Seven ways to allocate water resources Regulatory Capital Value

Ofwat has published technical guidance for companies on how they might approach allocating pre-2020 water resources Regulatory Capital Value at PR19. Consistent with its wider approach to regulation, Ofwat has opted not to impose a common allocation methodology: “Instead, we expect each company will have ownership and responsibility for how its legacy pre-2020 RCV is allocated between water resources and network plus, consistent with an unfocused approach.”

The technical paper sets out seven potential approaches companies could use, along with the following list of issues to consider: • The definition of water resources. • Impact on wholesale tariffs. • The links to Water Resources Management Plans. • The links to bulk supplies. • Roll forward of historic net Modern Equivalent Asset Value (MEAV). • Revaluation of net MEAV. • Separating pre and post-privatisation RCV. • The potential for reallocation at the 2024 price review.

The regulator said it plans to meet with companies to understand their proposed approach in response to the guidance in April and May this year. Companies have until January 2018 to propose their allocations and provide sufficient supporting evidence to enable Ofwat to carry out a review and provide feedback, which will be by the end of April 2018. Binding decisions on RCV allocations will be issued as part of PR19 final determinations in December 2019.

In May 2016, Ofwat confirmed it would take an unfocused approach to the allocation of water resources RCV – which means an allocation on the basis of the proportion of the asset value of water resources relative to the wholesale water business. It said: “A focused approach would not be viable or desirable as, given the scale of the RCV discount at privatisation and the existing MEAV estimates, a focused approach could result in the entire legacy RCV being allocated to water resources for some companies – and in some cases, this would still be below the relevant MEAV.”