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Water company returns cut to 30-year low

The regulator is hoping to cut customer bills by an average £50 over the next five years
December 19, 2019

The UK’s water regulator has cut providers’ allowed returns on capital over the next five years to their lowest level since privatisation. The level of allowed returns declined to 2.96 per cent for the whole of the business over the AMP7 regulatory business cycle, from 3.19 per cent between 2015 and 2019. 

However, companies whose performance is better or worse than the regulator’s benchmarks will earn a return that is higher or lower in practice than Ofwat’s allowed return. For example, United Utilities (UU.) delivered cumulative net outcome delivery incentive (ODI) outperformance of £21.4m for the first four years of AMP6 and anticipates this will reach £50m by the end of the cycle in 2020. 

Water companies have until 15 February to respond to the regulator’s final determination. Thames Water and Northumbrian Water are considering appealing the decision on the grounds that the settlement is too harsh. 

Ofwat said a reduction in the returns on capital would allow water companies to lower customer bills by an average £50 over the next five years, although some of that would be absorbed by inflation. 

The regulator has also demanded that water companies reduce gearing levels – measured as debt as a proportion of regulatory capital value – and share some of the benefits with customers through a gearing outperformance mechanism. For example, United Utilities plans to contribute £71m to its CommUnity Share scheme and match dividend payments beyond a threshold with further contributions.

Shares in all three listed UK water companies rose sharply upon the election of a Conservative majority, which removed the threat of nationalisation as mooted in the Labour manifesto.