Utility Week

18 | MAY 2021 | UTILITY WEEK Finance & investment continued from previous page Putting a true valuation on natural capital Natural capital and green nance are set to feature as key themes at the UN climate change summit COP26 this year (or possibly next if it is postponed because of the pan- demic) and also featured heavily towards the end of Utility Week's Investor Summit. A leading advocate of natural capital solutions, Anglian Water CEO Peter Simpson talked about the company's long journey towards carbon neutrality in its operations and its ambition to pioneer new markets for soil sequestration of carbon in East Anglia to cover the nal furlong towards that goal. Simpson described how Anglian's com- mitment to slashing emissions – in place since the 1990s – has created what is now a leading approach to the application of "six capitals" thinking with regards to calculat- ing the value of investments. He also said the company's robust approach to building a natural capital balance sheet has enabled it to tap into more than £1 billion of cheap, green nance since 2017, backing over 850 capital projects. Encouraging others to follow a similar route, Simpson said that "availability of green funding is huge. But the key is hav- ing the standards and reporting integrity to access it". For Anglian, the next phase of its grow- ing dependence on natural capital solu- tions as the foundation for sustainable and resilient infrastructure systems, is a pilot scheme with local landowners to build a regional carbon o— setting market. Simpson explained that the ultimate aim is to "put a market value on natural methods of sequestering carbon, achiev- ing biodiversity and social bene ts", and he called for expressions of interest for involvement from representatives of nan- cial markets. "It's a hug opportunity," stated Simp- son. "Just on carbon. A 1 per cent increase in soil carbon across just 1.5 per cent of the East Anglian landscape would satisfy the entire o— setting needs of the water sector. There's a huge opportunity and one of our observations is that demand for this kind of thing will be far greater than the abil- ity to supply. So we need to start getting in there." Comment Mark Caines Partner, Flint Global T he Competition and Markets Author- ity (CMA) has a lot on its plate. Brexit has increased its merger caseload; it is home to the new Digital Markets Unit; and it is in the midst of a debate about whether the competition policy framework is t for pur- pose. It cannot help that it is also repeatedly asked to adjudicate between sector regula- tors and regulated companies. In the past two years there have been multiple appeals covering water, energy and aviation. In each of these appeals, the weighted average cost of capital has been a central issue, and sometimes the only issue. This is perhaps not surprising. Changing just one number (even one that rests on mul- tiple assumptions) can have a huge impact on company revenues. But what is odd is that the arguments – and hence the answers – are frequently similar if not identical. We have several di— erent regulators carrying out largely the same analysis. They reach subtly di— erent conclusions which are then revisited by the CMA. The overall process is lengthy, expensive and disruptive. We need to x this if the UK is to remain an attractive investment destination and at the forefront of regulatory thinking. This does not mean changing the standard of appeal, but the government's consideration of reforms to economic regulation provides an ideal moment for a radical solution. One option would be an independent body to determine allowed returns. Mod- elled on the OŸ ce for Budget Responsibil- ity, it would provide an input to the price control processes of the sector regulators. There would be a di— erent gure for each sector and the gures could be updated and applied regularly. The sector regulators in turn would deter- mine cost allowances, performance commit- ments, penalties and rewards in a way that was consistent with the relevant weighted average cost of capital gure. Why would this help? First, it would avoid duplication, create a focused centre of expertise and potentially reduce the number of appeals. Second, the independent body could consider macro-economic factors such as the wider bene ts of investment as well as micro-economic ones. Third, allowed returns could track market conditions more accurately, avoiding the pitfalls of xing a gure today that becomes out of kilter tomorrow. And fourth, a respected independent body could relieve some of the pressure on the CMA. https://¥ int-global.com/ "Is it time for independently set returns?" putting in mechanisms like outperformance wedges, because outperformance is seen as being bad. That's a really worrying sign to¦me. "Outperformance is good. It's a good thing for the investor but it's also a bloody good thing for the customer. Because they share in the bene t of that outperformance. We need to get back to a mentality that is about how to create a system that's good for everyone." Anderson's impassioned contribution to the panel drew nods of acknowledgement from others, including Flint Global partner Mark Caines, who suggested there has been a growing trend for competition between regulators to be seen as toughest on returns. He said this is directly unhelpful in the con- text of net zero. Caines pleaded for a resto- ration of a "fair bet" principle in regulation to encourage the scale and pace of invest- ment needed for net zero. He pointed to the example set by Ofcom in its recent ruling to allow BT to charge more for rollout of full bre broadband as an important example to energy and water regulators. DNOs have decided en masse to go to the CMA Anglian Water has had programmes in place to cut emission since the 1990s

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