Ofwat ups gearing threshold for sharing to 70% to kick in at PR19

Ofwat has raised the threshold at which outperformance sharing for high gearing will kick in at PR19. In April, it proposed a 5% deadband above the notional gearing level of 60%. In a decision document published last week following extensive consultation, it opted to apply outperformance sharing to only to those companies with actual gearing at least 10% higher than notional gearing – i.e 70% geared and above.

This was one of a raft of decisions on its April consultation on revisions the the PR19 methodology on legitimacy grounds that Ofwat published in brief, to maximise the time companies have to factor the developments in to their business plans, due on 3 September. It will publish a full position statement and synopsis of consultation responses later this month.

Its other decisions on outperformance sharing included:

• Ofwat’s illustrative mechanism would share 50% of the difference between notional nominal cost of equity to actual nominal cost of debt for the proportion of gearing that is above the threshold. The regulator said companies could propose their own mechanisms if their alternative delivers equivalent benefit to customers in the round. It will assess each company’s approach to benefit sharing as part of its Initial Assessment of Business Plans.

• Ofwat has also adopted a more flexible stance on implementation. It said outperformance mechanisms can include a transition period where there is convincing evidence that this is in the customer interest. It also clarified that the ‘in the round’ benefit assessment includes both financial and wider impacts such as risks borne by customers.

There were also decisions on dividends, executive pay, transparency and financial resilience.

Ofwat chief executive Rachel Fletcher said: “Through the measures we’ve announced today, we are strengthening the incentive on companies to improve their performance for customers and cutting the rewards that come from financial engineering. This is an important step in making sure water companies put customers’ interests and those of future generations, at the heart of all the decisions they take.”