Ofwat has launched a new consultation on proposals which would see Thames Water customers bear only 80% of any potential losses from the sale of Thames Tideway Tunnel project land, rather than bearing the losses in full.
Ofwat has launched a new consultation on proposals which would see Thames Water customers bear only 80% of any potential losses from the sale of Thames Tideway Tunnel project land, rather than bearing the losses in full.
Launching the consultation, the regulator said that the change will give effect to a different sharing arrangement between Thames Water and its customers so that the water company is incentivised to increase value for customers via the sale of Thames Tideway Tunnel project land.
Thames Water bought the land at key points of the 25 km (16 mile) route for the tunnel, which Ofwat describes as of “unprecedented scale, size and complexity in the water sector in England and Wales.”
A Condition of Thames Water’s Licence currently stipulates that 100% of the profit from any disposal of project land will be fully paid to customers, and similarly, if land is sold at a loss, customers will bear 100% of the loss.
This is a departure from the normal sharing arrangement on the sale of land by water companies. For all other land sold by Thames Water, or by any other water company, there is normally a 50/50 sharing arrangement between the company and customers i.e. customers bear half of any loss and any profit will be shared equally between the company and customers.
Currently, the costs and delivery of the project are shared between:
- Thames Water, which undertakes preparatory and interfacing works for the project; and
- Tideway, the Infrastructure Provider (IP) which finances and is responsible for construction of the tunnel.
The consultation covers the sale of surplus land Thames either acquired rights over or purchased as part of the preparatory work to enable the construction of the TTT.
The consultation paper says that given the extent of land purchased for the TTT and the fact that the land is only being held for a relatively short period, it was considered appropriate to change the normal sharing arrangement for the benefit of customers by means of a licence amendment in 2015.
However, land values in London have declined since the 2015 amendment .
“Under the current sharing arrangement, there is no incentive on Thames Water to seek to maximise value from the sale of project land, because if land is sold at a loss, the loss is fully borne by customers,” the paper says.
Ofwat is now proposing to amend the sharing arrangement to rectify this situation so that customers only bear 80% of any loss and gain 80% of any benefit. According to the regulator, if implemented, this will give the utility an incentive to take steps to maximise the value it will get from selling surplus project land.
Ofwat said the proposal has been discussed Thames Water which has provisionally agreed to the change.
The paper says the adjustments recognise that:
- portions of the land may need to be retained for operational reasons;
- the value of some land will be impacted by the presence of the TTT and the Northern Line Extension;
- and because of the need to acquire some sites quickly, some project land was purchased by Thames Water at an above market rate.
If agreed, the adjustments will be covered by a performance commitment issued as part of Ofwat’s final determinations due to be published on 11 December 2019.
Deadline to submit comments to Ofwat on the proposed changes is 11th November - click here to download the consultation paper.
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