Ofwat set to come down hard on water companies

Published July 13th, 2017

The industry regulator Ofwat plans to make it much harder for UK water companies to generate excess returns from 2020 onwards, by slashing their allowable cost of capital and imposing tougher financial penalties on those with the poorest operational performance.

The proposed methodology for the PR19 pricing review that Ofwat published earlier this week will cut the industry’s allowed weighted average cost of capital (WACC) to less than 3% – from 3.74% in the current period – and introduce a much stricter system of outcome delivery incentives (ODIs), which reward the best performers in the sector and penalise the worst.

“There are some companies that are likely to struggle in the AMP7 period because these ODI penalties could be really substantial,” said Richard Khaldi, a water sector expert at PA Consulting Group, who was formerly a senior director at Ofwat. “The days of easy money in the water sector are over.”