Utility Week

Utility Week 25th October

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Page 14 of 31

Policy & Regulation Analysis Ofwat's zero sum game Thames has found Ofwat in no mood to negotiate on prices, says Ellen Bennett. O fwat's uncompromising response to Thames Water's bid for a bill increase came as little surprise this week. Battle lines were drawn when Thames went ahead with its application for an interim determination, knowingly risking the ire of Ofwat chairman Jonson Cox and his team. The Thames camp insists it is only asking for what it is entitled to, but its approach has been interpreted as a refusal to work co- operatively and heed the messages coming out of Ofwat. It was almost certain the regulator would refuse Thames' bid for a £29 levy, particularly in light of the current furore over the cost of living. Thames would have known this, but been hoping for negotiation. Ofwat, however, seems determined to make a point, offering Thames nothing at all – subject to "technical consultation". Further skirmishes can be expected. The regulator has put corporate governance top of its agenda, saying boards should be predominantly governed by independent nonexecutive directors. Thames has 18 board directors, nine of whom are non-executive and six of whom are alternate directors, appointed to represent them when they are not available – a practice Ofwat has criticised in general terms. There are three independent non-executive directors. Thames needs to keep its shareholders happy, and reassure them that it will recoup the costs of the massive Thames Tideway Tunnel. This will have been one of its motivations in asking for more cash: a red rag to Ofwat, given that Cox has been vocal about some water companies putting investors' interests above those of customers. Thames would argue that its bills are the lowest in the country; that it is asking for only a one-off rise; and that the very shareholders demonised in the media are in fact largely pensioners dependent upon a decent financial return on their investment. Ofwat sees it differently. If it sticks to its guns and offers Thames a settlement of zero, the water company is likely to take it to the Competition and Markets Authority. And then Thames submits its AMP6 business plan, and the real battle begins… Ofwat and PR14 4.1% Estimated cost of capital chief regulation officer Sonia Brown used in calculations at a recent conference 13 The licence section that resulted in a stand-off between Ofwat and the water companies in 2012, before the appointment of Cox as chair and a change of director for the regulator "The cost of debt is currently at the low end of the curve - this doesn't mean we should include some extra fat." Ofwat chief regulation officer Sonia Brown urges water compnay management teams to lock in debt at low rates "I am very pleased to be returning to Ofwat at this key time." Cathryn Ross, Ofwat's new chief executive, who started last week "The dichotomy between profits and customers' prices raises business, regulatory and moral questions." Jonson Cox writes to The Telegraph, 2013 "This is the right time for me to move on" £10.7m The levy Ofwat has imposed on water companies over the next two years to meet the extra costs of delivering PR14, recalculated this summer £291m The amount of extra money Thames has asked for in the AMP5 cycle Outgoing chief executive Regina Finn at the surprise announcement of her resignation in May, seven months before the submission of Dorothy Thompson, chief executive of business plans for PR14 biomass generator Drax £0 The settlement Ofwat has offered Thames UTILITY WEEK | 25th - 31st October | 15

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