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Future treatment of the RCV
As part of its Water 2020 Programme, Ofwat is continuing its journey of cost discovery in order to facilitate upstream market reform. Ofwat has invited Severn Trent to look at how the Regulatory Capital Value (RCV) might be allocated between the elements of the value chain and how this might enable competition to develop. Any allocation of the RCV could have a bearing on the price charged to competitors seeking access to company networks but not all approaches to access pricing require the separation of the RCV, as Oxera explore in their separate report on that topic.The RCV has been the cornerstone of the regulatory framework in England and Wales, giving investors the confidence to provide the capital required to maintain and enhance industry assets. It is a measure of the investment that has been made since privatisation, but it is only a small fraction of the value the industry's assets; more than 25 years after privatisation the RCV is only 15% of replacement cost. This Oxera report explores the unusual nature of the water industry and the reason why approaches that have been successful in other regulated industries may not be appropriate in the water sector. It highlights the limitations of different allocation methodologies and argues that this step may not be necessary for the industry to set efficient access prices in the short term.
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