The Consumer Council for Water (CCWater) is warning against water companies being able to give to customers with one hand while taking from them with the other in the 2019 Price Review. The water watchdog has welcomed Ofwat’s tighter squeeze on companies’ financing costs which will help to keep bills down in the future. But it says a decision by the industry regulator not to keep a cap on the financial rewards companies can reap from beating their performance targets could open the door to bill instability.
Ofwat announced that it has set the Weighted Average Cost of Capital (WACC) at 2.4%. This is the assumption it makes on the cost water companies will incur in raising capital to fund investment in assets like pipelines and treatment works. This is the lowest WACC since the industry was privatised and is within the range recommended by CCWater last week, following independent research.
Tony Smith, Chief Executive of CCWater, said: “This is positive news for customers. Ofwat has been over-generous to water companies in the past at the expense of customers – a point we have repeated publicly many times and has been echoed by the National Audit Office and the Public Accounts Committee. This lower cost of financing is an important step in keeping future water bills as low as possible. However, we are concerned that the regulator has decided to remove the cap on the financial rewards companies can receive for meeting their performance targets. This could hand companies an opportunity to claw back some of the money they would be unable to get through lower financing costs and it could lead to bill increases which many customers view as rewards for doing the day job.”
Ofwat’s announcement came as it published its final methodology for the price-setting process which sets out how it wants water companies to develop their service and investment plans for the five-year period from 2020 to 2025, and how it will assess them when they are submitted.
CCWater is pleased that the regulator has taken on board some of its recommendations to make the methodology stronger, but believes it could have gone further to ensure water companies deliver better customer service. In particular, it believes Ofwat has missed an opportunity to encourage companies to put more focus on customer satisfaction and trust by not placing a greater proportion of the incentives available on the customer experience measure (‘C-Mex’).
CCWater will look closely at the detail of Ofwat’s final methodology and continue to push companies to deliver business plans that customers consider to be acceptable and value for money.