Adviser for Ofwat's response to CMA document

The Supplier shall provide the following Services to the Customer:

Review of issues related to the allowed return in the Competition and Markets Authority (CMA's) provisional findings report on Ofwat's 2019 Price Review in response to 4 water companies' appeal, including:

 Risk free rate - Comment on CMA's use of AAA corporate bonds to inform RFR, with reference to assumptions required by CAPM to hold.

 Total market return - Comment on the CMA's range, point estimate and overall approach.

 Total market return - Comment on need for volatility bias adjustment and point estimate used by the CMA for 'ex-ante' approaches.

 Aiming up - comment on the CMA's approach to aiming up, applicability to the water sector

 Gearing outperformance mechanism - comment on the CMA's critique of our mechanism. The response should address concerns

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about the presence and level of gearing outperformance and lack of evidence that high gearing is harmful. It should also reference the Modigliani Miller theorem and provide a view on whether it is consistent with our mechanism, given the particular characteristics of the water sector.

The Supplier shall provide the following Deliverables to the Customer as part of the Services:

 A report of professional opinion and findings related to the Services described above, to form part of Ofwat's response to the CMA's provisional findings (deadline 27 October 2020) and published on Ofwat's website. To meet this deadline, the Supplier is to produce a draft report by 9am 19 October 2020, with some preliminary work shared for discussion in advance; final report by 9am 26 October 2020.  Final report to be published on Ofwat's website.

 Potential attendance by videolink at any hearings related to the above matters.

 Any follow-up work related to the above matters (e.g. advice on response to any questions from the CMA).

Additional information: For further information, please contact procurement@ofwat.gov.uk