Member

Through PR24, the pricing formula, Ofwat is guaranteeing real returns to water companies’ shareholders, even though the calculation is based on a fictitious regulatory capital value or RCV, fictitious amounts invested during the year—because the numbers are inflated by financial engineering, such as capitalisation of interest and repair and maintenance—and fictitious levels of gearing. PR24 assumes that the average level of gearing is 55%; Thames Water already exceeds 80%, and that is what the regulator accepts. Fictitious levels of equity come into play in the calculation of the weighted average cost of capital, which then decides what return the companies are entitled to. Why would we want to trust regulators that just dream up numbers that cannot be substantiated in any way whatever?