Ofwat consultation on the approach to setting the cost of debt
Ofwat has today launched a consultation on the approach to setting the allowed cost of debt for the 2019 price review.
In previous reviews, Ofwat has set the cost of debt for the five year review period based on the historical cost of debt in the market and forecasts for the future cost of debt over the price review period.
In the consultation, Ofwat is asking if there is a way to set the allowed costs to better reflect the efficient cost of debt and to reduce the risk of inaccurate forecasts.
Ofwat’s preferred position is setting the cost of embedded debt based on evidence of efficient costs at the beginning of the price review period, indexing the cost of new debt to market benchmark interest rates, and making adjustments for changes in the cost of new debt at the end of the price review period.
The use of an end of period adjustment would reduce bill volatility over the course of a price review period.
David Black, Senior Director of Water 2020 at Ofwat, said:
“We want to make sure that we keep incentives on companies to get the best deals possible on the cost of debt, but we also want to ensure customers benefit from sector outperformance against market benchmarks as well as minimise the risk of inaccurate forecasts for the cost of new debt.”
“We think our proposed approach will deliver these outcomes. It will be fairer, avoiding a process of resetting the cost of debt each and every year, which could see more volatility in bills. We are keen to hear what people think of these proposals.”
The consultation runs until 17 October.