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10 | 24th - 30th OctOber 2014 | UtILItY WeeK Interview programme management – this takes it into another dimension. We envisaged the alli- ance being a design and build programme management approach – it is now way beyond that. I sat in a meeting with the sen- ior directors last week, and the alliance team were giving us presentations on the vari- ous incentive arrangements we're looking to develop. We're all sharing the same incentive arrange- ments – senior executives from construction companies giving us, a water company, a presentation on ODIs [outcome delivery incentives], well – that's pretty mind- blowing. Did I think that was going to happen 12 months ago? No." To get to AMP6, you've got to go through the price review, PR14. Thames is one of three companies Ofwat flagged up as having significant discrepancies between its business plan and the regulator's calculation, cen- tring on the funding of the Thames Tideway Tunnel, of which more later. Does Baggs expect a satisfactory con- clusion when the regulator makes its final determina- tions in December? "I sincerely hope so – a huge amount of work has gone into developing our plan." He mentions affordability, bad debt, leakage and the emphasis on customer consultation that has characterised PR14. "I've been in the industry for 28 years, and this price review is significantly different to any other price review I've been through. Putting the emphasis on companies owning their plans has been the one big step change." Intriguingly, Baggs mentions that a company's cus- tomers do not always want the same thing: "If companies are going to own their plans, you really need to reflect that in terms of how you monitor and incentivise. You can say we need to have consistency across the piece and sometimes it is really useful to have comparisons, but if we're really serious about moving towards competition, you've got to be driven by what your customers want, and we're seeing, even within our company, our custom- ers' views will be different in Swindon or Gloucester or Cheltenham compared to Brixton, Peckham or Enfield." The disagreement with Ofwat over Thames's original business plan is not an isolated occurrence. Indeed, the relationship between the regulator and its largest regu- lated companies has been fraught at times. Last year, Thames surprised its contemporaries by applying for an interim determination – essentially, an unplanned rise in customer bills – at a time when the regulator had been loudly emphasising its focus on keeping bills down. Can Baggs talk about that? "Not really. That's in the past. We applied in a very genuine way in terms of trying to recover costs we thought we were entitled to. Ofwat made a decision and we accepted that." Thames has also fallen foul of Ofwat on areas such as corporate governance, where it is currently overhaul- ing its board structure to meet the regulator's guidelines. The board has hitherto been dominated by investor rep- resentatives from the company's shareholders, chief among which is Macquarie. But Baggs insists the rela- tionship with the regulator is solid, dismissing Utility Week's suggestion that the company is permanently in the "naughty corner" as "unfair": "The relationship has improved over recent years. We recognise where we need to improve. Equally they recognise where we have made improvements already. It's a difficult balance with the regulator; they're there to protect the interests of cus- tomers. It comes back to the companies doing the right things for customers." Baggs is swi to praise Ofwat's understanding of the need for a stable investment environment, and namechecks the regulator several times in his honour roll for the Thames Tunnel. The £4 billion construction of a sewer under London is a once-in-a-lifetime project that has necessitated the invention of a unique funding and delivery model which, says Baggs, could be rolled out to other infra- structure projects. Aer a lengthy process, it won plan- ning permission in September. Yet the tunnel is not without its critics. It has faced pockets of community resistance as well as high-profile expert opposition from professor Chris Binnie and for- mer director general of Ofwat Sir Ian Byatt. This is obvi- ously a sore point: at the very mention of the phrase "widespread opposition", Baggs's external affairs direc- tor, Richard Aylard, leaps in with an impassioned rebut- tal. The opposition is not widespread at all: duly noted. This small display of prickliness is interesting. Thames is under heavy fire from the media. As Aylard and Baggs point out, any national story about water companies is always going to take Thames as its starting point and for a water company that serves 25 per cent of the population, negative headlines are inevitable. Baggs diplomatically claims to believe most of the coverage is fair, but he also hints at some irritation with the press: "There's a lot of myth and legend in the press, and I sup- pose that comes back to us explaining better what we do as a business, and how the industry has managed, and what we deliver, and how it is financed. We've all read the stories about tax and dividends and people making lots of profit and no investment – a lot of that is just myth and legend. "When you read articles in the press that say we are paying record levels of dividends, we're not actually, or making record profits. When you read press articles that say the level of investment has halved in the past ten years, actually it's not. It's doubled. There's a lot of myth and legend out there and the onus is on us to be on the front foot and really explain to our customers and stake- holders what this industry is about, and that it's actually a huge success." For the record, Thames has produced a document set- ting out its finances, which reveals it invests more than £1 billion a year, equivalent to £6 for every £1 returned to shareholders, and pays its "fair share" of tax, it says. Difficult questions about the regulator and media dealt with, Baggs is on his feet with infectious enthu- siasm, taking Utility Week to see the evidence of the transformation project in action. The future is about cus- tomers – where Thames is making significant improve- ments on the SIM score, rising from 63 in 2013 to 71 in this year's figures, though it must be said, still coming last. It's about smart meters – Thames is rolling out compulsory meters and following successful trials, will be universally opting for smart meters. "It's a brave new world," says Baggs, that will see home management sys- tems linking energy and water, allow Thames to better manage its network and have the added bonus of help- ing identify and tackle leakage – a perennial bugbear for the company's customers. And the future is about a happy and healthy workforce – health and safety is the thing that keeps Baggs awake at night, he says, and well- being is important too: he is gearing up to set an exam- ple by having his diet and exercise regime monitored for health and well-being week. Aer an hour of questioning on the highs and lows of running the UK's largest water company, he's still smiling – that's a good start. "When you read articles in the press that say we are paying record levels of divi- dends, we're not actually, or making record profits" Thames's values Be respectful and value everyone Passionate about everything we do Be proud, be blue Take care Take ownership Reach higher, be better