WET News

4 WET NEWS AUGUST 2017 NEWS+ Significant WACC reduction at PR19 Regulator publishes draft methodology for the next price review, with greater customer service, long-term resilience, affordability, and innovation among the key challenges to be met. W ater companies should expect a "significant r e d u c t i o n " i n t h e weighted average cost of capital (WACC) at PR19, Ofwat has warned. Ofwat has published the draft methodology for its forthcoming 2019 price review – PR19 – which sets out its expectations and requirements for companies pre- paring their 2020-25 business plans. It also gives early insight into the likely cost of capital, which will be confirmed in December when the regulator publishes its final methodology. Although the regulator would not commit to a number for the WA C C , s e n i o r d i r e c t o r f o r Water2020 David Black pointed to research from PwC last month which suggested that the cost of equity – if it were set on the same RPI-linked basis as at PR14 – would be 3.8-4.5% at PR19. This compares with the PR14 number of 5.65%, which Black said is "quite a step down". The regulator has not yet set out its view on the second element that makes up the WACC, the cost of debt, as this will be informed by market data. Richard Khaldi, water sector expert at PA Consulting Group and formerly a senior director at Ofwat, said the days of "easy money" in the water sector are over. "PR19 w i l l b e a t o ug h r e v i e w f o r companies with a significantly lower cost of capital and a focus on operational outperformance," he added. "Ofwat will expect com- panies to deliver more for their customers, a more resilient net- work, and affordable bills. In this climate, companies will need real financial and operational strength to meet the demands of both cus- tomers and investors." The proposals, which are cen- tred on four themes – great cus- tomer service, long-term resilience, affordability, and innovation – challenge water companies to "step up". The regulator said it expects companies to provide value for money bills and "challenge them- selves to push the efficiency CONTRACT WINS • WSP's water consulting business has been awarded two new deals in Northern Ireland and the Republic of Ireland. It has been appointed to NI Water's PC15 Professional Services Framework; and to Irish Water's Nation- wide Asset Register Data Capture Programme. • EMCOR UK has been awarded a contract by Anglian Water to perform integrated facilities management services across 84 of its UK sites which, in total, supply water and water recycling services to more than six million customers. • Lanes Group has been commissioned by the Carillion Kier JV, working for Highways England, to install ultraviolet liners during the M6 J16-19 Smart Motorway scheme between Crewe and Knutsford. frontier" to provide scope for price reductions. It said that there were opportunities for efficient compa- nies to make a return "at least equal" to the regulator's allowed cost of capital. The draft methodology also outlines proposals to replace the service incentive mechanism (SIM) with WaterworCX – which would comprise two new mechanisms to incentivise a better experience for residential customers and devel- oper services customers. Ofwat chief executive Cathryn Ross said the regulator's plans will "encourage companies to be ambi- tious in what and how they deliver for customers, the environment and society, now and in the future". "Water companies which perform poorly will find this a tough review," she warned. As part of the price review pro- cess, Ofwat will assess water com- panies' business plans, and those with exceptional plans will benefit from early certainty, public recog- nition and financial benefits. Where plans are not considered to be of sufficiently high quality and stretching, Ofwat will step in to protect customers' interests. Ofwat has warned it will not adopt a "do no harm" rule for com- panies with exceptional plans, as it did at PR14, as it will provide early guidance on the cost of capital and retail margins for companies The days of "easy money" in the water sector are over "PR19 will be a tough review for companies with a significantly lower cost of capital and a focus on opera- tional outper- formance" Richard Khaldi, PA Consulting Group Good monthT- Bad month For Thames Water's iconic pumping station on the Isle of Dogs in East London, which has been declared a Grade II listed building by Historic England. For Hundreds of 'lost' rivers, which could soon be rediscovered and eventually restored thanks to a ground- breaking project by Thames Water. For Yorkshire Water, fined £600K by Leeds Crown Court for allowing sewage to leak into a Staithes watercourse in July 2015. The EA has introduced a series of special measures for South West Water, after the firm reported spillage incidents more than three times the sector average. EIB funding helps Welsh Water's green energy strategy Utility is investing millions of pounds to further develop renewable energy generation capacity. D wr Cymru Welsh Water has secured a £250M loan facil- i t y w i t h t h e E u ro p e a n Investment Bank (EIB) to help finance its extensive capital expenditure programme as well as plans to further develop renew- able energy generation capacity