Consumer watchdog presses Ofwat to curb cost of capital at 1.8%-2.5%

Ahead of Ofwat's publication this Wednesday of its final PR19 methodology which will include its indicative view of the cost of capital, the Consumer Council for Water has piled on the pressure to keep the WACC down, arguing that it should be set between 1.8% and 2.5%.

The call came on the back of an independent recommendation from Economic Consulting Associates, following a report which CC Water commissioned. The study looked at the financial markets, cost of capital decisions made in other regulated sectors and water companies’ financial performance, including historical data and forecasts.

Chief executive at the Consumer Council for Water, Tony Smith (pictured), said: “Ofwat must ensure that water companies do not continue to make generous returns at the expense of customers. This independent study reinforces our view that there is an opportunity for Ofwat to set a much lower cost of capital that will help to hold down bills.”

When it published its July consultation, Ofwat said the PR19 WACC would likely begin with a two, so CC Water has pitched for that to stay at the lower end of the two range. The equivalent figure for PR14 is 3.74%. CC Water said if the regulator had applied a cost of capital of 2.5% for this period, it would have reduced customers’ bills by about 7%.