UK water regulator demands ‘profound changes’ from water companies

Ofwat tells UK water providers to drop their cost of capital to a record low and be ‘more efficient and innovative than ever before’.

UK water regulator Ofwat has challenged the nation’s water providers to be at the forefront of “profound change” in the sector as it published the first phase of its upcoming price review.

The body has ordered companies to lower their cost of capital to 2.4 percent RPI, which would translate into an average saving of between £15 ($20; €17) and £20 per customer each year from 2020 to 2025, a new record low for a utility, it said.

The country’s water companies are now required to outline to Ofwat how they will meet these demands by September 2018, ahead of the 2019 pricing review.

Ofwat said the cost of equity for water firms will take into account evidence from historical data and more recent market and forward-looking evidence. It will also seek to index the cost of new debt, the outperformance of which will be limited. The costs that water companies will be able to recover through higher bills will also be limited.

“The next decade will see profound changes in customers’ expectations and we are pushing the water sector to be at the very forefront of that,” said Cathryn Ross, chief executive of Ofwat. “We’ve said many times already that this will be a tough price review for companies. We will cut the financing costs they can recover from customers and, with this lower guaranteed return, they will need to be more efficient and innovative than ever before. I’ve no doubt that the sector can step up and meet the challenges we’ve laid before them today.”

Water UK, which represents the country’s major water providers, acknowledged the task posed by Ofwat and reiterated its commitment to the regulator’s demands.

“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,” said Michael Roberts, the organisation’s chief executive. “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.”

UK-based water companies have come under heavy scrutiny recently, in part due to the threat of nationalisation by the opposition Labour Party, while Thames Water has received fines for leakages this year totalling £28 million.

Over the past year, the likes of AMP Capital and Macquarie have exited Thames Water, while Morgan Stanley and Infracapital sold Affinity Water for about £1.6 billion in May. Meanwhile, stakes held by 3i Infrastructure in Anglian Water and by Corsair Capital and Deutsche Bank in Yorkshire Water are believed to be for sale.