At a recent event, Oxera Principal Sahar Shamsi analysed cost of capital developments in UK regulated industries. She explained how the forthcoming decision on the PR19 WACC in the water sector will have read-across implications for returns across more than £160bn of UK regulated infrastructure assets, and their investors, over the coming decade.
 
Some recent press coverage of the event:

Oxera Principal Sahar Shamsi gave a detailed presentation on development in the allowed cost of capital at the Moody’s event, and questioned the implications of Ofwat’s move to reduce the scope for pure financial outperformance and increase incentives for operational outperformance. She identified the move to reduce windfall gains as a “policy choice” linked to the legitimacy issues that have been raised about the sector recently. But suggested greater cost pass through to customers on the back of company performance will have downside as well as upside for customers, potentially creating its own impact on legitimacy. It could, she said “undermine consumer acceptance”.
 
Shamsi hammered home the scale of impact a WACC reduction will have on the water industry. With a total RCV of £70bn, and assuming a 1.3% decline in the real vanilla WACC relative to PR14, the result would be a reduction in annual allowed returns of around £900m across the industry, or £4.5bn over the five year term. What’s more, she pointed out “other regulators are watching” and that water decisions could become case precedents for other regulated industries, with a major effect on returns.

Source: The Water Report (2017)