Question to the Department for Environment, Food and Rural Affairs:

To ask His Majesty's Government why OFWAT calculate gearing levels of water companies by using a debt-to-assets ratio as opposed to a debt-to-equity ratio.

It is standard practice for regulated sectors to calculate gearing by reference to Regulator Capital Value (RCV). This is because there exists an RCV which represents costs incurred to date which can be recovered from customers in the future. This approach to calculating Regulatory Gearing is used by Ofgem and the Civil Aviation Authority and is recognised by the Rating Agencies.

As the RCV represents the net stock of investment that has been contributed by debt and investors over time, it grows with net levels of investment. This provides the capacity against which companies may raise debt and equity to finance investment programmes.

There is no equivalent to an RCV for companies operating in a competitive market. Gearing measured by reference to RCV is a more useful metric than standard accounting measure of gearing in a utility sector because future revenue streams are more certain than they would be for companies operating in a competitive market.