To ask the Secretary of State for Environment, Food and Rural Affairs what the projected rate of return on capital allowed under agreed plans for 2005-10 with Ofwat is for each water company; and what rate of return on capital was achieved by each company in each of the last five years. (81090)

Ofwat publishes pre-tax rates of return—measured as operating profit as a percentage of regulatory capital value—in its annual report “Financial performance and expenditure of the water companies in England and Wales”. Post-tax returns have not previously been published. The figures in the table have been calculated as operating profit less current tax, as a percentage of regulatory capital value.

At the 2004 price review, Ofwat set a real terms post-tax return of 5.1 per cent. When comparing this to actual returns the comparable rate is the “Vanilla WACC (Weighted Average Cost of Capital)”. This is on a real basis and assumes a pre-tax cost of debt and post-tax cost of equity—on this basis the return that Ofwat set was 5.8 per cent.

Water only companies were allowed a premium on the return of 0.3—0.9 per cent.

At price limits, Ofwat takes companies’ particular levels of debt into account before allowing for tax.