Utility Week

18 | 27TH MARCH - 2ND APRIL 2020 | UTILITY WEEK Finance & Investment Before coronavirus changed the world… Jane Gray reviews discussion and debate on the interplay of regulation and legitimacy in the utilities sector from a time before coronavirus dominated. I n the days before the coronavirus outbreak transfixed the world and brought life as we know it to a halt, the Utility Week Investor Summit rallied company management and financial leaders alongside senior representatives from the investor, fund manage- ment and credit ratings community. As one of the last physical events to take place before government advice saw a shutdown of conferences and other mass gatherings, the summit was still at liberty to foster discussion on non-pandemic issues, and the topics which dominated the day were undoubtedly the twin challenges of mitigating the impact of climate change and maintaining legitimacy for companies which are fundamentally con- nected to natural capital. Two keynote speeches from the chairs of Ofwat and Ofgem set out how the industry's regulators are attempting to absorb the complex issues tied up in these challenges into frameworks which create tough but investable market conditions for utilities – though responses in panel debates including representation from utilities chief executives and pension funds gave mixed reviews on their success. While there was an overall message that institutional investors are willing to enter into a period of reduced returns on their utility investments as a necessary step in the battle for affordability and legitimacy, concerns were raised over how far returns should dip – especially in the context of rising demand for major infrastructure investment to support decarbonisation and climate resilience. There was a clear message to regulators to be cautious of "throw- ing the baby out with the bath water" by altering regulatory frame- works with a good track record of attracting sustained private invest- ment in an overzealous attempt to be seen as consumer champions. One network chief executive candidly admitted he worries that Ofgem is trying to fix a model that is not broken in its proposed approach to the RIIO2 price control. "I worry that just as we get on top of leakage as the number one public issue, concern about the state of our rivers may overtake it as a source of pub- lic outrage." JONSON COX, CHAIR, OFWAT and private investment requires the regula- tory system to be effective and responsible to the evolving context." While "levelling-up cannot be done with- out digging up", Sir John cautioned that investment in the regions cannot all be about "big shiny projects". "Infrastructure alone is not going to level-up the rest of the country. City leaders outside London need new pow- ers and adequate medium to long-term fund- ing settlements." The session's second speaker, the chief executive of Bristol Water, Mel Karam, high- lighted the challenge of how utilities balance the requirements of the climate crisis with the requirement for investment and the issue of legitimacy and cost to consumers. Parallels could be made with the past, he said, when water companies were born out of a need to radically improve public health and fulfil a social purpose. This aligning of companies, investors and public sentiment is extremely powerful, he added, pointing to how Bristol's social contract has proved a mechanism that allows the company to understand and measure society's and consumers' understanding of the service they receive. There were mixed responses from the investor panel discussion on the level and pace of government funding and the deliv- ery of large infrastructure projects, although there was consensus on the positive view taken by investors on many aspects of the UK's current regulatory models. Capital was available and waiting, the summit heard, and a new majority govern- ment and decision on Brexit had all helped shore up confidence, but it also heard inves- tors continued to look to government for clarity before moving on major investments. Re-opening the contracts for difference auctions to onshore wind, solar and storage was wholeheartedly supported, as investor sentiment on fossil fuel divestment devel- oped and interest rose in transition assets. The rapid transformation of the utilities landscape was also seeing a shi' in inves- tor behaviour, with a move away from tra- ditional investment models towards new models to diversify risks in single assets. Suzanne Heneghan, editor, Utility Week magazine - Bronte Somes, managing director, head of infrastructure equity Europe, UBS Asset Management, p16 - Malcolm Paterson, business development director, ScottishPower Renewables, p17 - Andrew Perry, principal, Energy Practice, Oliver Wyman p17 Event Utility Week Investor Summit, 5 March, London continued from previous page Key talking points: How low are investors willing to see returns fall while the sector acts to combat climate change and restore public legitimacy? To what extent are water company credit rating downgrades a serious reflection of the financeability of regulatory settlements? What balance of affordability and financeability represents a win-win situation for customers and investors? Is environmental stewardship now the cornerstone for legitimacy and social purpose in the utilities sector? Are investors willing to provide patient capital while utilities work out how to make money from new, service based business models in a low/no carbon economy? How are investor valuations of data and digital capability in utilities evolving as the need for smarter operations and service to future environmental and enterprise sustainability become clear?

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