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The water regulator for England and Wales has said it will force the privatised companies it oversees to pass savings from reduced financing costs on to their customers.
Announcing its framework for water pricing from 2020, Ofwat said companies should expect their cost of capital to be no more than 2.4 per cent. This is a reduction of
1.3 percentage points from its last price review in 2014 and would be a record low for a regulated utility, Ofwat said.
It said in a statement that this reduced cost of capital could result in an average saving per customer of £15-£25 a year from 2020.
Ofwat uses its estimates of the costs of capital and equity for water companies as levers to control what they charge.
If the calculations end up being too high, privatised water businesses can take advantage of the gap between their financing costs and regulated prices to plump up their profits and pay higher dividends to shareholders.
On Wednesday, Ofwat pledged this would not happen.
Water customers across England and Wales can look forward to lower bills, improved services, reduced leakage and more help for the most vulnerable in our communities.
Ofwat Chief Executive Cathryn Ross added:
We’ve said many times already that this will be a tough price review for companies. We will cut the financing costs they can recover from customers and, with this lower guaranteed return, they will need to more efficient and innovative than ever before. I’ve no doubt that the sector can step up and meet the challenges we’ve laid before them today.