Water firms asked to take lower returns

Suzie Neuwirth
OFWAT yesterday put pressure on water companies to accept a lower rate of return on investment during the 2015 to 2020 price cycle.

The regulator suggested a 3.85 per cent weighted average cost of capital – the combined returns on debt and equity – compared to an average 4.2 per cent submitted by the companies in their business plans last December. The firms do not have to adopt Ofwat’s guidance, but will have their business plans approved faster if they do.

The water industry sets prices every five years. Most companies have pledged not to raise customers’ bills above the rate of inflation over the next regulatory period.

Analysts’ views were mixed, with RBC Capital Markets calling it “a clear negative for the listed water companies”. But Deutsche Bank said it was a reasonable package.

“The guidance that we issued today offers a further opportunity for companies to secure the best possible outcome for their customers,” said Ofwat chief executive Cathryn Ross. FTSE 100 water firms Severn Trent and United Utilities declined to comment, as did FTSE 250-listed Pennon.