Fast track action points virtually wipe out financial benefits

Ofwat’s interventions in the PR19 business plans of Severn Trent, South West Water and United Utilities will largely offset the financial benefits of fast tracking, according to Moody’s.

Although the three companies’ plans were of high quality, the companies had to accept a small number of changes to their submissions to achieve fast-track status and the associated benefits, including a reward of 10 basis points on the return on regulatory equity.

Moody’s noted “this is approximately half of the level Ofwat awarded to the two fast-tracked companies at the 2014 price review” and went on to say: “We estimate that the additional action points, particularly on cost efficiencies and improving performance…will largely offset the modest financial rewards obtained of £18 million, £6.5 million and £22 million in aggregate over the five years for Severn Trent Water, South West Water and United Utilities Water, respectively.”

Nonetheless Moody’s said the fast tracking was a credit positive because the companies will receive allowances largely in line with their proposals and will be able to move towards implementing their plans for the new regulatory period, on top of the small financial rewards. For the remaining companies, particularly those in ‘significant scrutiny’, Ofwat’s business plan assessment was credit negative, with cost efficiency a major challenge.

“The sector as a whole proposed total expenditure of around £56 billion, roughly 13% above the level the regulator considers necessary, with the gap largely linked to enhancement expenditure, rather than maintenance,” noted Moody’s.