Review of Ofwat’s Weighted Average Cost of Capital (WACC)

We commissioned MCC Economics to review Ofwat’s weighted average cost of capital (WACC) ‘early view’ for the Price Review 2024 (PR24).

This is the assumption the regulator Ofwat makes on how much it will cost water companies of raising finance to deliver investment to improve water and wastewater infrastructure and the services people receive. This is an important part of the price review process, as this assumption has a significant impact on customers’ bills.

The report examines various aspects of Ofwat’s indicative PR24 WACC, including:

• The overall WACC allowance and cross-checks
• Debt and financing assumptions
• Equity assumptions, specifically the:
  • risk-free rate
  • total market return; and
  • equity beta.

Key findings

• The review of data, assumptions, and methods used by Ofwat found 24 signals that the true cost of capital is lower than Ofwat’s ‘early view.’
• By replacing its ‘early view’ with a ‘market-led-view,’ Ofwat could save customers £2.6 billion over 5 years, equivalent to around £20 per household per year.