There is much to be welcomed in Ofwat’s “Future Price Limits - statement of principles". Certainly focussing incentives carefully
to deliver desired outcomes and reducing and removing regulation will be
welcomed. But is there still too much emphasis on the Regulated Capital Value
(RCV)?
RCV measures the money invested in the water
business and the water company’s shareholders get a guaranteed return for the
investment made. It’s a nice simple and easy method for the regulator. But is
it in the best interest of customers? The big problem is that it encourages
water companies to invest in capital solutions not revenue. So innovative ideas
like managing the water catchment better to prevent pollutants entering the
water course rather than paying to remove them get penalised as often they
involve no significant capital expenditure.
Ofwat have looked at the issue of Capex bias
and recognised there may be a problem. There is a natural tendency to want to
engineer and build things – finding the right balance between Opex and Capex is
not easy.
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