In its PR24 redeterminations, the CMA “aimed up” due to concerns about misestimation in the cost of capital. But focusing on uncertainty in cost of capital estimation alone risks missing the broader picture. Other aspects of the package also rest on inherently uncertain estimates, and regulators should be explicit in how they deal with this too.
Looking forward, the IWC’s proposed new supervisory regime for the water sector will change the approach to estimating price control packages, with a move away from econometric benchmarking. This may result in implicit aiming-up on costs.
As with aiming up on the cost of capital, this may be in customers’ interest. However, the government, in its new SPS, should be explicit about this and identify the potential for outperformance from the outset. The new regulator needs to be clear about its approach to implementing such steers. Failure to do so risks undermining the new regime.