Utility Week

UTILITY WEEK | 13TH - 19TH MARCH 2020 | 13 Finance & Investment Ofgem chairman Martin Cave said the regulator is "wrestling" with how to address net-zero commitments in the price con- trol process. He said business plans for the next five years had to address the challenge of decarbonisation by 2050, but be flexible enough to adapt to evolving policy, inno- vation and societal change. As a consequence, the price review will have to include "sub- stantial net-zero re-openers", he said. Cave also pointed to the dif- ficulties of the individual targets of cities or regions aiming to hit net-zero emissions before 2050: "There's a new wrinkle to this ENERGY Ofgem 'wrestling' with net-zero commitments price control – we don't know what the key policies are going to be, we don't know how rapid the uptake of electric vehicles is going to be or what experimen- tation may take place in connec- tion to heat networks. "We anticipate this price control will include very substantial net-zero re-openers, which will enable us, as policy becomes clear and as the process of evidence of take-up is revealed, to make investments in a calculated way." However, Northern Powergrid CEO Phil Jones warned against re-opening price reviews, saying it could affect how investors per- ceive the potential risk factors. Cave said the decarbonisa- tion process presented a number of trade-offs, chiefly the question of how much of the financial burden is placed on bills as opposed to taxes. He added: "There is also the question as to whether we should address the decarboni- sation strategy at a national or a regional level. How do we react to those democratically elected mayors who have chosen to achieve more aggressive decarbonisation targets than the government? "That is something we are still wrestling with and the networks are also having to get to grips with." Cox dismisses credit rating downgrades Against the ongoing backdrop of policy and market uncertainty and their impact on investor confidence, Utility Week's 2020 Investor Summit brought together key figures from across the utilities and investment communities. Power and water companies gathered in the City with regulators, government advisers and analysts to discuss the latest issues around regulation and legitimacy; infrastructure, investment and climate change; M&A activity; and emerging business models. Here we share some of the talking points; a full report follows later this month. Ofwat chair Jonson Cox has dismissed fears over the finance- ability of water companies in the wake of PR19. Speaking at Utility Week's Investor Summit, he accused companies of using the threat of credit rating downgrades to put pressure on the regulator. He said: "As we head into a price review, what happens, I believe, is that managements use credit rating agencies as a tool to try and tell us just how difficult the review is going to be for them." Cox's comments followed recent downgrades of companies both accepting and challenging Ofwat's final determinations. He added: "I would remind you, we are still in credit rating territory. We have not seen some WATER Private firms 'miles adrift' of listed counterparts at PR19 Cox also remarked on the divide between listed companies and private equity in the water sec- tor, praising the "full transpar- ency" and "market feedback" offered by the former. He pointed out that the three listed water companies – United Utilities, Severn Trent and South West Water's parent company, Pennon – had outperformed the sector. He added that all three had produced fast track plans at PR19, while "in the main, consortia-owned businesses struggled with the price review". "They were miles adri™ on costs," he added. "I'd like to know what I should read into all those correlations. What should we read into all the appellants being privately owned compa- nies – and three of them owned by consortia?" Cox, who has led Ofwat's agenda for greater boardroom transparency and battled investors over issues such as dividends and independent governance, was asked whether he would consider building advantages for listed companies into the regulatory regime. He said: "Clearly there is a usefulness to our regime of listed capital, which gives us full transparency and a lot more market feedback. Would we go so far as to give them an advan- tage? That's an interesting point. I would say the listed companies have done well and deservedly well under our regime. "We will adapt if they all end up not being listed, but it remains important to transparency." Cox: Dire scenes threatened have not emerged Utility Week Investor Summit, London, 5 March 2020 of the dire scenes threatened actually emerge." He was speaking as the regulator revealed the results of its investor survey, which found that 41 per cent of investors do not feel that Ofwat is listening to them (compared with 29 per cent who do and 30 per cent undecided). The survey showed a year- on-year fall in Ofwat's maximum score on all metrics except inde- pendence of government. Cox noted that tensions were always likely to be higher at the end of a price control period. The breakdown of responses by investor type showed listed equity was significantly more likely to approve of Ofwat's approach than debt or private equity backers. JW

• Cover