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

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.