Wessex Water is warning that Ofwat’s Draft Determination (DD) on its AMP8 Business Plan puts its ability to retain and attract investment at risk.

The warning comes in a 430 page DD Risk & Return Document published by the water company on 28 August in its formal Response to the regulator’s Draft Determination - one of a series of documents running to many hundreds of pages.

Wessex Water says in the paper that its plan for 2025-30 proposes a step change in investment and, as a result, performance levels explaining that both the company and its longstanding shareholder YTL want to support the government’s growth and environmental agenda and are committed to delivering the investment for the benefit of customers.

“In this context, it is crucial to ensure that the overall risk and return package at PR24 allows companies the capacity to finance a large-scale investment programme to deliver for customers and the environment in the long-term”, the paper says..

Wessex Water, highlights its track-record of attracting and retaining long-term investment, underpinned by YTL as a committed and responsible investor.

The utility emphasises that at PR24, to ensure it can maintain this position it is essential that determinations are set whereby, for an efficient company the expected return for debt and equity investors is "commensurate with the risks they face."

This in turn requires that the:

• WACC is set so that it accurately reflects debt and equity investors’ risk;
• Determinations as a whole result in a symmetrical balance of risk for equity investors, so they expect to earn the allowed cost of equity (in line with the fair bet principle).
• An investment grade credit rating is secured, such that the company can raise debt finance on reasonable terms.

In Wessex Water’s view the overall risk and return package proposed in the draft determination puts its ability to retain and attract investment at risk. Given the size and scale of the investment programme, the downward risk skew created by Performance Commitments, Price Control Deliverables and other mechanisms, the draft determination has not achieved the right alignment of risk and return, the company says.

The utility is warning that a Final Determination that maintains this position would not meet Ofwat’s consumer and financing duties for the following reasons:

1. The circumstances under which PR24 is being determined are materially different from previous price controls. The scale of investment at PR24 will be far greater than the recent past, both to address historical underinvestment and meet challenging forward-looking statutory and regulatory targets. This means Ofwat’s previous approach to setting the WACC (which may have been broadly appropriate in a different context) is increasingly likely to be inaccurate and undercompensate investors for the increased risks they face.

2. Equity investors face an imbalanced risk package at PR24, with returns skewed to the downside. Outturn evidence demonstrates that PR19 was also skewed to the downside (including for firms identified by Ofwat as being efficient), and the source of this has not been addressed (i.e. removed or offset). The PR24 methodology and draft determinations introduce additional sources of downwards skew.

Wessex Water is encouraging Ofwat to adopt “a more holistic approach” to setting the cost of equity, to ensure consistency with other price control parameters and support the economic growth objective.

“We encourage a thorough review of the risk and return package at final determination. In the absence of change in the final determination, the financeability of water companies, and therefore the critical investment required at PR24 (and thereafter) will be at risk, further perpetuating the cycle of underinvestment in the water sector”, the paper says..