Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/213927
Policy & Regulation Market view Market view Getting more for less Buoyant times The cost of living debate has emphasised the need for water firms to get value for their customers' money, says Tony Ballance. T We have set out what we believe needs to he central challenge faced by utility companies in the UK today is how be done in Changing Course through the Susto keep bills low at the same time as tainable Implementation of the Water Frameimproving services and contributing to a work Directive. The report makes three key recommendations. healthier environment. First, ministers should set clear prioriEnergy companies estimate that so-called green levies add £112 to an average custom- ties for investment, prioritising the improvement of poorer rivers over making marginal er's energy bill each year. In the case of the water sector, the leg- improvements to already generally healthy islative framework for the environmental rivers. This will make the most practical difimprovements we need to make is provided ference for the funds available. Second, ministers should ensure the by the Water Framework Directive (WFD). We have previously estimated that the cost affordability of environmental improvements by setting an appropriate pace of meeting the more stringent WFD and scale for investment. standards could push up customers' It is the responsibility of water bills by around 20 per cent between companies to ensure the invest2010 and 2030. ments we make deliver maximum At Severn Trent we know that value for our customers' money. many of our eight million customers But it is rightly the responsibility have seen their incomes squeezed in of elected officials to make the recent years. Despite us offering the judgement about the appropriate lowest average water and sewerage scale and pace of investment. bills in the country, around 9 per It is also right that these decicent of our customers spend more sions are not made in isolathan 5 per cent of their disposable "There is a limit to what tion. We welcome the report the incomes on water. National Audit Office published We need to keep prices down people can on 13 November 2013 recommendbecause there is a limit to what peo- afford" ing that government departments ple can afford. We also need to keep prices down to consider the cumulative impact on utility maintain public confidence. If the public bills when implementing new policies or believe their money is being misspent, or if legislation. Third, water companies should develop utility companies are not behaving responsibly, it will jeopardise our ability to make innovative, better value solutions for making the long-term investments necessary to cope improvements to the health of our rivers. Water companies need to play their part with climate change, population growth and by constantly seeking new and better ways of renewing our Victorian infrastructure. While our customers want us to keep our doing things, but they need to be supported bills as low as possible, we also know they by regulators willing to provide the flexibility generally want us to play our part in continu- necessary to encourage the experimentation necessary to drive innovation. ing to improve our rivers and water courses. Our customers want their water bills to be Our customers like the fact that, according to the Environment Agency, our rivers are as low as possible. They also want us to connow in better health than at any time since tribute to a healthier environment. We can the industrial revolution, largely because of and must do both by implementing the WFD the improvements made by water companies in a sustainable way. Dr Tony Ballance, director, strategy & over the past 20 years. We believe it is possible to keep water regulation, Severn Trent bills low and also deliver significant environ- Download the full report at: http://www. severntrent.com/water-framework-directive. mental improvements. 14 | 22nd - 28th November 2013 | UTILITY WEEK Uncertainty has not deterred M&A activity in the water sector, says Steven Bryan. U ncertainty over the impact of impending regulatory reform in the shape of this summer's Water Bill has caused speculation of a slowdown in merger and acquisition (M&A) activity in the UK water sector. Concerns about Ofwat's pricing methodology in the context of PR14 have also been mooted as having a potential negative effect on the level of premiums payable in transactions. In fact, 2013 has seen a fairly high level of deal activity in the sector, notwithstanding the uncertain regulatory climate and that we find ourselves in the third year of the fiveyear pricing cycle. Sales of both South Staffordshire Water and Sutton and East Surrey Water reached financial close early in the year, while a small stake in Thames Water also changed hands in April and a consortium of investors made a bid to take Severn Trent private over the summer (now aborted). Neither the publication of the Water Bill in June nor Ofwat's final methodology and business plan expectations for PR14 in July appear to have dampened activity. In spite of the early December deadline to submit business plans, there has reportedly been a potential sale process involving stakes in Kelda, Yorkshire Water's holding company, and Southern Water has recently announced the sale of a minority interest to Canadian investor Northleaf Capital. Equally, premiums to regulatory capital value (RCV) payable for investments in the sector appear to be steady at or above 30 per cent, at least in cases where the whole business is sold (even the recent Northleaf minority acquisition of a less than 5 per cent interest in Southern Water is reported to have changed hands for just over 20 per cent premium). Payment of a 30 per cent premium to RCV is comparable to the premiums paid in the same period of the previous pricing cycle pre-financial crisis. For example, Royal Bank of Scotland sold Southern Water in 2008 for £4.2 billion, estimated to be a 27-30 per cent premium to RCV (amid speculation that such levels were unsustainable). Similarly, Kelda was acquired in a take private bid in 2008 for