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14 | 10TH - 16TH APRIL 2015 | UTILITY WEEK P oliticians are increasingly focused on tackling tax avoidance and highly complex tax reduction schemes employed by some well-known compa- nies. The recent budget built on this trend with the so-called Google Tax. The big six energy companies have complex tax arrangements. Four of the big six are overseas-owned and pay corporate taxes under various jurisdictions, offset- ting their gross liabilities with vari- ous capital allow- ance concessions. As for Centrica, virtually no-one fully understands its tax liabilities, partly because of the many North Sea oil and gas taxes that are levied concurrently. In fact, much of the ongoing tax criti- cism of utilities is focused on the water companies. In Thames's case, it reported an operating profit of £549 million in 2012/13 and of £655 million in 2013/14. Yet, for both these years, tax credits were recorded, partly due to one-off capital allowance treatment changes. Importantly, most utilities have high net debt levels and benefit from offsetting interest payments against their taxable profit. Furthermore, the UK's long-established system of capital allowances enables companies with high investment levels to derive further financial benefit. Hence, ultra-low rates of tax rates are oen applicable. While the current corporation tax regime may be anomalous and even unfair, it is the duty of parliament – and not of regulatory bodies – to prescribe util- ity taxation policy. Tackling tax avoidance and limiting schemes to minimise a company's corpo- ration tax liability are moving rapidly up the Treasury's agenda. Nigel Hawkins, director, Nigel Hawkins Associates Talking point AS FOR CENTRICA, VIRTUALLY NO-ONE FULLY UNDERSTANDS ITS TAX LIABILITIES "Water companies, especially, are in the firing line over tax" T he water sector is on the cusp of a revo- lution – not only in terms of politics. Ofwat chairman Jonson Cox opened the door for "radical" mergers and acquisitions (M&A) when he called for "dynamic and dif- ferentiated" approaches to any mergers. Plus, the time following the completion of any price review is typically the time when investors eye up potential new homes for their money. South West Water parent company Pennon, according to RBC Capital Markets equity research analyst Maurice Choy, is the most likely target for M&A. "Pennon offers the best investment value and balance among its publicly listed peers," Choy said. This is due to its attractive RPI+4 per cent dividend policy until 2020, plus discussions have been reignited by the resignation of Pennon chair Ken Harvey. The other water companies also repre- sent potential targets. As Cox said, the way M&A could work in the post-PR14 and post- Analysis T he shi to a privatised model was meant to remove the need for state intervention, allowing the market to decide what investment, and in what gen- eration technologies. "New priorities are the reason why the state is back big time," says Dieter Helm, professor of energy policy at the University of Oxford. "Decarbonisation necessitates state intervention." Helm says this shi to a low-carbon economy, which the then energy secretary Ed Miliband signed up to in the 2008 Climate Change Act, could have been achieved under regular market conditions. However, with the carbon price as "ineffective" as it is – currently €7 per tonne as the market struggles with chronic oversupply – investors are not being driven towards low-carbon investments. This, coupled with the high upfront cost and low running costs for renewable technologies, is why energy secretary Ed Davey said last month "we have to intervene". He added that a technology-neutral solution, led by the car- bon price, would be the ideal solution, "the second best solution for the UK is contracts for difference [CfDs]". Electricity Market Reform (EMR), the legislation tasked with delivering reliable, low-carbon energy at as small a cost as possible to consumers, intro- duced CfDs, as well as the capacity market. But this latest intervention, coming on top of several others – or as Helm puts it, the Miliband-Huhne-Davey energy policy – has created its own problems. Bloomberg New Energy Finance founder Michael Liebreich told a conference in Lon- don in March that the UK and Europe have "probably chosen the stupidest ways" of trying to encourage investment by "impos- ing enormous amounts of policy uncertainty and instability". He highlighted the retroactive changes made in southern Europe, and the "perma- nent reviews and complexities" in the policy regime, such as the changes the government made to the solar subsidy regime, scaling back the support for large-scale solar. What investors crave is stability and clarity. But the constant changes to policy, plus the impending impact of the election – one where energy policy could be significantly over- hauled should Miliband enter Num- ber 10 – has hit the attractiveness of the UK for investors. March's EY renewable energy country attractiveness index revealed the UK slumped to a 12-year low of eighth aer being leapfrogged by France. The key reasons, according to EY's energy corporate finance lead Ben Warren, are the "slow passage of market reform" and the "policy hiatus" created by the election. "We can expect an effective moratorium on energy policy," he added. Not that Davey would agree with that. EMR, which is bedding in and starting to deliver new capacity and low-carbon tech- nologies via the capacity market, has been designed to give investors a guaranteed return. Something to give them certainty. Networks are the traditional energy home for investors, with the price control setting A last chance to impress By the decade's end, energy needs £100 bil- lion; water needs £44 billion. The money has to come from somewhere. By Mathew Beech. M&A: Water sector ready to get it together? £100bn Investment needed in the energy sector £44bn Planned water sector investment over the next five years UtilityWeekLobby