EDHECinfra Addresses Concerns Over Ofwat's Role In Thames Water Fiasco

In an open letter addressed to Iain Coucher, Chairman, and David Black, Chief Executive Officer of Ofwat, the UK water regulator, the EDHEC Infrastructure & Private Assets Research Institute (EDHECinfra) has expressed deep concern about the regulator's role in the mispricing of Thames Water's cost of capital. The letter, penned by Professor Noël Amenc, Dr Frederic Blanc-Brude and Dr Tim Whittaker, highlights the impact of mispricing on both end-users and private investors in the infrastructure sector. The failure to use the right approach and the right data to accurately estimate the cost of capital has led to distorted incentives and significant consequences for all stakeholders involved.

The authors raised concerns about the flawed methodology for estimating the cost of equity capital, underlining its ineffectiveness in explaining returns and its reliance on a limited sample size. They also emphasised that the mispricing of the weighted average cost of capital (WACC) by Ofwat, setting it at 2-3%, far below the market reality (11-12% for Thames Water), has created perverse incentives for the management to maximise short term returns. Unhealthy incentives for the firm eventually led to excessive risk-taking and to the destruction of shareholder value.

EDHECinfra recommends a reconsideration of Ofwat's practices and methodologies to ensure a more accurate and transparent estimation of the cost of capital, promoting fair treatment for both consumers and investors in the regulated sectors, and invites the regulator to refer to its latest research paper on the analysis of the Thames Water fiasco, entitled "Low Tide. Benchmarking Risks in Infrastructure Investments: What the data showed about Thames Water."

"Ofwat has informed us that they will be considering our open letter as part of their price review and picking up the points that we have set out as part of that process, so it is encouraging to learn that our concerns will be taken into account. We look forward to seeing how they will be addressed," said Frédéric Blanc-Brude, Director of the EDHEC Infrastructure & Private Assets Research Institute.

Consult a copy of the open letter sent to Ofwat.

EDHECinfra will be holding a webinar hosted by Dr Tim Whittaker, Research Director, EDHEC Infrastructure & Private Assets Research Institute, on Tuesday, February 20th at 9am GMT to discuss the issues raised in the open letter to Ofwat. Please click here to register for the webinar.