Table 1: Open in new tab The TTT...

Traditional regulatory framework

Challenges with the traditional framework for the TTT

Bespoke regulatory framework arrangement

Financing

Thames Water would raise private finance through the regulatory mechanism.

The large scale of capital expenditure required for TTT coupled with Thames Water’s already high gearing could significantly impact Thames Water’s cost of debt and cost of capital, ultimately threatening the utility’s ability to provide a service to customers.

Stand-alone infrastructure provider
Per the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013:
• TTT will be developed by a stand-alone third-party infrastructure provider (IP) with regulatory and structural ring-fencing as per UK water and water and sewerage companies (WaSCs);
• Ofwat will grant a licence adapted for IP rather than WASCs;
• IP will design, construct, own, finance, operate, and maintain TTT in accordance with Project Specification;
• IP will be financed through a mix of equity, bond, and bank debt. In addition, IP may have access to EIB debt.

Procurement

Procurement carried out by licensee (e.g. Thames Water).

Projects involving planning and construction (as opposed to building and operating) are complex and may not appeal to investors who lack specialized infrastructure teams.
Construction bidders willing to take on risk and uncertainty may require large contingency budgets

Thames Water to procure IP and construction contracts (on behalf of the IP)
Per the Water Industry Act 1991 (as is given effect with modifications by the SIP regulations) Thames Water will:
• Conduct preparatory ‘interface works’ between the utility’s sewers and the IP’s tunnel;
• Remove project risk from the perspective of procurement (by obtaining planning consent and acquiring land, as appropriate);
• Minimize time to commence construction through parallel procurement of IP and construction contracts (on behalf of the IP);
• Remove risk related to proposed construction site by undertaking pre-work;
• Enable construction efficiencies to be delivered.

RAB

RAB is estimated by Ofwat as the value of the existing regulatory asset base of an established utility that is eligible for a return.

No existing asset base, given that TTT is a greenfield development.

RAB applied to a separate asset instead of a company
• Expenditure incurred in connection with the project is added to the RAB as construction progresses;
• RAB adjusted annually to reflect allowable project spend.

WACC

Ofwat sets an industry-wide WACC to allow utilities to earn an appropriate return for a period of 5 years.

There is potential regulatory risk for investors from a variable rate of return.
The IP could potentially find more favourable financing terms

WACC initially set by tender instead of by Ofwat (i.e. Bid WACC)
• Bid WACC is significantly lower than any cost of capital set for a regulated utility in the UK;
• Fixed Bid WACC over construction period of 10+ years;
• From post-construction, the WACC will be set by Ofwat.

Revenue

Revenue is based on the RAB and the WACC and collected by Thames Water.

No existing asset base (RAB) given that TTT is a greenfield development.
For investors, there is potential for unstable yields if subject to periodic reviews

Bid WACC initially applied to projected RAB to enhance liquidity
• No change to revenue provision during construction;
• Revenue collected by Thames Water on behalf of IP.

Periodic review

Periodic reviews are carried out in 5-year business plan cycle.

Potential regulatory risk for investors given uncertainty and unpredictability between reviews.

No periodic reviews during construction period
• The construction period will be treated as a single regulatory period, i.e. more than 10 years;
• Post-construction, full regulatory reviews.

Efficiency assessments

As part of periodic review, Ofwat assesses relative capital efficiency with a view to creating incentives for water companies to improve capital efficiency and deliver real price benefits to customers.

Potential regulatory risk for investors given uncertainty and unpredictability between reviews.

No efficiency assessments during the construction period
• Pre-agreed overall project cost and risk envelope approved by the regulator;
• IP incentivized through pain/gain share mechanism.

Government support

Under extraordinary circumstances, i.e. security of supply.

The large scale of the project and associated construction risk could discourage risk-averse investors.

Government acts as the insurer of last resort and provides cover for insurable events above the amount the market is ready to provide
• In the event of cost overruns above threshold outturn, the government can be required to provide equity financing to fund shortfall. Otherwise, it must discontinue the project;
• The government may elect to discontinue the project and pay compensation under certain circumstances;
• £500m committed liquidity facility in case of market disruption.

Traditional regulatory framework

Challenges with the traditional framework for the TTT

Bespoke regulatory framework arrangement

Financing

Thames Water would raise private finance through the regulatory mechanism.

Procurement

Procurement carried out by licensee (e.g. Thames Water).

RAB

RAB is estimated by Ofwat as the value of the existing regulatory asset base of an established utility that is eligible for a return.

No existing asset base, given that TTT is a greenfield development.

WACC

Ofwat sets an industry-wide WACC to allow utilities to earn an appropriate return for a period of 5 years.

