Economic asset valuation for bioresources RCV allocation at PR19
For the next price review (PR19), Ofwat has set a separate price control for bioresources.
Regulatory Capital Value (RCV) is a ‘building block’ of a price control, representing the value of accumulated investment in the services. In order to set a separate price control it is necessary to allocate an RCV to bioresources.
Ofwat asked all companies to propose an initial view of the separation of the bioresources RCV by 29 September 2017. South West Water submitted this allocation as described below.
In allocating the RCV Ofwat asked companies to adopt a ‘focused’ approach, which means that the full value of the bioresources assets are deducted from the RCV, with the remaining value being attributed to the wastewater network plus control.
Ofwat specified that the approach should represent the economic value of the assets, as at 31 March 2020 and provided companies with detailed guidance on how to derive this value.
SWW have followed Ofwat’s guidance and its five-step process in calculating the economic value of our bioresources service.
Step 1: Define the modern equivalent asset – define a hypothetical set of assets a new entrant would build to deliver the bio-resources service we currently provide
Step 2: Estimate how much it would cost to build the hypothetical set of assets
Step 3: Reflect the existing assets – make adjustments for differences between the hypothetical and our existing assets for age, energy and bio-solids revenue, and ongoing costs
Step 4: Consider alternative approaches – make comparisons with alternative approaches, including a roll forward of the PR09 approach
Step 5: Propose and explain approach
Ofwat asked each company’s Board to provide written assurance that the values are appropriate and consistent with the guidance published by Ofwat.
To enable our Board to provide this assurance, we commissioned an independent external review of our submission. Reflecting the complex nature of the allocation, we used three independent assurers for different aspects of our submission.
- CH2M - to assure the non-financial information, including asset data and our estimation of the gross economic value of our bio-resources service.
- PwC to assure the underlying financial information
Each of the assurers provided a written report, allowing the Board to sign off our proposed allocation for submission to Ofwat.
The overall result of the valuation produced the following figures, submitted along with supporting documentation to Ofwat on 29 September 2017.
|Overall gross economic valuation of bioresources assets||£195.6m|
|Net economic value of bioresources assets||£99.8m|
|% proposed RCV allocation to bioresources||5.7%|