Water sector rises to the PR19 challenge

Water UK has promised the sector will rise to the challenge of Ofwat’s 2019 price review, which the regulator has promised will be “tougher for the average company”.

The industry representative group acknowledged that the price review is a “tough challenge” from Ofwat, and will be tougher for some companies than others. However, Water UK chief executive Michael Roberts said the industry has a “strong track record” in providing customers with a “world-class product and service”.

“We’ve cut bills, increased help for the less well-off, and reduced leakage by a third, and we are committed to achieving even more for customers in the future,” he added.

Ofwat published its methodology for PR19 today (13 December). As part of the methodology, the regulator signalled a record low cost of capital of 2.4 per cent in RPI terms.

Ofwat said it would expect this reduced cost of capital to result in an average saving per customer of £15-£25 per year from 2020 onwards.

Water sector expert at PA Consulting Group Richard Khaldi, previously a senior director at Ofwat, said the outlook for underperforming companies was “bleak”.

He suggested that water companies may have been expecting Ofwat to soften the impact of its proposed methodology for PR19. However, he added, the final methodology “makes it clear” that there will be no concessions.

“Ofwat has chosen the lower end of the expected range for the Wacc and is continuing to push for operational outperformance. This means companies are very unlikely to be able to offset lower returns overall with operational outperformance rewards unless they are already at or near the upper quartile.”

PwC water sector leader Richard Laikin said: “The bar remains high for companies preparing their business plans and companies will find it challenging to earn exceptional plan status in Ofwat’s assessment. The methodology will benefit the top performers, with those in this bracket expecting to earn higher financial rewards for cost savings and for out-performance against targets. Ofwat has also increased incentives for companies to improve their plans. Poor performers, however, will face greater financial challenges.

“Companies are also likely to focus on Ofwat’s early view of the cost of capital. This is towards the low end of expectations, but does at least provide clarity for companies to finalise their 2020-25 business plans. In other areas, Ofwat has slightly softened its approach, such as the introduction of year-on-year forecast upper quartile targets for common performance commitments.

“With much to do before the September 2018 business plan submission date, it will be a challenging time ahead for water and wastewater companies. Pressure is ramping up to create effective and robust plans in line with the methodology and deliver the quality of evidence Ofwat is looking for.”

The Consumer Council for Water has welcomed the lower Wacc, but slammed Ofwat’s decision to scrap a cap on the financial rewards available to water companies for beating their performance targets, saying it could “open the door to bill instability”.