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UTILITY WEEK | 10TH - 16TH APRIL 2015 | 15 E L E CT I O N C O U N TD O W N : 2 7 D AY S TO G O W hether it's Premiership football, the attempted takeover of a "Brit- ish" pharmaceutical company or the claim "vampire kangaroos" operate the capital's water supply, attitudes to owner- ship have changed in British politics and this causes turbulence, uncertainty and risk for business. The dominance of private equity owner- ship in the water sector has meant signifi- cant attention has been paid to this sector and companies have found themselves placed on the wrong side of a moral argu- ment in what they consider to be a legal and compliance matter. The water regulator has been careful not to comment on tax policy and has been clear the regulated companies, and their custom- ers, can benefit from capital allowances associated with their investment. These concerns reverberate across the political divide. In its business manifesto, Labour states: "We will support incentives for long-term investment, examining the case for changes to redress the systemic bias in favour of debt finance." The chancellor is unequivocal, stating: "We like multinational companies being based here. We like them creating jobs here and they should pay their taxes here as well." He has implemented the Diverted Profits Tax, designed to make sure they do. Whoever is in power aer 7 May will have to balance being seen to act on these matters while reassuring inward investors of the stability of UK politics, taxes and regulation. But the outrage is loud, remedies are not apparent, and prolonged scrutiny will keep utility companies at the centre of this storm. Michelle Lewis, director, McQuillan Viewpoint Domicile, tax and ownership – a troubling policy trinity election world is set to move away from the assumption that "bigger is better". Cox said that the "logic of vertical integration no longer works", and suggested that M&A could see wastewater businesses merge as some companies sell their whole- sale water supply business. Whitman Howard utilities analyst Ange- los Anastasiou told Utility Week that, despite what appears to be a favourable environ- ment for M&A, and a regulator willing to approve "creative" takeovers, the election will be a barrier for some. All eyes will be on the election. MB out an eight-year window of how much the returns on investment will be. But there is a slight bump in the road, as the Competition and Markets Authority (CMA) has accepted calls from British Gas Trading and Northern Powergrid to appeal against Ofgem's RIIO- ED1 price control decision for the eight-year period from 1 April 2015 to 31 March 2023. The CMA is also in the midst of its inquiry into the energy market and starting an inves- tigation into Bristol Water's rejection of the PR14 final determination. The outcomes of these will be watched keenly by investors. The water sector, fresh from the bruis- ing PR14 price control, is also crying out for investment. The companies have set out plans to plough £44 billion of investment into the sector over the next five years. Here, with the top investor worry of regu- latory risk settled for the next period, the next major concern, according to the Water UK investor survey, is political risk. Some- thing, as EY says with energy, which is only exacerbated with an election on the horizon. Another potential area of concern is the "difficult issue" of indexation. Ofwat chair Jonson Cox has indicated a determination to break the industry link to RPI. He accepts doing this would be difficult and controver- sial, but says: "Financial markets are noth- ing if not adaptable, but we realise that change may take some time." Despite all these concerns, the regu- lated utilities still represent a secure invest- ment, with predictable and steady long-term returns. The election result will provide clar- ity for investors, and that will allow much- needed investment to flow into the UK. Investor views of the top risks (% of respondents giving this ranking) Listed Unlisted Bondholders Banks Rating agency Adviser equity equity (% view) (% view) (% view) (% view) (% view) (% view) 1st 2nd 3rd 1st 2nd 3rd 1st 2nd 3rd 1st 2nd 3rd 1st 2nd 3rd 1st 2nd 3rd Regulatory risk 86 0 0 52 26 13 36 29 7 40 0 0 33 0 33 71 14 29 Political risk 0 57 14 23 10 3 14 21 21 20 40 0 0 33 33 14 14 14 Risks associated with competition 0 0 0 3 3 10 0 7 0 0 0 0 33 0 0 0 0 0 Risks associated with financing 0 0 14 10 23 6 21 36 29 40 40 60 0 33 0 14 43 0 Execution risk 0 14 29 0 0 16 0 7 0 0 0 20 0 33 0 0 0 14 Environment 0 0 14 0 3 13 0 0 0 0 0 0 0 0 0 0 0 0 Other 0 0 14 3 13 3 0 0 0 0 20 20 33 33 33 14 14 29 Estimated investment in low-carbon electricity generation capacity between 2010 and 2014 Generation Estimated investment in generation technology capacity 2010-2014 (2012 prices) Onshore wind £7.9bn Offshore wind £9.5bn Biomass and bioenergy £8.8bn Marine £0.1bn Solar PV £11.4bn Hydro £0.3bn Other renewables £1.7bn Renewables generation investment £39.6bn Nuclear £2.5bn CCS - Renewables, nuclear and CCS investment £42.1bn The effect on business plans of changes in the approach to PR14 Significantly better Better No different Worse Significantly worse Unable to answer 100% 80% 60% 40% 20% 0% Listed equity Unlisted equity Bondholders Banks Rating agency Adviser Listed equity Unlisted equity Bondholders Banks Rating agency Adviser Listed equity Unlisted equity Bondholders Banks Rating agency Adviser Listed equity Unlisted equity Bondholders Banks Rating agency Adviser Risk-based assessment Giving outcomes a central role in the plans Customers at the heart of the plans Ensuring companies own their plans Source: Water UK 2014 investor survey Source: Water UK 2014 investor survey *Actual number of responses Source: Water UK 2014 investor survey Source: Decc Made the sector significantly more attractive Made the sector more attractive Made no difference to the attractiveness of the sector Made the sector less attractive Made the sector significantly less attractive EFFECT OF OFWAT'S EXPRESSION OF WILLINGNESS TO DISCUSS MERGER AND DEMERGER PROPOSALS 100% 80% 60% 40% 20% 0% Rating agency Listed equity Unlisted equity Bondholders Banks Adviser *6 12 17 10 4 3 1 5 1 1 2 3 1 1