Weekend press round-up: Water watchdog showers criticism on rival regulator

In our latest review of sector coverage across the national newspapers, Ofwat lashes out at the CMA's generous interim determinations as lacking 'explanation, reasoning or analysis'; three water companies are scrutinised for their offshore accounts; and a report from the London School of Economics states 80,000 jobs could be created in the green recovery.

Water watchdog showers criticism on rival regulator

Ofwat has delivered a stinging rebuke to the Competition & Markets Authority (CMA) over its lenient ruling on water companies’ returns — raising the bizarre prospect of one regulator suing the other.

The CMA stunned the industry, and the wider world of regulated utilities, by overturning Ofwat’s ruling on how much profit companies could make. It said returns should be even higher than requested, adding 20 per cent to Ofwat’s permitted rate of return and up to £15 a year to bills, or £75 over the five-year period.

That has big implications for sectors from electricity and broadband to aviation, and could lead to investors clamouring to earn more.

Shares in power giants National Grid and SSE are up 11 per cent and 13 per cent respectively since the ruling last month.

Under chairman Jonson Cox, former boss of Anglian Water, Ofwat has been on a crusade against big dividends, sewage leaks and mounting debt — a path followed by other regulators.

In a letter, Ofwat’s chief regulation officer David Black accused the CMA of running a hurried and botched process when it investigated water companies’ appeals over Ofwat’s pricing regime.

He said it had “become clear that undue time pressure is now impacting adversely upon the process”.

Black also said the findings lacked “explanation, reasoning or analysis” on how the CMA reached its decision on returns. “It is difficult to overstate the importance of this process being as fair and robust as possible,” he said — a thinly veiled warning that Ofwat may pursue a judicial review. The CMA said: “We are conducting a robust and thorough review with careful analysis of the evidence before us.”

Sunday Times

Three UK water companies hang on to tax haven subsidiaries 

Southern, South East and Welsh have finance companies registered in Caymans despite calls to close them

Three of the UK’s privatised water companies still have subsidiaries in the Cayman Islands tax haven, more than three years after the regulator urged their closure in an attempt to rebuild public trust. Southern Water, South East Water and Welsh Water all have finance companies registered in the islands, though all three say they provide no tax benefits.

Southern Water and Welsh Water paid no corporation tax in the year to March 2020. South East Water paid £1.9m tax on pre-tax profits of £33.8m. Although the industry regulator Ofwat does not forbid financial holdings in tax havens, since 2017 it has encouraged the industry to close any Cayman Island subsidiaries after sustained public criticism of high executive pay and dividends, coupled with a perceived lack of investment.

In a statement, Ofwat said: “Damaging behaviours in the past have left a gap that still needs to be closed and we believe that moving away from having Cayman Island subsidiaries can be part of closing that gap. “Water companies provide an essential public service and so we expect these businesses to demonstrate corporate attitudes that can build public trust.”

Ofwat has been trying to tackle poor behaviour in the industry. Four out of England’s nine combined water and sewerage companies were recently rated as poor or requiring improvement, the worst result since 2011, and water companies have also been criticised for failing to repair leaks.

Three of the 11 privatised water and sewage companies in England and Wales are stock market listed, while the rest are owned by a collection of mainly private equity and sovereign wealth funds. England is the only country in the world with a fully privatised water and sewerage system, with ownership transferred from the state to large regional monopolies in 1989.

The Cayman subsidiaries were set up a decade ago to get around rules preventing the water companies from raising cash on the bond markets. Although those rules have since been scrapped, many continued to use them. Interest payments made through havens are often not taxed as heavily.

Thames Water, Yorkshire Water and Anglian Water have all closed their Cayman subsidiaries in the past two years.

Nick Hood, analyst at Opus Restructuring & Insolvency, said: “For all the protestations of full tax accountability, any business that is a private monopoly deriving its revenues from the UK public needs to understand that having a subsidiary in the Cayman Islands and its ultimate parent company in Jersey will rightly be viewed with suspicion.  “If these arrangements are not designed to deny public scrutiny or to deprive HMRC of tax revenues, then why do they still exist?”

Southern Water, owned by a consortium including JPMorgan Asset Management and UBS Asset Management, had promised to close its Cayman subsidiary by the end of 2018 but in a statement this month said it is “in the process” of doing so. “The vehicle has no impact on Southern Water’s tax position and we are taxed entirely in the UK and considered ‘low risk’ by HMRC,” the company said. It added that although it paid no corporation tax, it did pay other taxes such as business rates and employment taxes.

As with many of the water companies, Southern has a complex corporate structure involving more than 25 subsidiaries and a top company registered in Jersey.

South East Water said it was “registered in the Cayman Islands for historic company law reasons but . . . is resident in the UK for tax purposes”. “The company does not gain any tax benefit from this. We have committed that no further debt in the Cayman Islands will be raised,” it added.

Welsh Water, which operates as a not-for-profit with no shareholders, said its Cayman subsidiary was due to be closed in the next few months. “Our tax liabilities are low, because most of our revenue is usually reinvested directly back into our network as capital expenditure,” it added.

Financial Times

Net zero goal ‘will be ally of recovery’

Achieving net zero emissions by 2050 will create as many as 80,000 jobs and help to achieve Boris Johnson’s national renewal mission, a report published today says.