at its sites. The company has reached a key milestone in its drive to cut carbon emissions by ensuring that its sites across Wales and Hereford- shire are now powered by green energy. It already generates its own energy from renewable sources but a new energy contract with DONG Energy will ensure that energy Welsh Water uses from the grid will also be guaranteed green energy. The move to secure green energy is a major step forward for the company, which has an annual energy bill of more than £44M – the majority of which is used for pumping water and wastewater. To help it reduce its energy costs, the company already generates 20% of its own energy needs through wind, hydro, solar and advance anaerobic digestion. It aims to increase this to 30% by 2019. We l s h Wa te r i s i nve s t i ng around £36M to transform Five Fords wastewater treatment works into an innovative energy park – incorporating solar and hydro and the UK's first project to inject bio-methane gas into the national gas distribution network. The company is also develop- ing an advanced anaerobic diges- tion plant on the site which once complete will use the waste the site treats to generate enough energy to supply around 3,000 homes. The loan will enable the com- pany to deliver its £1.7bn invest- ment programme between 2015- 2020 to invest in its assets for the benefit of customers and the environment. Welsh Water has benefited from loans of more than £800M from the EIB since the inception of Glas Cymru in 2001. This has helped finance more than £1.6bn of capital expenditure in improving water and wastewa- ter services across its operating area. Pe te r B r i dge wa te r, We l s h Water's finance and commercial director, said: "…we must manage challenges such as accessing fund- i ng f o r o u r i nve s t m e n t p ro - grammes at a competitive rate as well as continuing to drive down costs as we make the company more efficient. We are therefore delighted to have secured this loan facility as it helps us deliver higher investment and lower bills for our customers." Need to know Ofwat expects companies to step up efficiency in PR19, and will challenge those that fail to do so Ambitious and innovative companies with high quality business plans that set new standards for the sector can expect higher financial returns as well as a fast-tracked process Ofwat said resilience is about reducing the probability of water supply interruptions and wastewater flooding Water companies will need to develop and implement new ways of working including the way they work with their supply chain to use in preparing business plans alongside its final methodology – which will be published in mid-December. Ofwat had forewarned that it would be "less forgiving" of low- quality business plans during PR19 than it was at PR14, and that it would not hand-hold water com- panies through the price review period. The consultation on the draft methodology closes on August 30. C o n t i n u e d i n v e s t m e n t in improving the under- standing of network per- formance through a balance of modelling, asset management and intelligently targeted monitoring technology is needed if the sector is to overcome the challenges of climate change and population growth, whilst meeting Ofwat's expectations to transform cus- tomer service This was among key messages to emerge from a recent one-day industry conference, hosted by environmental and engineering consultancy RPS, that looked at innovation in the wastewater sec- tor, the future of the UK's sewer network, and the challenges facing water companies. Delegates heard that the con- tinued investment will enable intervention in sewerage failures before flooding and pollution and occurs. As climate changes and popu- lations increase, the sewerage sys- tems are coming under increasing pressure to accommodate greater and more intense flow volumes, whilst dealing with an ever-ageing network of pipes and pumping sta- tions that require continual main- tenance or replacement. It is not widely known outside the world of water companies that the UK water industry deploys sophisticated software, skilled engineers and technicians and advanced technologies in order to keep our sewerage systems operating effectively. If water companies invest wisely in installing monitor- i n g t e c h n o l o g y, g u i d e d b y modelling and asset management approaches to install them at the optimum points of the network, and invest in the skills to analyse the data received, then they will reap rewards in AMP7, not only in terms of optimised investment, but transforming customer service and business reputation. This approach should be a core com- ponent of PR19 planning. One theme of the day was that the industry is "data rich but information poor", and there was a consensus that it should make better use of asset data it has and share it better, particularly with customers. Collaboration and partnership was another theme with delegates calling for a more integrated approach to delivery from water companies, regulators, councils and highway authorities. Sewerage systems are coming under increasing pressure to accommodate greater and more intense flow volumes Investment must continue to tackle climate change

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