A water watchdog is calling on Ofwat to set the lowest ever cost of capital for the water industry.
The Consumer Council for Water (CCWater) recommends the regulator should set a Weighted Average Cost of Capital (WACC) between 1.8% and 2.5% for 2019.
This is the assumption made on the cost water companies will incur in raising capital to fund investment in assets like pipelines and treatment works.
CCWater says this affects returns to investors, interest and debt repayments, which can have a significant impact on customers’ bills.
It suggests a 0.1% increase in the cost of capital can add around £2 per year to the average bill.
Ofwat set the equivalent cost of capital between 2015 and 2020 at 3.74% – if the regulator had applied a cost of capital of 2.5% for this period, CCWater says bills would have been reduced by about 7%.
Tony Smith, Chief Executive at the CCWater, said: “Striking the right balance on the cost of capital is a difficult challenge for the regulator but Ofwat must ensure that water companies do not continue to make generous returns at the expense of customers.”