We recognise that the sector has been thinking about better ways to co-ordinate. A crucial assumption underlying wholesale returns is the weighted average cost of capital WACCitself comprised of a mixture of assumed debt and equity financing. After many years of trying, we have also seen Retail competition introduced in the water sector this year.
Water regulator Ofwat has published an open letter challenging incumbent water companies operating wholly or mainly in England to do more to support the development of competititive markets.
It often includes only one cost driver. Frontier shift and input price inflation In addition to relative efficiency, Ofwat also accounts for technological improvements or frontier shift for base expenditure.
Real input prices such as real wage growth potentially offset frontier shift improvements.
This planning should then provide the basis for individual water company plans.