PWC sets out retail net margins for PR14

PriceWaterhouseCoopers (PWC) has suggested that appropriate retail net margins for water companies should be between 0.5 per cent to 2.0 per cent for household activities and 1 to 4 per cent for non-household activities.

Ofwat’s delivery partner for the current price review, PWC said in a paper published this week that a higher range was appropriate for the non-household segment because of the additional risks associated with the introduction of competition in 2017.

Ofwat will set separate allowed revenues for wholesale and retail activities for the first time at PR14. This will include two binding retail controls – one for household customers and one for non-household customers.

PWC said it had assessed household retail net margins and non-household margins separately because of uncertainty regarding what level of margin that might be needed to achieve efficient entry in to the competitive market.

The consultancy said: “A balance must be struck between setting margins too high so that customers suffer unduly higher prices in the short term and setting margins so low such that competition fails to develop and customers don’t benefit from longer term cost reductions.”

PWC assessed retail net margins for the separate household and non-household controls using a definition of the allowed return as retail Earnings Before Interest and Taxation (EBIT) as a proportion of retail turnover.

According to PWC, the net margin is intended to provide an efficient company with a normal return that is appropriate to the capital employed and risks as a retailer. 

PWc developed the figures using comparator analysis based on data from the Water Industry Commission for Scotland, Ofgas, the Commission for Energy Regulation , Utility Regulatory (UREGNI), and Offer.