Utility Week

UTILITY Week 3rd June 2016

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UTILITY WEEK | 3RD - 9TH JUNE 2016 | 25 Operations & Assets Analysis M artin Baggs, who is standing down as chief executive of Thames Water, saw the company through the chal- lenging 2010/15 AMP5 regulatory period. And, although the company is no longer publicly-quoted, running Thames remains a daunting task. Aer all, it will be spending about £8.4 billion over AMP6, the current regulatory period, with annual investment alone exceeding £1 billion. On a more tangible level, apart from its high-profile projects, Thames still oper- ates 348 sewage treatment works in its supply area. During the 2010-15 quin- quennium, many significant events took place. But for Baggs, the highlights will include Thames' complex preparations for the hosting of the successful 2012 Olympic Games in Lon- don; the Ofwat-recognised efficiency savings of £161 million over AMP5; the integration of 40,000 kilometres of private sewers; the delivery of the Lee Tunnel sewerage scheme and the 'kick-starting' of the controversial Thames Tideway Tunnel (TTT) project. On the regulatory front, Baggs will feel that Thames did as well as could be expected from the last periodic review. The review's final determinations were implemented in April 2015. And, unlike Bristol Water, there was no appeal to the Competition and Markets Authority (CMA). Baggs took over the top job following the sudden departure of David Owens, shortly aer the publication of Ofwat's final deter- minations in 2009. These figures fell well short of Thames' aspirations, especially with regard to Ofwat's weighted average cost of capital (Wacc) assumption. This time round, Thames won praise from Ofwat for its various submissions and, more importantly, some concessions, especially regarding the £300 million West London Counters Creek project. Within its formidable investment budget, Thames has some big schemes. In particular, its stakeholders, includ- ing Baggs, will welcome the commission- ing of the complex £678 million Lee Tunnel scheme, which captures overflows of about 16 million tonnes of sewage a year. Inevitably, the £4.2 billion 25-kilome- tre TTT has featured prominently in Baggs' years at the helm; many of London's river- side boroughs continue to harbour robust views on TTT. Add in the many arcane planning issues, technical reservations from some lead- ing water engineering experts and the difficulties of financ- ing it, and it is clear that, at times, the project must have been all-consuming. Last year, though, an infrastructure provider, Bazalgette Tunnel, was finally appointed – with its own regulatory licence awarded by Ofwat. Importantly, Baggs and his team have managed to devise a funding regime that curbs the price increases that Thames' cus- tomers would otherwise have incurred to finance TTT. From this year, Thames' domes- tic water charges have begun to incorporate its cost. Nonetheless, mainly because other means of funding TTT have been secured, Thames' average annual customer charges will increase modestly in real terms, from £368 this year to £380 in 2019/20. During his tenure, Baggs has certainly brought some stability. Even so, Thames' net debt at September 2015 had risen to £9.9 billion. This figure gives a gearing ratio of 80 per cent compared with 60 per cent for Severn Trent. The impact of the much lower AMP6 Wacc – cut to 3.6 per cent – is vast. Thames estimates its revenue base will fall by over £800 million during the five-year period compared with the AMP5 Wacc figures. And, as with Tata Steel and BHS, Thames Water's combined pension deficit – of almost £300 million at the end of September 2015 – remains a concern. At the operational level, Baggs will be disappointed that – on his watch – Ofwat imposed a £119 million penalty for Thames' poor customer service and the unsatisfac- tory performance of its underground waste- water assets. And excessive leakage remains an abiding concern. Thames plans to cut its leakage to below 650 million litres a day – still a mind-boggling loss rate. High bad debt, partly because of Lon- don's transient population, remains an issue. Thames' £93 million debt relief appli- cation was peremptorily turned down at the last periodic review by an unsympathetic Ofwat. In the absence of a quoted share price, judging Baggs' tenure as CEO is difficult. But he has certainly steadied a rocking ship and rightly focused on the core water and sewer- age business. His successor, Steve Robertson – from the telecoms sector – will, however, have no shortage of issues to address, even with the contracting out of the TTT scheme. Nigel Hawkins, director, Nigel Hawkins Associates Thames Water – the Baggs era Outgoing CEO Martin Baggs has steered Thames through a tricky regulatory period and overseen a series of successful projects from the Olympics to the Lee Tunnel. Nigel Hawkins looks back. "Without of a quoted share price, judging Baggs' tenure is difficult… but he has certainly steadied a rocking ship and rightly focused on the core water and sewerage business." Who is Steve Robertson? Truphone chief executive Steve Robertson will replace Martin Baggs as chief executive in early September 2016. He has spent his career in telecoms. For the past decade he has been chief executive at BT Openreach, which he led from its incep- tion in 2005 until 2010, and then at Truphone, where he developed ground- breaking technology that helped it become a disruptive player in the global market. Robertson said: "I am excited to lead a business that makes such a vital contribution to our customers' lives and the economy of our region."

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