Ofwat consults on PR24 risk/return, base costs and bioresources

Ofwat, last week, published three further papers on its emerging thinking on aspects of PR24.

In its Discussion paper on risk and return, Ofwat restated its view that companies should only earn high returns from great performance. It said it anticipated retaining its approach in which returns are determined by an allowed base return on capital and a framework of incentive and risk allocation mechanisms. The paper covered thinking on cost of equity and cost of debt, finance ability and financial resilience. The regulator also shared that it is minded to transition to full CPIH of the RCV at the start of PR24; and that it considers there may be benefits to adopting a lower notional gearing at PR24, including because there may need to be a greater role for equity in providing a buffer against shock. Respond by 2 February.

In Assessing base costs at PR24, Ofwat said it was looking for detailed feedback on: principles; developing and selecting econometric wholesale base cost models; improving the cost adjustment claim process; forward-looking capital maintenance; the cost-service relationship; and the impact of Covid-19 on residential retail costs. Respond by 3 February.

Finally, in Our proposed approach to funding bioresources activities at PR24, Ofwat is consulting on the additional information companies would be expected to provide alongside their regulatory reporting to improve regulatory econometric cost benchmarking models. The paper also sought views on detailed proposals for a new approach to funding bioresources activities at the next price review. Respond by 10 February.