Severn Trent makes case for bigger ODIs and multiple WACC categories at PR19

May 1, 2017

Bigger rewards should be on the table at PR19 as part of a package of measures to drive companies to deliver more for customers, according to Severn Trent. Designing incentives to deliver for customers, a report launched by the company last week, sets out four key elements that would deliver a challenging yet rewarding, clear and credible framework for 2020-25.

 

Key elements

  • Outcome Delivery Incentives – these should be financially more significant than those in play for PR14, with more in-period payments. Rewards should be paid for upper quartile performance without dynamic adjustment. There is support for a mix is common and bespoke ODIs. 

  • Cost of capital – Severn Trent argued companies who take more risk and with more challenging plans should be allowed an higher WACC, with a number of WACC categories in play. Reward payments should be informed by past performance as well as forward commitments. 

  • Cost assessment – the 5% cap applied at PR14 where companies forecast totex underspend should be scrapped; cost benchmarks should be set the upper quartile level not tighter. 

  • Output incentives – the company said these still have a role to play for longer term and resilience-based initiatives, in the context of the wider outcomes based framework. 

The report, intended as a constructive contribution in the final months before Ofwat publishes its PR19 draft methodology, is part of Severn Trent’s Changing Course/Charting a Sustainable Course series of papers. 

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