longer-term view of planning that could allow projects to cross multiple AMP cycles.