There is potential regulatory risk for investors from a variable rate of return.
The IP could potentially find more favourable financing terms

Revenue

Revenue is based on the RAB and the WACC and collected by Thames Water.

No existing asset base (RAB) given that TTT is a greenfield development.
For investors, there is potential for unstable yields if subject to periodic reviews

Bid WACC initially applied to projected RAB to enhance liquidity
• No change to revenue provision during construction;
• Revenue collected by Thames Water on behalf of IP.

Periodic review

Periodic reviews are carried out in 5-year business plan cycle.

Potential regulatory risk for investors given uncertainty and unpredictability between reviews.

No periodic reviews during construction period
• The construction period will be treated as a single regulatory period, i.e. more than 10 years;
• Post-construction, full regulatory reviews.

Efficiency assessments

Potential regulatory risk for investors given uncertainty and unpredictability between reviews.

No efficiency assessments during the construction period
• Pre-agreed overall project cost and risk envelope approved by the regulator;
• IP incentivized through pain/gain share mechanism.

Government support

Under extraordinary circumstances, i.e. security of supply.

The large scale of the project and associated construction risk could discourage risk-averse investors.

Table 1:

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The TTT regulatory regime

	Traditional regulatory framework	Challenges with the traditional framework for the TTT	Bespoke regulatory framework arrangement
Financing	Thames Water would raise private finance through the regulatory mechanism.	The large scale of capital expenditure required for TTT coupled with Thames Water’s already high gearing could significantly impact Thames Water’s cost of debt and cost of capital, ultimately threatening the utility’s ability to provide a service to customers.	Stand-alone infrastructure provider Per the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013: • TTT will be developed by a stand-alone third-party infrastructure provider (IP) with regulatory and structural ring-fencing as per UK water and water and sewerage companies (WaSCs); • Ofwat will grant a licence adapted for IP rather than WASCs; • IP will design, construct, own, finance, operate, and maintain TTT in accordance with Project Specification; • IP will be financed through a mix of equity, bond, and bank debt. In addition, IP may have access to EIB debt.
Procurement	Procurement carried out by licensee (e.g. Thames Water).	Projects involving planning and construction (as opposed to building and operating) are complex and may not appeal to investors who lack specialized infrastructure teams. Construction bidders willing to take on risk and uncertainty may require large contingency budgets	Thames Water to procure IP and construction contracts (on behalf of the IP) Per the Water Industry Act 1991 (as is given effect with modifications by the SIP regulations) Thames Water will: • Conduct preparatory ‘interface works’ between the utility’s sewers and the IP’s tunnel; • Remove project risk from the perspective of procurement (by obtaining planning consent and acquiring land, as appropriate); • Minimize time to commence construction through parallel procurement of IP and construction contracts (on behalf of the IP); • Remove risk related to proposed construction site by undertaking pre-work; • Enable construction efficiencies to be delivered.
RAB	RAB is estimated by Ofwat as the value of the existing regulatory asset base of an established utility that is eligible for a return.	No existing asset base, given that TTT is a greenfield development.	RAB applied to a separate asset instead of a company • Expenditure incurred in connection with the project is added to the RAB as construction progresses; • RAB adjusted annually to reflect allowable project spend.
WACC	Ofwat sets an industry-wide WACC to allow utilities to earn an appropriate return for a period of 5 years.	There is potential regulatory risk for investors from a variable rate of return. The IP could potentially find more favourable financing terms	WACC initially set by tender instead of by Ofwat (i.e. Bid WACC) • Bid WACC is significantly lower than any cost of capital set for a regulated utility in the UK; • Fixed Bid WACC over construction period of 10+ years; • From post-construction, the WACC will be set by Ofwat.
Revenue	Revenue is based on the RAB and the WACC and collected by Thames Water.	No existing asset base (RAB) given that TTT is a greenfield development. For investors, there is potential for unstable yields if subject to periodic reviews	*Bid WACC initially applied to projected* RAB to enhance liquidity** • No change to revenue provision during construction; • Revenue collected by Thames Water on behalf of IP.
Periodic review	Periodic reviews are carried out in 5-year business plan cycle.	Potential regulatory risk for investors given uncertainty and unpredictability between reviews.	No periodic reviews during construction period • The construction period will be treated as a single regulatory period, i.e. more than 10 years; • Post-construction, full regulatory reviews.
Efficiency assessments	As part of periodic review, Ofwat assesses relative capital efficiency with a view to creating incentives for water companies to improve capital efficiency and deliver real price benefits to customers.	Potential regulatory risk for investors given uncertainty and unpredictability between reviews.	No efficiency assessments during the construction period • Pre-agreed overall project cost and risk envelope approved by the regulator; • IP incentivized through pain/gain share mechanism.
Government support	Under extraordinary circumstances, i.e. security of supply.	The large scale of the project and associated construction risk could discourage risk-averse investors.	Government acts as the insurer of last resort and provides cover for insurable events above the amount the market is ready to provide • In the event of cost overruns above threshold outturn, the government can be required to provide equity financing to fund shortfall. Otherwise, it must discontinue the project; • The government may elect to discontinue the project and pay compensation under certain circumstances; • £500m committed liquidity facility in case of market disruption.

