Today we have published our report evaluating Ofwat’s proposals for a ‘gearing incentive mechanism’ at PR24, which may financially penalise companies with gearing above 70%.

Drawing on existing theoretical and empirical research, we developed econometric models for efficient gearing.  Our work suggests that the case for the mechanism’s role in promoting efficient choices over capital structure has not yet been made, and that the proposed 70% gearing threshold is plausibly within the range for efficient gearing in the sector.  Therefore, the mechanism might inadvertently discourage efficient and appropriate capital structures, which might be detrimental to customers and deter investment.  This is a complex but important and interesting issue and we hope that our contribution advances constructive debate in this area.