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UTILITY WEEK | 9Th - 15Th JanUarY 2015 | 17 Policy & Regulation plans are implemented, serious efficiency savings need to be made. These savings, according to the GMB's national officer for the water industry, Eamon O'Hearn Large, historically tend to come – at least in part – from job cuts at the start of a new price con- trol period. He tells Utility Week: "We have a concern that we've seen in previous determinations companies immediately shi to make jobs redundant. That's the historical cycle of things." Angelos Anastasiou, utilities analyst at Whitman Howard, agrees that job cuts are likely early on in the price control period, but he points out that savings can be made in other ways. "There is always the potential for some job losses to help on the operational front," he says. "But now we've moved to the totex environment, you can do more if you can be more innovative and come up with different ways of doing things." Severn Trent has already cut 500 jobs – but rather than from the frontline, it is looking to reduce its middle management numbers. This is widely expected to be the template that others will follow. As AMP6 beds in and the companies get to grips with the framework within which they have to operate, the financial certainty – and opportunities for outperformance to be duly rewarded – investors may once again take an interest in the sector. Choy tells Utility Week that merger and acquisition activity "is more likely than not to happen", while Anastasiou says the trend of investor activity aer a price control is concluded "is set to continue". Ofwat chairman Jonson Cox has even opened the door to a "radical" restructur- ing of the water market, calling for "dynamic and differentiated" approaches to any M&A activity that follows the conclusion of PR14. Choy predicts that the big money moves might come in only once Ofwat has signalled its intention for the next price review and longer-term direction. "Investors buy for more than one AMP cycle – possibly four or five AMPs – so they care about the long-term trajectory of the sector," he says. Plenty to resolve Bristol Water: Before the final de- terminations were made, Bristol Water was one of companies Ofwat had concerns about, with the company's business plan having a gap of £207 million (57 per cent) from the regulator's dra determination. This gap has closed slightly but "very material differences" remain and Ofwat slashed 19 per cent from the compa- ny's business plan, with the regulator setting the company's total expenditure at £409.2 million. Ofwat's chief regulation officer, Sonia Brown, highlighted the regulator's concerns by saying "a wide range of further efficien- cies" are needed otherwise the company's shareholders "will be exposed to additional cost". Ones to watch United Utilities: In many ways, UU was a winner in the final determi- nation. Having provided more evi- dence, it won £300 million of totex concessions from Ofwat. But cuts of £370 million by UU "have kicked the can down the road" into the next AMP cycle, potentially causing issues later on. However, cutting a £1 billion gap between the initial business plans and dra determination down to only £179 million is something of a victory for UU. Thames Water: The regulator has made "significant interventions" around the Thames Tideway Tunnel. However, it has been agreed that a separate price control for activi- ties related to the super sewer is the best route forward. Thames came in below Ofwat's thresholds for water and wastewater, but the regulator rejected the new claim for addi- tional bad debt costs of £93.2 million. PR14 winners South West Water and Affinity Water: The big winners from the PR14 process, having been granted enhanced status back in April 2014, giving them the green light to press ahead with their AMP6 de- livery plans and allowing them to benefit from the higher Wacc due to Ofwat's 'do no harm' principle. Welsh Water and Northumbrian Water: Both companies received early dra determi- nations in May and have seen no significant changes to their revised business plans. Anglian Water: Saw no material interventions from Ofwat to its retail plans, although the regulator has cut £54 million from its proposed wholesale water totex (down to £1,719 million). The company also proposed a wholesale wastewater totex of £2,518 million – £41 million below Ofwat's threshold. 1,000 2,100 600 1,300 Pennon share Price, January-December 2014 severn TrenT share Price, January-December 2014 And it is the cash-rich investors that are expected to come in. Anastasiou says Cana- dian pension funds and sovereign wealth funds will be among those looking to the UK water sector. He adds that takeover bids "still seem imminent and the current share prices [of United Utilities, Severn Trent and South West Water's parent company Pennon] are reflect- ing that by being as high as they are". (See graphs). Tompkins sounds a note of caution, say- ing the returns set by Ofwat are "lower than you'd normally expect", which might dis- suade some investors, although the sector is "very low risk" and will still provide a return – albeit a lower one than predicted. As PR14 becomes AMP6, the water com- panies have a lot of work to do, not only in delivering their promises, but in ensuring they are in a fit state to do so on budget. The returns for shareholders and com- pany reputations rest on it. As do the poten- tial hungry investors waiting to join the party. uniTeD uTiliTies share Price, January-December 2014 1,000 600