Thames Water stands to make a colossal £162million a year in additional revenue from its 20 mile long super sewer due to a ‘perverse incentive’ in the way the water industry is financed.
Current regulations encourage water companies to build their way out of problems rather than consider greener, more sustainable options, according to Professor Colin Green, who is a national expert on water economics.
Thames Water claims the massive concrete tunnel, which would be around the size of the Channel Tunnel, is needed to prevent sewage being released into the River Thames. But Professor Green, who is based at Middlesex University, says financial gain is likely to be the real motive behind the controversial scheme.
Professor Green says that 14 million Thames Water customers will be ‘ripped-off’ under the current plans as the current price system ‘creates a strong incentive to pour concrete’ rather than explore green alternatives that don’t make money.
The problem arises as water companies are allowed to borrow money cheaply on the bond markets to pay for projects like the £3.6 billion super sewer, or Thames Tunnel as it is officially known - but water regulator Ofwat allows Thames Water to charge customers 4.5% per annum to service its borrowing and to pay dividends to its shareholders.
“The current system encourages water companies to borrow money to spend on large capital projects,” says Professor Green. “There is a strong incentive to pour concrete as for every pound Thames Water borrows, to pay for large projects like sewers or reservoirs, they make a handsome return off their customers.”
Thames Water's customers from Essex to Swindon and all Londoners can expect to pay an extra £120 per year for life on top of current bills - doubling the cost for sewerage - to pay for the huge tunnel with costs ‘inevitably due to rise’ according to the company’s Chief Executive Martin Baggs.
Professor Green added: “At a time when we are all seeking to reduce outstanding debts, this is not the right time to increase debt for a scheme which will not contribute to economic growth, employment and sustainable development but only increase the costs to hard pressed households and businesses.”
At a recent hearing of Lord Selborne’s Thames Tunnel Commission, evidence was presented showing that the Thames Tideway Strategic Study Group spent just £12,000 researching green alternatives to make the Thames cleaner - compared to more than £5million building a case for the super sewer.
Hammersmith & Fulham (H&F) Council has long argued that it makes no sense to spend such a vast sum of money on a gold-plated solution during the age of austerity. Earlier this month independent water expert Chris Binnie, who worked for Thames Water to create the sewer plans, said the whole basis for the project was out of date and needed to be revisited.
Cllr Stephen Greenhalgh, H&F Council Leader, says: “Water industry experts are lining up to say that Thames Water’s case for the super sewer is flawed. The Thames has won awards for its cleanliness but we all agree that it could be cleaner still. The question is how this is delivered and it appears Thames Water’s true motivation for pushing through this massive concrete tunnel has more to do with financial gain than cleanliness.”
Water regulator Ofwat has looked into the issue of ‘capital expenditure bias’ (capex) in the water industry. It says: “If capex bias in the water and sewerage sectors is real, then the companies are not developing the best solutions for their customers and the environment. This means that they are not spending money on sustainable and efficient solutions to deliver the right outcomes. Financial modelling suggests that our regulatory incentives may cause the companies to prefer capital expenditure.”
A consortium led by the Australian bank Macquarie bought Thames Water for £8 billion in 2006 and if the super sewer goes ahead the regulatory capital value (RVC) of Thames Water will increase by at least 40 per cent allowing Thames Water executives to charge customers much higher bills and make a large profit on their borrowings.
Cllr Greenhalgh concludes: “The more I learn about Thames Water’s motives the more I think the whole thing stinks. There is no need for the super sewer in its current form at all. This is a view backed by numerous experts who have repeatedly come forward to say there are alternative ways to clean up the river without the huge environmental, social and economic costs. If Thames Water won’t see sense the Government needs to compel them to revisit these alternatives before it is too late.”
It is not the first time Thames Water has faced accusation of capex bias. A public enquiry into Thames Water's proposed £1 billion reservoir at Steventon in Oxfordshire, which would have been as big as Gatwick Airport, found that the case for the reservoir had not been adequately made and that Thames Water had not considered other more sustainable options.
Lord Selborne's Thames Tunnel Commission is due to make its recommendations public on Monday 31 October at an event at the House of Lords.
See BBC report here.
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