Advice on Alternative Approaches to Setting the Cost of Debt at PR19

This work will be used by both Ofwat and the CAA

The primary purpose of this work will be to undertake a fundamental review of the potential approaches to setting the cost of debt and advise on the principles we should consider when determining the most appropriate approach. The work should provide supporting evidence to assist our decision on the most appropriate approach to setting the cost of debt at PR19 and H7, while reflecting the need to ensure that at its heart the selected approach delivers the best outcome for customers.

The work will draw on market evidence and include an assessment of the relative merits for customers and investors of adopting alternative approaches to setting the cost of debt, including a fixed cost of debt, indexation methodologies and alternative risk sharing approaches.

The work will consider:

It will be important to draw out whether these principles differ if there is a move to a longer price control or to fixing elements of the price control over several periods, or there is a step change in the size of the regulated asset (eg For the CAA new runway capacity).

In carrying out the work, the contractor will have regard to recommendations set down by the NAO and the subsequent report by the PAC. In particular, we expect the contractor will:

This should consider, but not be limited to: