Utility Week

UTILITY WEEK | 6TH - 12TH SEPTEMBER 2019 | 15 Policy & Regulation in the Test Area Assessments – faces many challenges, especially since Ofwat is clearly unconvinced by the long-term resilience of its business plan. Ofwat's dra determination sought twice the cuts in average customer bills – £60 in real terms over a • ve-year period – over what Southern proposed in its business plan. The Thames situation is compounded by its £11 billion net debt, the £4.2 billion Thames Tideway Tunnel scheme and a ra of other issues that Ofwat has identi• ed, including a dreadful leakage record. There is a case for arguing that Thames should have a once-and-for-all, Transco- style, slug-out with the CMA. A er all, Ofwat is seeking a 10 per cent real cut in average prices by 2025; Thames has o† ered just over 2 per cent. To be fair, chairman Ian Marchant has inherited a dire situation and will need an aggressive list of initiatives to right the listing Thames ship. Anglian's biggest issue is its in‰ ated cost base. This was estimated, on the wholesale water side, at 32 per cent above Ofwat's view of e‹ cient costs. The wastewater premium is 19 per cent. Ofwat is proposing a price cut by 2024/25 of 12 per cent in real terms. Anglian's o† er is just over a miserly 1 per cent. Closing so vast a gap will be a real challenge. Yorkshire's • gures are similar to those of Anglian, especially in terms of future water bill cuts. With Ofwat seeking a 10 per cent real cut by 2024/25 and Yorkshire setting out its stall for no material real terms price cuts, another major gap has opened up. The Wessex situation is di† erent, with the contentious 2.4 per cent Wacc • gure being a prime case for a CMA referral. In its Test Area Assessment conclusions, Ofwat gave Wessex a pointed reminder: "There is limited and unconvincing evidence in support of Wessex's proposed upli to the 'early view' cost of capital." Don't go there, seemed to be the underly- ing message. An in‰ ated cost base seems to be Ofwat's major concern with Dwr Cymru, which explains why it is seeking a near 14 per cent real terms cut in bills by 2024/25. Ofwat argues that Dwr Cymru's wholesale water costs are 26 per cent above its bench- mark while the • gure for retail – described as "very ine‹ cient" – is close to a 40 per cent premium. With Ofwat seeking bill reductions of 25 per cent in real terms by 2024/25, Northum- brian would seem to be an obvious candidate for a CMA referral. However, Northumbrian has already o† ered well over 80 per cent of Ofwat's target, so the gap should be emi- nently bridgeable. Pivotal moment Overall, with the sector facing much tighter • nances than previously, PR19 is pivotal. For the highly geared companies, there will be some comfort in the belief that, what- ever Ofwat throws at them, they must be allowed to retain investment grade status with the credit agencies, such as Moody's who recently published a major analysis of the sector's • nances. In e† ect, a regulatory ‰ oor is in place. Of course, any company appealing to the CMA must also weigh up the chances of suc- cess, especially given the uninspiring record of such appeals. Nevertheless, unless there are material movements, the most likely appellants within the privatised 10 water companies remain Southern, Thames and Anglian – and prob- ably in that order. Nigel Hawkins is the utilities analyst at Hardman Research and a Utility Week correspondent THE BIG NUMBERS Anglian Water Thames Water Northumbrian Water Yorkshire Water Dwr Cymru South West Water Southern Water (area shown is for water and wastewater supply) United Utilities Wessex Water Severn Trent -12% -13.9% -14.6% -14.7% -14.2% -9.9% -4.7% -11.5% -10.0% -25.6% The difference between what the ten WASCs have asked for and what Ofwat has proposed in its draft determinations

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