Ofwat: Customers must benefit from higher Wacc

Water companies intending to raise bills through a higher cost of capital must prove that customers are going to benefit, Ofwat has said.

A number of water only companies proposed an increased weighted average cost of capital (Wacc) in December, arguing that their smaller size made it more costly to raise finance. However, Ofwat said the companies had not set out evidence of how a higher Wacc could benefit customers.

In a statement Ofwat said: “We will not accept an increase to customers’ bills for the water only companies without evidence of the benefits those customers will see.”

The regulator set out a notional Wacc of 3.85 per cent, down from 5.1 per cent in the current cycle in its January guidance.

All companies intending to propose a higher Wacc in their revised business plans in June, have been told to set out evidence on why their “specific circumstances increase their efficient cost of finance”. They will also need to include “quantifiable benefits” to customers over the period 2015-20.

The two companies to be awarded ‘enhanced’ status, South West Water and Affinity Water, accepted Ofwat’s lower Wacc in their revised business plans in April.

Water-only company, Affinity, had originally asked for a small company premium for the Wacc but withdrew it in response to Ofwat’s risk and reward guidance.

Ofwat said it was “not actively encouraging companies to propose an adjustment”.

Sonia Brown, Ofwat’s chief regulation officer, said: “Let’s be clear, there will be a high bar of evidence required to persuade us that this is the right thing to do for customers.”