When providing company determinations, Ofwat set a sector wide allowed return, on the basis of the notional capital structure. The notional capital structure provides clear signals about the allocation of risk. It protects customers from bearing much of the risk of companies' actual financing decisions and provides strong incentives on companies to raise finance efficiently. This approach is consistent with other UK sectors that are subject to regulatory price controls and is recommended by the UK Regulators’ Network.

The actual achieved equity return for any company will depend on the company's unique actual capital structure and company performance. Considerations about the actual capital structure are matters for each company and its investors to manage, consistent with the clear allocation of risk and responsibility for a company's actual financing and capital structure.

The Government is clear the overall performance of the water sector is unacceptable. That is why we have given Ofwat increased powers under the Environment Act to hold companies to account for poor performance and ensure dividends are linked to delivery for customers and the environment.

Furthermore, under the “Cash Lock-Up" licence condition, companies must not make a dividend payment where it would pose a risk to their financial resilience. We are confident Ofwat will not hesitate to act when a company has failed to meet these requirements.

The value of regulatory equity is publicly accessible for each water company. Regulatory equity on the basis of a company's actual structure is Regulatory Capital Value less net debt.

Notional regulatory equity is published annually for each company by Ofwat. Ofwat also presents company gearing levels against actual structures in its annual monitoring financial resilience report.

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.