Ofwat's early view on PR24 allowed return tops PR19 figure
Ofwat offered an early view on the allowed return it could set at PR24 when it published its final methodology for the price review last week. At 3.29% in real CPIH terms, this was over 30 basis points higher than the PR19 allowed return. It was based on data up to 30 September 2022, and on an allowed return on equity and debt of 4.14% and 2.60% respectively.
However, Ofwat emphasised the volatility of the current environment, and noted that it may index a component of the allowed return on equity if the recent levels of market volatility (especially interest rates) persist.
The regulator’s methodology remained largely in tact from its draft proposals, though there were some notable updates and new decisions. These included:
• notional gearing reduced from 60% to 55%;
• water demand Performance Commitments (PCs): Ofwat will set separate PCs relating to the different components of water demand – leakage, per capita consumption and business demand (which will include the largest users of water) – a joint target was mooted at the draft stage;
• C-MeX: incentive increased from ± 12% of annual retail to ±18%;
• enhanced incentives confirmed for leakage and per capita consumption;
• a new Water Efficiency Fund will be established, valued at £100m, to facilitate the development of transformative improvements to water efficiency at a regional and national level, to help to reduce demand for water – details to follow;
• smart meters – Ofwat said it expected all companies to consider smart meter solutions as the standard meter installation type and to collaborate on common standards;
• storm overflow expenditure – improvements are expected through base expenditure; extra funding will only be permitted for going beyond current legal requirements;
• net zero – more details were provided on Ofwat’s expectations here, including that some reductions are expected from base expenditure, with funding for enhancement activities and a new net zero challenge pot providing extra allowances to companies that propose the most efficient and mature approaches to emission reduction;
• customer acceptability and affordability testing of business plans – new guidance was published on this from CCW and Ofwat which, among other things, elevated expectations on companies’ Independent Challenge Groups to “play a key role in the assurance process for affordability and acceptability testing”; and
• business plan categorisation: this remained as trailed, except Ofwat added a minimum expectation for each company to evidence that it can credibly deliver the proposals in its plan.
For details, see January’s edition of THE WATER REPORT
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