Water & Wastewater Treatment Magazine
Issue link: https://fhpublishing.uberflip.com/i/983816
www.wwtonline.co.uk | WWT | JUNE 2018 | 11 by the privatisation process are natural monopolies, the government of the day sought to protect customers' interests by creating the economic regulator – Ofwat – to control water bills and set service levels. This was achieved through a system of 'comparative competition', central to which is the five-yearly price review cycle. WACC – the assumption that Ofwat makes on the cost water companies will incur in raising debt or equity to fund investment in assets - is one of the biggest building blocks in the price review. The next review will be completed in 2019 (PR19), and cover prices from 2020 to 2025. Ofwat is predicting a WACC - in Retail Price Index (RPI) terms – of 2.4 percent for PR19. This is a reduction of 1.3 percent from the 2014 price review's WACC, and a record low for regulated utilities. Ofwat's WACC forecast for PR19 is driven by lower expectations of the market cost of debt and equity. The effect on customer bills could result in an average saving per customer of £15-£25 per year from 2020 onwards. Since privatisation demand for water and sewerage services has proliferated as population has grown, and water quality and environmental standards have become increasingly stringent. In more recent years the need for resilience in the face of such things as climate change has added to the requirements placed upon the water companies in England and SCOTT AITKEN, MANAGING DIRECTOR, BLACK & VEATCH PR19 to see capital maintenance come to the fore The tight cost of capital set by Ofwat for PR19 will mean water companies will need to place the emphasis on maintenance and maximising value from assets, writes Scott Aitken C hange is afoot for the water utilities in England and Wales. For the last 30 years these private companies have favoured capital investment for the creation of new assets, as the best way to achieve their service, environmental and quality targets. Looking to the future, however, new assets are likely to be the solution of last, rather than first, resort. Among the most significant reasons for this change is the decision by the water sector's economic regulator, Ofwat, that the weighted average cost of capital (WACC) in the next price review will be at the lowest level since the privatisation of water services in England and Wales, in 1989. Because the water companies created The Talk: opinion Wales. Investing in new assets, or extending existing assets has been the companies' favoured response with £130 billion invested since 1989. However, concerns about the regulatory framework creating the potential for a capital expenditure (CAPEX) bias was among the reasons for Ofwat's shi˜ to a total expenditure (TOTEX) price review, rather than using separate CAPEX and OPEX, for the current price review. With a regulatory determination that is likely to see customer bills reduce - and a low WACC - CAPEX investment will need to be very carefully considered and targeted. Water companies will be required to fund resilient systems and ensure business processes and structures are lean and efficient. At the same time there will be no decrease in the quality and service level demands placed upon them; while public, customer, political and regulatory scrutiny is growing. This means the water companies will need to focus on the performance of their existing assets – to an unparalleled degree – to ensure regulatory compliance, while also meeting the expectations of owners and shareholders. However, there is good news for water companies that want to do things differently and embrace change. Significant efficiency opportunities exist for the water companies that can capitalise on both data and technology. Advances in both these areas are significant, affordable, and offer