Ofwat’s price review reduces investors’ allowed returns and costs. But it has provided greater than expected protections for investors
The UK’s water sector breathed a sigh of relief last week when the Conservative general election victory wiped the possibility of nationalisation off the agenda for the foreseeable future.
Its reaction to the regulator Ofwat’s “final determination”, outlining the returns water companies will be able to make and other obligations, penalties and rewards they will face in the next five-year regulatory period, is likely to be less euphoric.
Ofwat on Monday (16 December) said that it has set the return on capital, a measure of returns to debt and equity investors, available to water companies in the five years from April 2020 at 2.96%, “the lowest allowed return since the privatisation of the water sector.”
As well as cutting returns, Ofwat is also imposing other measures on water companies, such as more stringent targets in areas such as water leakage and water supply interruptions.
However, Ofwat, which has been in negotiations with water companies since outlining its initial plans two years ago, has moderated some of these plans.
“The headline reduction in returns is in line with expectations, but there has been a softening in some areas, so it will be interesting to see what will happen in terms of appeals to the Competition and Markets Authority (CMA),” says one industry observer.
Following Ofwat’s final determination, the water companies now have two months to appeal to the CMA. “I think water companies will now be digesting final determinations and we will probably see in January whether they decide to go to the CMA,” the industry observer says.