Utility Week

UTILITY WEEK | 18TH - 24TH JANUARY 2019 | 17 Finance & Investment Brexit: the big unknown A very big elephant in the CFO's room is Brexit. At the time of going to press, there is still a large question over Britain's exit from the EU, although a report published at the end of last year by the Department for Business, Energy and Industrial Strategy (BEIS) claimed Brexit will not undermine the security of the UK's energy supply. "We have considered the potential impacts on our supply chain, as we source some equipment from the EU," explains UK Power Networks finance director Jenny Harrison. "We will seek to manage the risk of any delays at the ports, which could mean bringing forward some purchases." Utility Week's annual CEO Insight report, the first of which was published in September last year, found Brexit worries had particularly grown among the chief executives of energy retailers, where a downturn in the economy could impact on customers' ability to pay their bills. In addition, many of the senior figures interviewed for that report highlighted the growing risks that they faced over the cost of materials and labour. NI Water finance director Ronan Larkin says the current economic and political climate around Brexit is creating uncer- tainty and "investors generally don't like uncertainty". "Brexit might bring difficul- ties in relation to continued availability of skills and labour for the sector," says Larkin. "It might give rise to supply chain and logistic difficulties in bringing into the UK essential parts and components and consumable supplies used in water production and in wastewater treatment." He adds: "The uncertainty experienced currently with Brexit does present challenges on planning ahead. The sector is assess- ing these challenges right now so any risks can be understood and mitigated. The sector generally focuses more on customers and customer outcomes than it does on share price – and that is the right focus. If goods and materials cost more aer Brexit due to tariffs then that will put some pressure on cashflows in the sector." "Both Ofwat and Ofgem have made it clear their expectations regarding customer outcomes/ outputs will only increase going forward." Richard Khaldi, water specialist, PA Consulting "All this public and political scrutiny is putting regulated utilities under more pressure than they have ever been before." Jane Pilcher, treasurer, Anglian Water Brought to you in association with returns," says Electricity North West CFO David Brocksom. "However, the way the measure is calculated overstates the returns. They quote a return for us of 9.27 per cent, but if you look at our annual report, it's actu- ally between 5.5 per cent and 6 per cent, the big issue being the amount of under-funding we get for interest costs. "It reflects incentive income. We have taken 25 per cent of our customer minutes lost out of the network, so we have massively improved reliability. Those incentives have encouraged us to perform well and our cus- tomers get the benefit. "Ofgem is indicating a very significant cut in equity returns. I think that cut will prob- ably save customers about 1p a day, but if it results in the sector not being attractive to long-term, patient capital then we will not be able to fund the business plans and invest- ment in the infrastructure that we need as a country. And that's my concern. "When you are looking at pension fund money and assets that depreciate over 40 years, you have to take a long-term view and my fear is that political pressure will mean people will do the wrong thing by accident." Western Power Distribution (WPD) finance director Ian Williams is another who is calling for a better informed debate. "What is important is the need for political and regulatory stability to be maintained so we can continue to perform well for our cus- tomers, and for any debate about profit and return to be properly informed. "I welcome dialogue about our role as network operators and what we are deliv- ering to our customers for 27p per day. It is important, but it has to be a debate based on fact and not outlandish claims. This is one of the reasons why we were the first net- work company to voluntarily publish RIIO accounts for 2016/17. We have just published RIIO accounts for 2017/18 and I would urge other DNOs to do the same. "We will have to ensure that the frame- work for RIIO2 is practical and works for all stakeholders – and first and foremost it needs to work for our bill-paying customers, both today and into the future." "We will seek to manage the risk of any delays at the ports, which could mean bringing forward some purchases." JENNY HARRISON, UK POWER NETWORKS FINANCE DIRECTOR

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