Ofwat consults on allowing Tideway to pass increased costs from COVID-related impacts on to customers

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Water regulator Ofwat is consulting on proposals to allow Tideway to pass a proportion of increased costs in the order of £200 million from COVID 19-related impacts on to customers.

The proposed amendments are required to give effect to an alternative sharing rate between Bazalgette Tunnel Limited (trading as Tideway) and Thames Water’s customers for COVID-19-impacted costs on the Thames Tideway Tunnel project and a different depreciation rate for COVID-19-impacted costs.

Ofwat is also consulting on potentially accepting an amendment to a regulatory milestone date to take into account the delay caused to the project by COVID-19, although this amendment is only likely to be introduced later, once the extent of delay (if any) is known.

Once constructed, the Thames Tideway Tunnel, will be a 25 km (16 mile) tunnel running mostly under the tidal section of the River Thames through central London.

Its purpose is to capture and convey almost all the combined raw sewage and rainwater discharges that currently overflow into the river.

Under its licence, Tideway bears 40% of any overspend and customers bear 60%.

Tideway estimates that its additional expenditure as a result of COVID-19 will be in the order of £200m (including the costs of delay).

Absent a licence amendment, Tideway will bear 40% of this amount.

At the start of the pandemic, Tideway approached Ofwat asking that the additional costs incurred as a result of COVID-19 be borne by customers.

The company argued that the impact of the pandemic was very extensive for the business and it was not a risk envisaged at the time of licence award and that the costs of it
should not be borne by its shareholders.

Ofwat recognised that COVID-19 ‘had had and will have a much more significant impact
on Tideway than on other companies in the sector’, but considered that Tideway
should not be wholly insulated from additional costs and must bear a proportion of them.

In line with this principle, Ofwat provisionally agreed to a different sharing rate between Tideway and customers in respect of early COVID-19 costs.

The regulator also provisionally agreed that COVID-19 expenditure should depreciate at a different rate from the rate that would otherwise apply to an asset with an expected life of
about 120 years. This was to support Tideway’s financial resilience in funding additional COVID-19 expenditure.

Ofwat has also provisionally agreed to amend a regulatory date to take into account delay solely caused by COVID-19.

These proposed licence amendments that are being consulted on are to give effect to these provisional decisions.

This consultation accepts responses until 7th of May 2021.

More information about this consultation and how to take part is available on the Ofwat website.