27th Jan 2014 12:55
LONDON (Alliance News) - Water regulator Ofwat Monday said it will "pre-qualify" water companies that have outstanding business plans for the period 2015 to 2020 which pass its tests for outcomes, cost and affordability, and board assurance.
Ofwat also adopted a more-lenient-than-expected limitation on cost of capital for the water companies.
In December, UK water companies submitted business plans to the regulator setting out their proposed investments plans for the next five years and how much they plan to charge customers
At the end of the process, Ofwat will mark the plans as either enhanced, standard or resubmission. Companies that pre-qualify can then choose to adopt Ofwat's risk and reward guidance, which will enable them to benefit from a fast-track approval process.
The benefits to companies will include certainty earlier in the price-control process, through a draft determination in April, Ofwat said. Companies without enhanced status will go through a standard process, while any company whose plan is deemed unsatisfactory will have to resubmit.
This early start gives enhanced-designation companies a greater opportunity to deliver for their customers and outperform during the price control period, the regulator said. In addition, they will obtain financial benefits in the form of an enhanced cost-performance total expenditure (totex)
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It is hoped that by providing companies with a totex target, they will be able to optimise across their capital and operating expenditure.
"Finally, all pre-qualifying companies will gain "reputational benefits" in capital markets and from customers from our recognition that they have produced an excellent business plan for their customers," the regulator added.
In its guidance, Ofwat said it plans to use a weighted average cost of capital (WACC) towards the upper end of its pre-qualification guidance of 3.85%.
The WACC, a measure of the return on the mix of debt and equity needed to underpin investment and spending plans, was previously limited to 5.1%. However, the regulator estimated that each 0.5% increase in the allowed WACC increases household bills by around GBP10.
The proposal comes as water companies face huge pressure to reduce customer bills while posting increases in profit.
"It is important for companies and customers that risks and rewards are appropriately shared between them," Ofwat Chief Regulation Officer Sonia Brown said in a statement. "This helps companies keep customers' bills as low as possible and deliver the services that customers need both today and tomorrow."
Water companies Severn Trent PLC and United Utilities Group PLC are among the top-five gainers in the FTSE 100 midday Monday. Severn Trent is up 1.3% at 1,699.00 pence, while United Utilities is up 1.3% at 709.84p.
By Anthony Tshibangu; [email protected]; @AnthonyAllNews
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