Utility Week

UTILITY Week 11th July 2014

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20 | 11Th - 17Th JULY 2014 | UTILITY WEEK Finance & Investment Analysis E arly last month, a little under a year since the specified infrastructure pro- ject (SIP) regulations came into force on 28 June 2013, the secretary of state for the environment declared that the Thames Tide- way Tunnel qualifies as a "specified infra- structure project". In a nutshell, this means the scheme – which would ordinarily be undertaken by sewerage incumbent Thames Water – satisfies the requisite tests (see box, right) for it to be delivered by a third party. Thames is charged with marshalling a far from insignificant £1.4 billion of prepara- tory work, but the bulk of the delivery, val- ued at £2.8 billion, is to be put out to tender. The successful bidder will be designated as the "infrastructure provider" responsible for the project, and licensed and regulated accordingly. The intention of the SIP regulations is to protect incumbents and their customers from particularly large or complex projects that could jeopardise business-as-usual services – and to deliver such projects for the best value for money. However, the exact extent of Thames Water's role in the project – what "preparatory work" looks like – is unclear. In its December business plan for 2015-20, Thames included £508 million of expendi- ture within its wholesale plan for the Tide- way works. In the revised plan it submitted at the end of June, this figure had soared to £655 million. This was principally on the back of higher construction and programme management costs, which arose because Thames is picking up work originally ear- marked for the infrastructure provider. The infrastructure provider licence award is not now expected until autumn 2015, so Thames is taking on more to prevent too great a delay in the tunnel's final completion date (see table, above). In another development in its June revised business plan, Thames Water has agreed to Ofwat's preference for an entirely separate price control for its Tideway Tunnel wholesale costs. This, both parties concur, will ensure that Thames's non-Tideway Tun- nel wholesale activities are comparable to those of other companies. It will also make it is easier to ensure that Tideway costs are demonstrably efficient, and that progress reporting and delivery accountability for the tunnel is clearer. Included within the scope of the tunnel price control will be: • development, land and compensation costs; • programme management and category 2/3 construction works; • Thames's integration team (co-located with the infrastructure provider), sup- portive assurance resources and insur- ance costs; • depreciation and return on existing Tide- way Tunnel-related regulatory capital value (AMP4 and AMP5 tunnel costs); • the marginal tax impact of the tunnel; • activities that would have been under- taken by the infrastructure provider but which Thames will now carry out to miti- gate the delay in the overall programme (notably, design and mobilisation work for the IP category 1 works); • incremental Ofwat fees caused by the Tideway tunnel. Thames commits to: procure an infra- structure provider; undertake the construc- tion activities (category 2 and 3 works) included in its business plan; procure the necessary land for the tunnel and comply Thames digs deep for tunnel The Thames Tideway Tunnel will be delivered by a standalone company, but that doesn't mean Thames Water won't also have to invest massive sums of money, as Karma Ockenden explains. changes In expendIture Source: Thames Water 2012/13 prices £m Comments December 2013 508 business plan Development (11) Removal of design costs now included within construction. Construction 107 Includes transfer of resilience activities from the infrastructure provider totalling £55m. Scope/cost/schedule and risk review on category 2/3 construction activities £34m. AMP5 to AMP6 programme slippage £9m. Beckton scope brought forward via Lee Tunnel transfer for works performed by MVB c£4m. Land (3) Major land acquisition – removal of 2015/16 acquisitions in AMP6 – £7m. Compensation – transfer from Thames Water to infrastructure provider, statutory – £14m for Section 10 claims and non-stat – £27m for off-site mitigation and compensation. Of which, £27m applicable in AMP6 time period. Land resale and rental income – culmination of income receipts expected later in project life £31m. Indirect costs 51 Seven months programme management and infrastructure provider running costs due to IP award date slippage. Risk 2 Disaggregation of risks and review of category 2 and category 3 risks. D&PG 1 Reflects bottom-up approach and resultant impact of changes processed above. June submission 655

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