Utility Week

Utility Week 22nd November 2013

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Finance & Investment This week Water firms urged to put cost of capital in 3 per cent bracket when they submit business plans Water firms urged to slash cost of capital Regulator Ofwat has urged water companies to bring down their cost of capital into the 3 per cent bracket when they submit their business plans next month. In a speech to industry delegates last Wednesday, Sonia Brown, chief regulation officer at Ofwat, said: "When companies put forward their proposals for the cost of capital in their business, there is a real opportunity Brown: 'opportunity' for this number to start with a three." The cost of capital set in 2009 was 5.1 per cent, but in September Brown said a 1 per cent fall with a range of plus or minus 0.5 per cent would reduce average bills by £4 to £25 per household each year. However, Brown last week said water companies had the opportunity to put forward a cost of capital at the lower end of her proposed range. "I could see at the time that companies could do better and I expect that companies will do better than that, given the opportunities presented by the current economic environment. "With nominal bond yields down around 1.2 per cent since prices were set in 2009, and record low interest rates, I would like to think that in their business plans, some – if not all – companies will go lower than that," she said. Brown also argued that bills could be reduced further with efficiencies from setting separate controls for retail and wholesale along with other changes such as a move toward total expenditure (totex) and water trading. "What would bad look like in this space? If bills don't go down and you don't explain to your customers why. Companies will lose the legitimacy of their customers and ultimately we will all lose the legitimacy of the s ector," she said. CM Stock watch Water Ofwat could find it hard to justify Thames deductions Ofwat may find it difficult to argue that Thames Water has been the only water company to benefit from favourable economic conditions were the regulator to go ahead with its proposed move to "claw back gains", according to an industry analyst. Speaking to Utility Week, Stefanie Voelz, water industry analyst at Moody's, said Thames Water was likely to go to the Competition Commission if the regulator decided to make a claim through the "substantial favourable effect" mechanism. Having formally rejected Thames's application to increase bills for 2014/15 through an interim determination earlier this month, Ofwat has also conducted a separate consultation on whether it could deduct gains from the water company due to it benefiting from "wider economic circumstances beyond its control". The consultation has now closed and Ofwat has yet to announce whether it will deduct additional gains from Thames due to "formula effects which could have resulted in significant net financial benefit… not arisen as a result of management action". However, Voelz said all the water companies had benefited from the effects of lower market costs of finance, which have Severn Trent share price, 22 October - 19 November Energy Drax confident it can beat profit forecasts Drax has announced it expects to beat City profit forecasts this year, due to strong demand for its power and an "encouraging performance" from its first biomass conversion unit. In an interim management statement, the coal-fired power station owner said it anticipated that full-year Ebitda and underlying earnings per share for 2013 would be "materially ahead" of current market consensus forecasts of £203 million. Energy Political squabbling threatens renewables The political "point-scoring" surrounding the UK's energy policy is threatening investment in the renewables sector, according to a report by EY. The report said the "inharmonious" political environment has created a "state of heightened uncertainty" which will lead to investors delaying their final investment decisions. EY environmental finance leader Ben Warren said the sector, especially offshore wind, has been "left susceptible to the mood of uncertainty". Severn Trent share price, November 13-19 1990 Severn Trent share prices held steady this week following the announcement that it had appointed the head of BT Group's Openreach division, Liv Garfield, as its next chief executive. Severn Trent's stock has risen 44 per cent over the past five years and it is currently valued at around £4.35 billion. been below those Ofwat had assumed when setting price limits for 2010-15. 1855 1880 1845 1825 1840 1825 1800 1815 1760 18 | 22nd - 28th November 2013 | UTILITY WEEK 22 Oct 1805 28 Oct 4 Nov 11 Nov 19 Nov 13 Nov 14 15 18 19

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