MD168

TO ALL MANAGING DIRECTORS OF
WATER AND SEWERAGE COMPANIES
AND WATER ONLY COMPANIES

11 April 2001

 MODIFICATION OF CONDITIONS OF APPOINTMENT: PROPOSAL ABOUT CONDITION B, PART IV (INTERIM DETERMINATIONS)

In MD167 I consulted on a proposal to include a revised version of the so-called 'Shipwreck' clause (Condition B, Part IV) in the licence of all water companies that do not currently have it.

This clause enables price limits to be reset, between periodic reviews, if the Appointed Business suffers a substantial adverse effect, which could not have been avoided by prudent management action, or enjoys a substantial favourable effect, which is fortuitous and not attributable to prudent management action. In this context, substantial is quantified as an effect of a magnitude greater than 20 per cent of the previous year's turnover (1).

This proposal arose in November 2000, as a result of the proposals from Glas Cymru to acquire Dwr Cymru. Glas Cymru argued that the clause provided greater clarity and certainty for investors and that this would benefit all stakeholders, including customers. I explained in MD167, that I considered it desirable, in principle, that water companies' licences should not differ unnecessarily. I therefore believed that it would be appropriate to clarify the position by offering to incorporate the shipwreck clause in the licences of those companies which do not at present have it.

Reponses to the Consultation

Twelve responses were received from water companies (of which eight were from companies that do not currently have the clause in their licences). Most welcomed my initiative to reduce the inconsistency between companies' licences. Two companies, United Utilities Water and Portsmouth Water, objected to the inclusion of the clause in their licences. A third, Thames Water, said that they might be content to have the clause at a later stage. All others either welcomed or expressed no strong objections to the inclusion of the clause in their licences.

All of the Customer Service Committees either supported or had no objections to the proposal, which they believed should be in customers' interests.

MBIA, the financial institution that is acting as guarantor for a large proportion of the Glas Cymru bond issue, wrote to recommend inclusion of the clause which, they believed, would be seen as a positive message to the bond markets generally.

Conclusions

The consultation has confirmed my view that inclusion of the clause in the licences of companies that do not currently have it would be a useful first step in removing unnecessary differences. I therefore intend to proceed with the modifications for all water companies except Thames, United Utilities and Portsmouth Water and will initiate a statutory consultation period under Section 13 of the Water Industry Act.

I believe that the clause may, in clarifying the position for vendors and investors, increase their confidence in the water sector. This would benefit both companies and their customers. So, whilst I do not intend to seek to force the modification on those companies that do not want it, I hope that in due course they will reconsider their position.

PHILIP FLETCHER

(1) Calculated as the Net Present Value (NPV) of the change in operating costs measured over a 15-year period, or the NVP of the change in capital cots over a 5-year period.