Utility Week

26 | MARCH 2021 | UTILITY WEEK Policy & Regulation continued from p24 Analysis Investors warn CMA of repercussions Aer preliminary findings that were accused of favouring investors over customers, the CMA proposed revised approaches to calculating the cost of capital, equity and debt. Responding to this change in approach, infrastructure investment groups warned that decisions made now will have repercussions beyond AMP7. GLIL Infrastructure, a pension fund investor in Anglian, suggested the revisions brought the sector "perilously close to the edge" of not being attractive to investors. It warned of a "negative cycle of low investment, poor returns, inability to attract and motivate strong management teams, and greatly reduced incentives for institutional investors". This may not cause immediate investment collapse, the group noted, but could damage future regulatory periods. It said the risks should not be underestimated and found Ofwat's focus on reducing the scope of investment to be at odds with government calls to invest in the future. Global Infrastructure Investor Association (GIIA), the membership body for institutional investors, said private investors seek regulatory stability and clear policy frameworks with incentives alongside a fair and merits- based appeals system. Dalmore Capital, also an investor in Anglian and the wider sector, said changing the cost of equity undermines one of the CMA's stated reasons for aiming up: "to promote long-term investment in the water sector and address the risk of an exit of capital". It said change would create a situation that penalised companies that took long- term financing in the early 2000s – in line with regulatory guidance at the time via "an assessment applied with the benefit of hindsight". Another Anglian investor, IFM, said Ofwat's assumption there was limited risk of capital exiting was founded on incomplete evidence. It said investor confidence had been rocked by PR19 and the CMA U-turn from its provisional findings had cast doubt on the stability and long-term attractiveness of the sector. IFM warned that unexpected changes to how regulators determine the cost of capital would erode investor trust and confidence. It said the proposed recalculation by the CMA "signals a worrying trend for future AMPs". framework the industry needs "to put it on a sustainable and stable path to meet its future challenges". He said it would be a mistake to move away from how the CMA "corrected the biases towards short-term bill reduc- tions and away from long-term resilience" in Ofwat's final determinations. Bristol Bristol Water's case focused on the higher debt financing costs it faces due to its size. In the most recent submissions, Bristol said Ofwat appeared to suggest Bristol was no longer small, which the company argued did not hold up to scrutiny. It noted that previous appeals at PR09 and PR14 set the precedent of permitting Bristol a small company premium. If it were le‡ to manage on Ofwat's final determination, Bristol said there would be no returns for investors, a low rating position with risk of further downgrade, and invest- ment limited to essentials only. Northumbrian Northumbrian said even high-performing companies were at risk of significant penal- ties and overspend due to cost allowances and service level targets of PR19. CEO Heidi Mottram said Ofwat's plan moved Northumbrian "a long way from the ambitious plan" which garnered customer and stakeholder support. Mottram said the sector's role in the green recovery risked being muted by Ofwat's short-term focus on bills despite clear con- sumer support. Northumbrian proposed an alternative package to close the cost gap and allow nearly £150 million of investment with a 21 per cent bill reduction. Yorkshire Failure to address financeability and the asymmetry between risk and return would, according to Yorkshire, lead to increased costs for customers and exacerbate concerns about investor confidence. It urged the CMA to "reset the dial" and allow adequate investment where required and as supported by billpayers. Yorkshire's customer forum raised the issue of flooding, which affects many residents, as an area bill- payers would gladly pay more to address. Yorkshire asked the CMA to step back from its U-turn on costs. These, the company said, would mean the CMA failed on its stat- utory responsibility that companies should be financeable. Ruth Williams, water correspondent Bristol said that if it were left to manage on Ofwat's final determination, there would be no returns for investors and a low rating position. Northumbrian CEO Heidi Mottram said the sector's role in the green recovery risked being muted by Ofwat's short-term focus on bills despite clear consumer support. The City rates water company debt low-risk – for now

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