The Competition and Markets Authority (CMA) has launched a short consultation following extensive representations by the four companies appealing against Ofwat’s PR19 decisions, the regulator and other stakeholders on its Provisional Findings – specifically on the cost of capital.
The calculation of an appropriate Weighted Average Cost of Capital (the WACC) forms a key part of Ofwat’s PR19 Price Review process and the CMA’s redeterminations on the appellate companies’ AMP7 Business Plans.
The cost of capital is an input into the calculation of the companies’ allowed revenue and is used to calculate the profit that the companies need to earn to repay their investors within the price control.
The CMA expressed concern in the Provisional Findings about the risks to long-term investment and capital availability should the cost of capital be set too low.
Following consideration of all of the evidence, the CMA said it is now consulting on its updated thinking outlined in two working papers on specific elements of the cost of capital: the Cost of Debt and Choosing a point estimate for the Cost of Capital.
The CMA said the two working papers should be read together and outline its updated thinking on the issues that they cover in the light of the representations received, further analysis and additional information provided.
However, the CMA points out that the working papers “…do not cover all the issues that relate to the calculation of the cost of capital or to the bills that customers will be paying. Nor do they represent the allowance to be awarded in our Final Determination.”
Impact on bills
Ofwat’s PR19 Final Determination for all the water companies in England and Wales assumed a weighted average cost of capital (WACC) for the companies of 2.96%. In contrast, the CMA opted for 3.5% in its Provisional Findings.
The combined impact of the proposed updated estimates set out in the CMA consultation would decrease the WACC by approximately 0.3%.
According to the CMA, when fed through into overall costs, this proposed decrease in the WACC would on average represent a further reduction in customer bills of around 1.5% over and above the average 9.3% reduction proposed for the four Disputing Companies in the Provisional Findings.
The CMA said:
“This represents approximately a 11% fall in average customer bills over the period of the price control relative to those applying in the 2015 to 2020 period.
“By way of comparison, Ofwat’s determinations for the four Disputing Companies would have led to around 12.5% reduction in bills.”
Deadline to submit responses to the consultation is 4pm on 27 January 2021 – which should be sent by email to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
A final decision on allowances will be taken by the CMA following the consultation process - the CMA is currently aiming to report on the Final Determinations in Mid-February 2021.
Click here to download the Point Estimate for Cost of Capital Working Paper
Click here to download the Cost of Debt Working Paper
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