Assessing the upside in Ofwat’s new debt vision
Ofwat’s favoured plan to change the way it sets the allowable cost of debt could actually benefit UK water companies at the next price review in 2020.
The regulator has come under pressure from the National Audit Office and politicians to change its approach, after companies consistently “outperformed” the fixed cost-of-debt allowance that Ofwat had set for previous five-year review periods.
In a consultation paper issued this week, Ofwat said its preference would be to set an adjustable index-linked cost of capital for new debt, with adjustments made either annually or at the end of the relevant five-year period.
If interest rates rise between 2020 and 2025 – not an unreasonable assumption given their current levels – this approach would clearly reduce the risk for companies. “From the companies’ point of view, it may very well be the right time for indexation to come in,” said Lakis Athanasiou at Agency Partners.