Water UK: ‘Reasonable’ WACC necessary for investment at PR24

Following the Competition and Markets Authority(CMA)’s decision to raise the weighted average cost of capital (WACC) for four water companies’ PR19 business plans, the sector’s trade body has urged Ofwat to set the WACC “at a reasonable level” at the upcoming price review.

In its response to Ofwat’s consultation on the PR24 framework, Water UK said financeability and remaining stable and consistent were essential to attract necessary investment to deliver major capital schemes this century.

Echoing the CMA’s decision to permit a higher rate of returns, Water UK iterated the need for the sector to be appealing to long-term investors at the next and future price reviews.

Water UK noted that investors in the sector are long-term orientated, as is the thinking within the infrastructure sector, so urged the regulator to create a supportive environment.

“This will not only require the sector to continue to be seen as an investable proposition, with a reasonable prospect of an appropriate balance of risk and returns, but also one with a clear and predictable long-term regulatory framework.”

It urged Ofwat to accept the broader principle that “setting an appropriate WACC” was a better way to address financeability constraints and steer away from artificially adjusting parameters such as gearing and index-linked debt that it had proposed in its consultation.

Water UK noted that although Ofwat had called its plans “PR24 and beyond”, there was little focus on the “beyond” portion and asked the regulator to provide clarity about the long-term direction of regulation and the principles that will apply in future price reviews.

The trade body welcomed the thinking around shifting to an outcomes-based approach supported by the regulatory framework, which it said is clearly needed for the sector. Such a shift would need to recognise that catchment and nature-based schemes could carry higher risk and cost than traditional capital programmes, it added: “Without such a shift, tensions between competing pressures at PR24 may be hard to reconcile.”

It voiced a concern relating to centralised customer research for business plans, as championed by CCW and included in Ofwat’s outline, that it could delay the process of writing business plans. Early clarity on the scope and timing of such research would be crucial, Water UK said, and warned that without it centralised planning could become “a single point of failure”.

Sustainability First, the think tank consumer group, praised the “dynamic tone” of Ofwat’s proposals and supported the long-term vision as well as goals of delivering greater social and environmental value including with systems-wide approaches; a clearer understanding of customers and communities; and greater efficiency and innovation.

However, it called for more detail on what companies’ boundaries of control are, what are deemed to be core functions, and how acceptable uses of customer funds would be assessed.

The thinktank said “a balance clearly needs to be struck” between Ofwat’s suggestion of reducing performance commitments and giving companies more flexibility to deal with uncertain patterns of weather and changing social expectations.

It warned the desire for greater regulatory simplicity could lead to less customer engagement and innovation. The group suggested putting alternative mechanisms in place to monitor and ensure projects and goals promised to stakeholders are delivered.