Utility Week

6 | APRIL 2021 | UTILITY WEEK "After a long delay, we now have a Fuel Poverty Strategy for England. This has the right guiding principles to address this national issue but we need action, not words in a government document" Adam Scorer, chief executive of National Energy Action: The Month in Review CMA narrows gap with Ofwat on water firms' cost of capital T he Competition and Markets Authority has set a new cost of capital for the appellant water companies at 3.2 per cent, which is closer to Ofwat's figure than its provi- sional findings in September. On 17 March the CMA pub- lished its redetermination for Anglian, Bristol, Northumbrian and Yorkshire Water, all of which rejected their final deter- mination from Ofwat in the PR19 price review. The return to investors will be 32 per cent lower than the last price control period, 9 per cent lower than the CMA's provisional findings in September and approximately 12 per cent lower than the rate proposed by the water companies. In the previous price control period the allowed rate of return was 4.67 per cent and for this review the water companies had proposed approximately 3.6 per cent. In September the CMA published its provisional find- ings that set the cost of capital 0.54 basis points higher than the regulator's decision at just over 3.5 per cent. It based its meth- odology on aiming up, which attracted criticism for being too generous to investors. The CMA's weighted average cost of capital (Wacc) is 0.2 basis points higher than Ofwat because the redetermination placed reliance on different information to produce a range of estimates. The CMA landed on an estimate slightly above the mid-point of the range. It is 0.4 to 0.6 basis points lower than requested by the appellants. Companies have been allowed additional spending on leakage and security of supply. The CMA has increased totex spending by 3 per cent and pro- vided enhancement spending of £75 million for company-specific schemes. Leakage reduction targets remain at 15 per cent as set by Ofwat. The CMA said the rate of return was the minimum it considers sufficient to allow the companies to finance their activities and invest in long-term infrastructure. Average bills for the four companies' customers will fall but the CMA's decision will leave consumers paying £10 to £13 more than Ofwat directed. • Consumer bills for Anglian will be £400; the company had proposed £418 and Ofwat had set £386 in its final determina- tion in December 2019. There is no change from the provisional findings by the CMA. • For Bristol customers, bills will average £172, which is a £2 less than the company asked for, £12 more than Ofwat's determi- nation and £6 higher than the CMA's provisional findings. • Northumbrian's bills were subject to the biggest drop at PR19 with Ofwat proposing a fall of £106 for billpayers. The CMA landed between Northumbrian's and the regulator's amounts at £334, which will still be a signifi- cant saving for consumers. • Yorkshire's average bills will be £374, a figure that is £5 lower than the company wanted and £10 more than Ofwat's final determination. Through the year-long process, the CMA said the evi- dence it gathered suggested the companies would need to spend more than Ofwat had calculated to carry out essential operations. Should the four companies' spending come in below the amount set, the extra cost allow- ance will be returned. Ruth Williams, water correspondent £250m Amount the government's automatic pension enrolment scheme for workers, Nest, will invest through Octopus Renewables over the next year, with the potential for up to £1.4 billion to be committed by the end of the decade Cost of capital for ED2 revealed A week before the CMA updated its cost of capital for the water sector, Ofgem announced its assumption for electricity distribution networks. The regulator set the baseline return on equity for investors in this sector at 4.4 per cent for the next price control period. In the finance annex to the RIIO-ED2 sector-specific methodology decision the regulator confirmed a 4.65 per cent cost of equity with a downward adjustment of 25 basis points – the outperformance wedge – to reflect the expected outperformance of networks based on past outcomes. The working assumption is that returns during the 2023-28 price control would be on average a third lower than under the current price control (which is set at 7 per cent cost of equity when adjusted to a comparable basis). National Grid CEO Weighted average cost of capital has been lowered from CMA's provisional findings, to 3.5 per cent

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