Utility Week

14 | 8TH - 14TH FEBRUARY 2019 | UTILITY WEEK Policy & Regulation regulator is concerned with the level of debt in the sector. Gearing shows how much debt a company has as a proportion of its regula- tory capital base, and one utilities analyst suggests that Ofwat may be "getting its own back" on companies that geared up in previ- ous price reviews. Ofwat says the fact the top performers are all listed companies is merely a coincidence. "The correlation is not necessarily causa- tion," says Black. "It's interesting. Obviously our assessment was neutral around owner- ship structures. We did look at things like financial resilience and the way companies have adopted and responded to our chal- lenge on improving the balance between shareholders and customers in the sector, but we do also note it's a small sample: there's only 17 companies and only three listed companies." Gove says he "shares Ofwat's view that all companies will need to ensure that incen- tives for owners from dividend policies and for executive teams deliver the best out- comes for customers, adding: "On the issue of gearing, I am disappointed to see that Thames Water and Yorkshire Water have not yet accepted Ofwat's default mechanism to share financial benefits of high gearing." Meanwhile, Byatt suggests that private equity funds, encouraged by rising prices, have "overplayed their hands", adding: "Maintaining the quality of the capital stock is desirable, but, for example, Thames Water got away with the Tideway Tunnel, which offered a safe return to investors despite pro- viding little if any benefits to customers and the environment." What now? For the fast-track companies, Ofwat will publish its dra‡ determinations on 11 April. Those put in slow track and significant scrutiny have until 1 April to revise and re- submit their plans; Ofwat will publish its dra‡ determinations for them in July. Final determinations will come in December. Ofwat has shown it is not afraid to be tough on the sector. As companies look again at their plans, will need to up their game. Our plans are all about much needed investment L ast September we asked our regulator for permission to invest a record amount in our business plan for 2020-25, to tackle issues that really matter to our 15 million custom- ers. These priorities include reducing leakage from our 20,000-mile network of water pipes and protecting the environment from pollution incidents, while keeping bills flat. It was therefore disappointing to learn that Ofwat has asked us to review many areas of our plan, includ- ing resilience, and to deliver it with an investment considerably lower than our proposed £11.7 billion. I'm concerned about how we can significantly increase resilience while spending less than we currently do. I'm now looking forward to engaging with Ofwat to fully understand the position we find ourselves in. If we don't invest in our network it simply will not be able to perform at the level it needs to in the future. Hence we remain committed to our plan. The plan is based on the feed- back of nearly a million customers – 70 per cent of them approve our final proposals. It includes significantly increased investment, which has been prioritised over shareholder dividends and will support thousands of jobs and regional economic growth. It's a plan that improves how we deliver across the board, while keep- ing average bills flat in real terms. Our bills are already among the lowest in the country, and will stay around that level despite our plans to invest heavily and reduce company debt. Our customers want us to prioritise higher investment above bill reduction. However, we recognise that those customers who are struggling to pay need extra help. That is why another key highlight of our plan includes quadrupling the number of families we will support with discounts of up to 75 per cent off their bills. We will also reduce leakage by 15 per cent, with a target to halve it by 2050, cut the number of pollution incidents we cause by at least 18 per cent, significantly reduce debt, restrict shareholder dividends and invest £2.1 billion in our pipes and IT to improve our operational resilience. We want to invest more in areas where we know it is needed. This plan is all about investment. Don't just take my word. John Dickie, director of policy and strategy at business group London First, has said that London's businesses "strongly support Thames Water's plan". And Adrian Butler of Imperial College London has released a report warning of droughts in London. Water shortages would be extremely damag- ing for a wide range of regional busi- nesses – the cost is unthinkable – but without investment there is a real risk of this becoming reality. Our plan includes preparing for a strategic reservoir for the South East and exploring the potential of water transfers. Climate change is real. Take last year's Beast from the East or the recent extremes in Australia and the US Midwest. With population growth in our region twice the average for the rest of the country, we must act way ahead of time to ensure we have the capacity to cope. We must invest now. Instead, from Ofwat's initial assess- ment, it appears we are being asked to reduce our current levels of spending. We are very concerned this will make it harder to meet the needs and expec- tations of our customers. What's next? We'll continue to study the feedback in detail and look forward to engaging constructively with Ofwat throughout the price review process. We need to under- stand the basis of this initial critique before resubmitting our plan. I remain really excited about deliv- ering on these proposals for our cus- tomers, and ensuring London and the Thames Valley has the modern and high-quality waste and water network our 15 million residents expect. Chief executive's view Steve Robertson, Thames Water continued from previous page Severn Trent share price, five day (pence) United Utilities share price, five day (pence) 2020 1980 1940 1900 29 Jan 30 Jan 31 Jan 1 Feb 850 840 830 820 810 800 29 Jan 30 Jan 31 Jan 1 Feb

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