	Traditional regulatory framework	Challenges with the traditional framework for the TTT	Bespoke regulatory framework arrangement
Financing	Thames Water would raise private finance through the regulatory mechanism.	The large scale of capital expenditure required for TTT coupled with Thames Water’s already high gearing could significantly impact Thames Water’s cost of debt and cost of capital, ultimately threatening the utility’s ability to provide a service to customers.	Stand-alone infrastructure provider Per the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013: • TTT will be developed by a stand-alone third-party infrastructure provider (IP) with regulatory and structural ring-fencing as per UK water and water and sewerage companies (WaSCs); • Ofwat will grant a licence adapted for IP rather than WASCs; • IP will design, construct, own, finance, operate, and maintain TTT in accordance with Project Specification; • IP will be financed through a mix of equity, bond, and bank debt. In addition, IP may have access to EIB debt.
Procurement	Procurement carried out by licensee (e.g. Thames Water).	Projects involving planning and construction (as opposed to building and operating) are complex and may not appeal to investors who lack specialized infrastructure teams. Construction bidders willing to take on risk and uncertainty may require large contingency budgets	Thames Water to procure IP and construction contracts (on behalf of the IP) Per the Water Industry Act 1991 (as is given effect with modifications by the SIP regulations) Thames Water will: • Conduct preparatory ‘interface works’ between the utility’s sewers and the IP’s tunnel; • Remove project risk from the perspective of procurement (by obtaining planning consent and acquiring land, as appropriate); • Minimize time to commence construction through parallel procurement of IP and construction contracts (on behalf of the IP); • Remove risk related to proposed construction site by undertaking pre-work; • Enable construction efficiencies to be delivered.
RAB	RAB is estimated by Ofwat as the value of the existing regulatory asset base of an established utility that is eligible for a return.	No existing asset base, given that TTT is a greenfield development.	RAB applied to a separate asset instead of a company • Expenditure incurred in connection with the project is added to the RAB as construction progresses; • RAB adjusted annually to reflect allowable project spend.
WACC	Ofwat sets an industry-wide WACC to allow utilities to earn an appropriate return for a period of 5 years.	There is potential regulatory risk for investors from a variable rate of return. The IP could potentially find more favourable financing terms	WACC initially set by tender instead of by Ofwat (i.e. Bid WACC) • Bid WACC is significantly lower than any cost of capital set for a regulated utility in the UK; • Fixed Bid WACC over construction period of 10+ years; • From post-construction, the WACC will be set by Ofwat.
Revenue	Revenue is based on the RAB and the WACC and collected by Thames Water.	No existing asset base (RAB) given that TTT is a greenfield development. For investors, there is potential for unstable yields if subject to periodic reviews	*Bid WACC initially applied to projected* RAB to enhance liquidity** • No change to revenue provision during construction; • Revenue collected by Thames Water on behalf of IP.
Periodic review	Periodic reviews are carried out in 5-year business plan cycle.	Potential regulatory risk for investors given uncertainty and unpredictability between reviews.	No periodic reviews during construction period • The construction period will be treated as a single regulatory period, i.e. more than 10 years; • Post-construction, full regulatory reviews.
Efficiency assessments	As part of periodic review, Ofwat assesses relative capital efficiency with a view to creating incentives for water companies to improve capital efficiency and deliver real price benefits to customers.	Potential regulatory risk for investors given uncertainty and unpredictability between reviews.	No efficiency assessments during the construction period • Pre-agreed overall project cost and risk envelope approved by the regulator; • IP incentivized through pain/gain share mechanism.
Government support	Under extraordinary circumstances, i.e. security of supply.	The large scale of the project and associated construction risk could discourage risk-averse investors.	Government acts as the insurer of last resort and provides cover for insurable events above the amount the market is ready to provide • In the event of cost overruns above threshold outturn, the government can be required to provide equity financing to fund shortfall. Otherwise, it must discontinue the project; • The government may elect to discontinue the project and pay compensation under certain circumstances; • £500m committed liquidity facility in case of market disruption.

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