The Consumer Council for Water(CCW)  has published a review of the Cost of Capital in the Water Sector in the run-up to the new price limits that Ofwat will set for the water companies of England and Wales in November 2009.

 In its report the CCW said that at the 2004 price review Ofwat set the weighted average cost of capital (WACC) at 5.1%, added a premium of between 0.3% and 0.9% for the smaller companies, and provided a financeability uplift for most companies to ensure that financial ratios in the latter years of the pricing period were not compromised.

According to the Council since then water companies have utilised the lower cost of debt, not only to fund their investment programmes but also to substantially alter their financial structures and as a result shareholders have received unexpected gains.

The CCW said that the importance of delivering a balanced cost of capital can not be overstated and that A WACC of 4.8% would have meant customers paying between £0.8 billion and £1.2 billion less than they have done, equivalent to between £32 and £40 per household over the five years of the current pricing period.

The CCW are critical of the figures fixed by Ofwat for the 2004 price review. The report points out that at the time that Ofwat was undertaking its price review Ofgem was also conducting a review of electricity distribution prices. According to the Council, the two regulators shared information yet came to different conclusions, with Ofgem setting a WACC of 4.8%.

The CCW Report states

“ It is interesting to note that immediately following the 2004 determination the value of companies rose rapidly and for the first time since privatisation no company appealed Ofwat’s determination. The water industry continues to attract investment and takeover activity because its stable regulatory regime provides a low risk environment in which to earn a return on capital employed. “