Utility Week

6 | 9TH - 15TH MARCH 2018 | UTILITY WEEK Policy & Regulation This week Cox eyes dividends in water crackdown Water regulator sets out its initial response to criticism of water companies' corporate behaviour Ofwat chairman Jonson Cox has set out a sweeping programme of reform for water companies that includes a radical overhaul of dividends, action on highly leveraged capital structures, and changes to companies' licences. Speaking at Water UK's annual City Conference for inves- tors in London, Cox responded to high-profile criticism of corporate behaviour in the sector from secretary of state for the environment Michael Gove. Cox has promised to inform Gove of pro- gress and next steps by early April this year. He said he was "thinking aloud" ahead of this deadline. Cox said the water sector is suffering a "crisis of confidence" on a scale not seen since the windfall tax of 1997. He blamed this on the financial structure of companies rather than their operational performance – specifically, on highly leveraged companies with gearing above 70 per cent. Ofwat regulates water companies on the basis of a "notional structure" of 60 per cent gearing. Cox called for a "gateway" for dividend payouts, so dividends would only be paid if the company is deliver- ing on its agreed outcomes. It would also see a base dividend of about 4 per cent, reflecting Ofwat's notional structure. This would be adjusted downward pro-rata if the company was more highly geared. Finally, in an echo of the controversial Section 13 row, Ofwat is considering asking for increased powers to "make simpler" the process for licence changes. Speak- ing at the same event, Gove reiterated his pledge to give Ofwat any extra powers it considers necessary. EB ENERGY Swansea lagoon 'on Hinkley terms' The Swansea Bay tidal lagoon can be delivered on the same terms as the Hinkley Point nuclear power station a™er the Welsh government offered financial backing, according to Richard Graham, Conservative chair of the all-party parliamen- tary group on marine and tidal lagoon energy. The project has been stymied since ex-energy minister Charles Hendry recommended it should be given the go-ahead in Janu- ary last year. At that time, Tidal Lagoon Power asked the govern- ment for a 90-year contract for difference (CfD) with an average strike price of £89.90/MWh. Welsh first minister Carwyn Jones last month offered to help pay for the £1.3 billion project if Westminster agrees to provide subsidies through a CfD. Graham says the company can now offer "exactly the same terms" for the Swansea project as the government has accepted for Hinkley Point – a £92.50/ MWh strike price over a shorter 35-year period linked to inflation. ENERGY CMA to investigate SSE-Npower merger The Competition and Markets Authority (CMA) will assess whether the merger between SSE and Npower could significantly reduce competition in energy supply to domestic customers. The two companies plan to create a company to serve their domestic retail customers. SSE began talks with the CMA over the planned merger of its supply business with Inno- gy's Npower in January, a™er the Business, Energy and Industrial Strategy select committee called for the CMA to probe the tie-up in December. The deadline for an initial decision is 26 April 2018. ENERGY May pledge on EU energy market Theresa May has pledged to explore how the UK can con- tinue to participate in the EU's internal energy market. The prime minister identified energy as one of the "many" areas where the UK and EU economies are "closely linked". "On energy, we will want to secure broad energy co- operation with the EU. This includes protecting the single electricity market across Ireland and Northern Ireland – and exploring options for the UK's continued participation in the EU's internal energy market." She said both the EU and the UK would benefit from a contin- ued "close association" with the Euratom nuclear co-operation arrangement. Cox: water is suffering a 'crisis of confidence' Political Agenda David Blackman "Gove has little time for what he sees as vested interests" It was already pretty chilly at last week's annual Water UK City Conference, which took place in the middle of the cold snap. The temperature in the room was even lower a™er environ- ment secretary Michael Gove finished his keynote speech. Gove has gone out of his way to cultivate environmentalists and animal lovers in the role he took over in the wake of last year's general election. However, water companies have been absent from Gove's lovebomb list. to be taken seriously in the City, as demonstrated by a research note issued last week by invest- ment bank Macquarie. This advised utility companies to set up offshore ownership arrange- ments to guard against the risk of their assets being seized. Gove warned water compa- nies that they will have a lot more to be worried about than a more onerous price control regime unless they shape up. They would be right to heed this message. Gove has form in this regard. While a passionate free mar- keteer, his time in government shows he has little time for what he sees as vested interests, most notably teachers during his spell as education secretary. He also understands that the performance of some privatised industries, notably those that are run as monopolies like water, are an Achilles Heel for the Conservative Party. Customers' patience with the water industry will be even thinner a™er thou- sands of homes were cut off a™er last week's big freeze. The prospect of nationalisa- tion by an incoming Labour government is at last beginning

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