Utility Week

Utility Week 17th June 2016

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

Issue link: https://fhpublishing.uberflip.com/i/695139

Contents of this Issue

Navigation

Page 19 of 31

20 | 17TH - 23RD JUNE 2016 | UTILITY WEEK Operations & Assets CV – Luis Garcia • CEO, Bristol Water March 2009- (7 years 4 months) • Member of the board, Aguas de Murcia November 2008- (7 years 8 months) • Member of the board, Aguas de Lorca March 2005- (11 years 4 months) • Director Nacional Sur, AGBAR March 2008-March 2009 (1 year 1 month) • Director general, Aguas de Murcia 2005-08 (3 years) • Director regional, Aquagest Región de Murcia 2000-08 (8 years) • Gerente general, Aguas de Cartagena (Cartagena de Indias, Colombia) March 1998-August 2000 (2 years 6 months) • Gerente general, Metroagua (Santa Marta, Colombia) 1996-98 (2 years) Analysis A er a difficult period, Bristol Water has confirmed that chief executive Luis Garcia, will be standing down. Garcia joined Bristol some seven years ago. The last two years of his stewardship have been turbulent because of profound regulatory disagreements with Ofwat. For Garcia, this will soon be history as he returns to the seemingly calmer waters of Suez, where he has worked before. Indeed, he is a career water executive, with extensive experience in his Spanish homeland. In confirming Garcia's exit, Bristol's chairman, Keith Ludeman, added that "we are grateful for all that Luis has achieved for Bristol Water, its customers, staff and all its stakeholders in his tenure." Ludeman also said that no replacement had yet been lined up; he will be hoping for a seamless transition – there are several major challenges to be addressed. With its 1.2 million customer base, run- ning Bristol is no sinecure. Aer all, in its water supply area, it operates 16 water treat- ment works, 164 pumping stations and 6,700 kilometres of main water pipes. In recent years, the 2014/15 periodic review has dominated proceedings – and absorbed a massive amount of senior man- agement time. Bristol was the only water company to appeal to the Competition and Markets Authority (CMA), partly on the basis of Ofwat disallowing future expenditure that Bristol deemed was essential. All other water companies accepted their final determinations without serious disa- greements despite the much lower Weighted Average Cost of Capital (Wacc) that was pre- scribed by Ofwat – a further bone of conten- tion with Bristol. During the 2014/15 regulatory process, it was clear that relations between Ofwat and Bristol were – at best – very strained, not helped by some aggressive public comments by senior Bristol executives. Hence, the first priority of Garcia's suc- cessor will be to restore Bristol's relationship with Ofwat. A similar scenario occurred with Ofgas and British Gas once the long-running – and bitter – saga of determining the appropriate rate of return for Transco was eventually set- tled. There were personnel changes and a less antagonistic relationship between the two organisations was established. In fact, Bristol had appealed against its regulatory determination in 2010, with mod- est success. Since then, the perceived gap in the revenue allowance has widened. This time round, the CMA gave away very little. Bristol's totex claim was £537 million over the five-year period compared with Ofwat's £409 million – the CMA's conclusion was £429 million. Furthermore, Bristol's efforts to persuade the CMA to raise the WACC fell on stony ground. The CMA's revised wholesale figure was marginally above Ofwat's 3.6 per cent but a long way short of Bristol's 4.37 per cent. Undoubtedly, Garcia's successor will have to grapple with the impact of these numbers. First, substantial cost savings will be sought. Further job losses could on the cards because Bristol has to adjust to a much lower revenue base than expected. Second, Bristol's capital expenditure budget will have to be reviewed – especially the Cheddar Reservoir 2 scheme, which received little sympathy from the CMA. And, locally, Bristol's public relations will have to be improved because some custom- ers will not have been greatly impressed by its dogged insistence that Ofwat was seeking to cut their water bills too aggressively. In any event, aer the CMA ruling, Bris- tol's water bills – excluding the sewerage component – should fall to £160 by 2019/20. There has been some surprise about the stubborn stance that Bristol has adopted over the 2014/15 regulatory review. It seems to have been driven by shareholder pressure. Bristol's ownership is, in fact, shared by Canada's Capstone, with 50 per cent, Spain's Agbar, with 30 per cent and the remaining 20 per cent, owned by Japan's Itochi. Corporate activity is another issue that the incoming chief executive will have to address, especially with water sector consoli- dation being favourably looked upon. Attempts to incorporate Bristol within another water company are likely, especially if a substantial part of any merger savings accrued to Bristol's shareholders. In this con- text, becoming part of Wessex Water, the local sewerage service provider, is quite feasible. Neither should two of the three quoted UK water companies be discounted. Severn Trent is increasingly focusing on its core business – adding in Bristol would be a pos- sible 'tuck-in' acquisition. Pennon, too, might be interested given how close the east Devon part of its supply area are to the western segment of Bristol's supply area. Price considerations, in particu- lar the premium over the regulatory asset value, will be crucial. More immediately, Garcia's successor will have to focus on AMP6 and ensure that, con- sistent with the CMA's latest ruling, its many obligations can be efficiently delivered. As for Garcia himself, he will be taking on new – and rather different – water chal- lenges at Suez. Nigel Hawkins, director, Nigel Hawkins Associates Seven-year switch Luis Garcia is leaving Bristol Water after more than seven years, the last two of which have been dominated by a row with regulator Ofwat. As Garcia heads for Suez, Nigel Hawkins assesses his legacy.

Articles in this issue

Archives of this issue

view archives of Utility Week - Utility Week 17th June 2016