Utility Week

8 | 6TH - 12TH MARCH 2020 | UTILITY WEEK Interview Introducing competition to water Helm published a paper on the water sector at the end of last year, which posed the question as to whether 30 years on from privatisation, the English water sector is the envy of the world. While the paper ostensibly challenges the model on metrics such as productivity and cost, it's over-arching conclusion is that ownership doesn't really matter. He argues that the introduction of CSOs would be the best way to finally answer the ownership question. Under his model, CSOs would have responsibility for water, sewerage, flooding and water pollution. The incumbent water companies could bid alongside other organisa- tions to provide some of these services. This, Helm says, would provide a "live experiment" as to whether private companies could outperform public bodies. "The key feature of my model is that it actually max- imises competition because, as with the system operator in electricity, you decide how much capacity you want and then you auction it. "The lesson from electricity is that system operators running auctions produces really quite exciting results." Regulatory bonfire With the introduction of system operators, Helm expects the current regulators to occupy a technical role in the interim period and eventually to "wither away". He insists this is more a criticism of the way the market has evolved rather than the performance of the regulators. He says: "These are very good regulators – they are conscious of the politics around them. There isn't much in the statutes which tells Ofwat or Ofgem to put higher priority on social and environmental considerations – they decided it was appropriate. "Ian Byatt [former director general of Ofwat] invented the concept of affordability and that wasn't in his primary duties." However, Helm insists it is now time for a more substantial overhaul. "The problem with looking aŒer customers' interests is, that's not the only interest. There is also net zero, a rapidly dwindling amount of water, technological change and the demands of infrastructure. "Thirty years of RPI+X has run its course. The next decade is about re-inventing and investing heavily in the core infrastructures." The latest price review in the water sector was described as the toughest yet and has resulted in an unprecedented number of companies referring their final determination to the Competition and Markets Authority (CMA). However, Helm is unconvinced that the protestations from the sector were entirely genuine. "You have this remarkable result that the regulator announces the final determination, and the three quoted companies go to almost record share price values. You might say it's relief from the nationalisation threat going ahead, but I don't think so. If you got the regulation right, then roughly the share price equals the market value because you're supposed to capture these extraordinary efficiencies. "So, why did Severn Trent rocket to £25.50 a share, a yield of 3.5 to 3.6 and a premium to the RAB [regulated asset base] of over 30 per cent? That tells you the regulator got it wrong. "I cannot recall, apart from the electricity distribution review in '94, any periodic review where there's been such a share price reaction. Investors clearly believe that this is a very soŒ outcome. "Now, I don't think it's a soŒ outcome. The debate oŒen focuses on the cost of capital but actually where the determina- tion really clamps down is on the capex and the capital maintenance. I understand the water companies' complaints there." Nationalisation by the back door So, what does this all mean for the nationalisation debate? According to Helm, the subject is already pretty much academic, as much of the privatisation agenda has already been reversed. He says the move towards social contracts and embedding decarbonisation in business plans is one example of the direction of travel. "We already have several companies who have effectively abolished the dividend. "If you run that forward, why are investors going to come forward with more money? The only answer is they're going to come forward with debt but not equity. That's no different to Network Rail or Welsh Water. "Nothing in these models says it has to be public funding. Take the Thames Tideway. Why is the cost of capital so low? Because it's underwritten by Thames's regulated asset base, which in turn is underwritten by the duty to finance function. "When you analyse it properly, there's actually very little here to show these are private companies at all and I don't see that trend reversing." Helm thinks that 2020 will eventually be seen as "the year things started to shiŒ" and that the influence of Ofgem and Ofwat will begin to wane. He says: "I question whether there will be any more periodic reviews. I genuinely think these will be the last ones." He adds: "I want apartheid between what's a public decision or what's a private decision. But once you've got a system operator making those decisions, then Ofgem and Ofwat become small in comparison. "I'd go further and have a single technical regulator. They will do cost of capital, they will do the efficiency studies. These are generic skills – we could save a lot of money in the administration, red tape and all that stuff by just having a single network technical body. It works in Northern Ireland, it works everywhere else. Nobody else replicates our model – there's a reason for that." Helm is currently finalising his next book, directly tackling the net zero journey, which will be published in May. By then we will have seen the detail of the white paper, and Helm is bullish that it will bear his hallmark. "I have no doubt whatsoever that my model will be adopted. It's just a case of whether it will be messily adopted. The danger is of this fuzzy area between the regulators, system operators and the auctions. It should be a clean break – just rebase. But politics rarely works like that." He knows that his ideas are likely to generate more criticism in these pages, but he is unperturbed. In fact he seems to revel in it. "Let them lobby for what they want, but if anyone can tell me of a way we can more cheaply achieve security of supply and decarbonisation of the energy sector in a timely way, tell me what that model is." "I question whether there will be any more periodic reviews. I genuinely think these will be the last ones."

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