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David Black, the head of Ofwat, has expressed concern that water companies are not recognising the gravity of the public anger over sewage discharges and called for chief executives to talk more openly about the issue of combined sewer overflows (CSOs).
Speaking at the Utility Week Forum this week, the chief executive said “the story of CSOs” would not be told without company executives explaining to billpayers how the system works, why their use had been acceptable and what work is underway to improve for the future.
“I worry the sector is treating sewage pollution as just a bad news story, rather than something that requires clear and radical change now and in the future,” Black told delegates.
He added that companies and their investors may not “really understand the level of public anger” over the “disconnect between environmental performance and shareholder earnings”.
Black underlined that Ofwat is modifying company licences to tighten requirements concerning minimum credit ratings for listed companies and the calculation of bonuses and dividends.
This followed the regulator raising concerns about the financial health of Southern, Thames and Yorkshire, all of which have seen shareholders required to inject more money into the businesses.
For PR24, Black said investment would be needed to meet ambitious sector targets to drive down emissions by 2030, as well as innovation to address process emissions that are not currently included in the target.
“We will set out in the draft methodology how we will fund investment required to make progress on net zero and other areas,” Black said.
He suggested companies that are ahead of peers on removing carbon could make up shortfalls for those less advanced at minimising emissions. This, Black said, would entail some form of carbon “bidding”.
He noted that from a societal perspective it does not matter where carbon reductions are achieved, but that from an investor point of view it will be significant. “It will require a range of tools, instruments and some new innovative thinking.”
Black described the cost of capital as an important part of the regulatory regime, but one that “gets too much attention”, adding: “It would be nice if we saw more focus on outcomes for customers than debating the finer points of cost of capital.”
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