Investment in green infrastructure and technologies will prevent long-term scarring of the labour market in the wake of the Covid-19 crisis, the report by the London School of Economics adds.

It calls on the prime minister to make good on his “levelling-up” promise this summer to “build back better, build back greener, build back faster” after GDP collapsed by a record 19.8 per cent as a result of a national lockdown.

The report highlights six labour-intensive areas where government investment would create the maximum number of jobs while also helping to achieve the UK’s commitment of carbon neutrality, including renewable energy infrastructure, electric vehicle production and home energy efficiency retrofits.

The UK was the world’s first major economy to enshrine in law a commitment to reach net zero carbon emissions by 2050.

Natural capital projects such as tree planting, carbon capture technology and green travel infrastructure are also cited as areas that have the potential to generate significant employment in the short and medium-term.

The researchers suggest the creation of a national investment bank through which to build “a portfolio of net zero-aligned investments [which] could create jobs across the UK in the short run, and growth opportunities into the medium and longer run”.

“The UK has made a strong start, setting out commitments to energy efficiency in buildings and offshore wind, but a step-change is needed given the scale of the challenge,” the report says. “With global demand for cleaner and more environmentally-friendly products and technologies set to increase rapidly in the coming decades, countries that take early action to develop green innovation and production capabilities are likely to reap significant growth benefits.”

There is evidence that green investment is already creating new jobs in Britain. This month, Octopus Energy announced its plans to create 1,000 new technology jobs across sites in London, Brighton, Warwick and Leicester. The sustainable energy supplier will employ graduates at the new sites to help develop the proprietary green energy technology platform which has helped to make Octopus one of the fastest-growing companies in the UK.

The Times

Worn-out NI water network on brink of a catastrophe: judge

Part of Northern Ireland could be engulfed in a major catastrophe if urgent upgrades to “worn out” water services are not carried out, a High Court judge warned.

Mr Justice Horner identified risks of homes being flooded and millions of litres of raw sewage spilling into an estuary with disastrous environmental consequences.

The potential dangers were set out as he removed a suspension on NI Water awarding contracts to carry out work on its network.

Under a Framework Agreement, the company tendered for contracts worth up to £1.7bn , involving both infrastructure and non-infrastructure projects.

But NI Water is being sued by Lagan Construction Ltd and the TES Group Ltd over the process.

The two legal actions prevented it from entering into deals with successful bidders.

With the litigation ongoing, lawyers for NI Water made an application to lift the restraint on awarding the contracts.

The court was told water services are in a “dire state”, with massive investment required in a network of 16,000 kilometres of sewers, 1,030 waste water treatment works and 1,300 pumping stations.

The infrastructure has struggled to support growing population numbers, placing the network at risk of flooding without upgrades.

According to Mr Justice Horner every major town is affected by water or sewerage capacity constraints.

Drainage problems mean waste water treatment works in Belfast and Kinnegar, Co Down cannot cope during heavy rainfall.

Raw sewage then flows into Belfast Lough with serious consequences for its water quality, the judge pointed out.

“In the background there are potential disasters waiting to happen,” he said.

Leaking sewerage systems siphoning from Strathfoyle, Co Londonderry near Lough Foyle was cited as one example of an “imminent possible catastrophe”.

“Should that occur millions of litres of raw sewage will spill into the Lough Foyle estuary,” the judge said.

“This will have untold environmental consequences for marine life. The shellfish industry in the event of such an escape will be eviscerated.”

He added: “The overall picture painted to the court is one of a chronically under-funded industry struggling to cope with present day demands and urgently in need of a major capital injection to arrest years of decline.”

It was acknowledged that the legal actions involve issues to be determined at a full hearing. NI Water faces the possibility of having to pay damages if the claims against it are ultimately upheld.

But at this stage Mr Justice Horner ruled that the public interest was overwhelmingly in favour of allowing it to award the contracts.

He said: “There is a significant risk, I find, that in the interim period while the suspension of the award of contracts continues, that a major catastrophe will engulf a part of Northern Ireland because of the worn out state of the water services.”

Belfast Telegraph

2500 jobs in £2.5 billion carbon capture plant for Grangemouth

GBTron Power Ltd, part of Singapore-based energy company LNG9, considered a number of sites in Scotland, but has now reached an initial agreement with Forth Ports to begin detailed feasibility studies on land and river berthing for its proposed operations at Grangemouth.

The £2.5 billion proposal will create up to 2500 new jobs during the construction phase, and many hundreds of direct and indirect full-time skilled jobs once the power station is operational.

The firm has informed both the UK and Scottish Governments of its plans and is in initial discussion with Falkirk Council about its proposals.

A GBTron Power Ltd spokesperson said: “Our proposals support the UK and Scottish Governments’ carbon reduction targets, particularly given our intention to produce hydrogen, which can be utilised to replace existing carbon fuels.”

The plans also offer the prospect of advancing national Carbon Capture and Storage (CCS) targets by capturing CO2 emissions generated by the proposed 2.4 GW power plant and then transferring them by pipeline for permanent storage below the North Sea.

Flakirk Herald

Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.