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Sludge has the highest level of total risk in the new water market, with water resources considerably lower, according to analysts at PricewaterhouseCoopers (PwC).
In a report for Ofwat, the consultancy said the setting of ‘gate prices’ can raise total risks, as they are likely to reflect the full economic costs of the sludge activity and add to competition risks.
“For sludge the proposed new market mechanisms are likely to take a different form to that of water resources, through the application of a gate price rather than an access price,” they said. “For entrants providing sludge services, the price paid/received is a gate price paid by the incumbent wastewater business to the entrant to undertake the sludge activity.”
This would place downward pressure on gearing where the reform creates an environment most similar to that of a fully competitive market.
Ofwat is consulting on its Water 2020 programme, which aims to change the regulatory framework and facilitate the introduction of new market structures in wholesale water and sewerage services in England.
PwC reviewed the reform options, suggesting there are some “potentially significant” impacts on the cost of capital and required returns without additional regulatory protections.
“Where these risks are ignored by Ofwat, then this could result in significant value impacts as well as regulatory uncertainty for investors and could result in a regulatory risk premium in the future,” analysts warned.
They suggested one way of dealing with these risks is to provide various changes to the regulatory regime, including allowing a higher cost of capital.
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