Richard Khaldi, water sector expert at PA Consulting Group is warning that the outlook for underperforming companies is bleak in the 2019 Price Review which will set limits on the prices that customers will pay for water between 2020 and 2025.

According to Khaldi, the water companies may have been expecting Ofwat to soften the impact of their proposed methodology for PR19. However, in his view  Ofwat’s  final methodology makes it clear that there will be no concessions.

The regulator  has chosen the lower end of the expected range for the WACC and is continuing to push for operational outperformance. This means companies are very unlikely to be able to offset lower returns overall with operational outperformance rewards unless they are already at or near the upper quartile, Khaldi said.

Ofwat has reconfirmed that it will require 14 common performance commitments, with some changes to the detail of those commitments. Although it is not expecting the end of AMP performance to be met from the beginning of 2020 as suggested by the consultation, Ofwat is expecting companies to meet the upper quartile standards for each year on certain commitments such as supply interruptions and internal sewer flooding.

The minimum 15% reduction in leakage requirement also remains. To add to the pressure on companies, what Ofwat termed ‘bespoke’ commitments have become much more prescriptive with requirements for these to cover environmental and resilience measures as well as asset health.

Companies must stay out of significant scrutiny category - or life in AMP7 will be very difficult

Ofwat has retained its four tracks for water company business plan assessment and is now offering an incentive of 10 basis points for achieving fast track. Khaldi commented:

“The most eye-catching change though is the significantly larger downside risk should a company not convince Ofwat it is able to deliver for customers and be classed as requiring significant scrutiny. In this lowest category Ofwat is proposing both caps on outperformance and reduced cost sharing rates “

“When combined with the stretching upper quartile performance commitments, companies requiring significant scrutiny will likely find life in AMP7 very difficult.”

Water UK - this is a tough challenge from Ofwat

The water companies themselves have acknowledged that the Price Review will be a tough challenge.

Responding to Ofwat's PR19 final methodology announcement, Michael Roberts, Chief Executive at Water UK, the body which represents all the water companies, said:

“This is a tough challenge from Ofwat – and it’ll be tougher for some companies than others – but the industry has a strong track record in providing customers with a world class product and service.

"We’ve cut bills, increased help for the less well-off, and reduced leakage by a third, and we are committed to achieving even more for customers in the future.”