Thames Sewer Plan May Be Triple Industry Average: BNEF

Thames Water Utilities Ltd.’s “super sewer” may generate profit at triple the industry average should the company win regulatory approval to build the 4.1 billion-pound ($6.6 billion) project, according to a London researcher.

Proposals by the U.K.’s largest water supplier to pay for the Thames Tideway Tunnel by increasing household wastewater charges by as much as 80 pounds a year may generate after-tax returns on equity as high as 24 percent, Bloomberg New Energy Finance said today. That’s more than three times the estimated 7 percent return for other water utilities, the report showed.

Days after regulator Ofwat rejected the utility’s request to raise bills 8 percent a year, the findings may threaten plans for a 25-kilometer (16-mile) tunnel Thames Water says is crucial to upgrade a Victorian-era system that strains to cope with London sewage, sometimes sending raw effluent into the waterway.

While utilities say such costly investments are needed to modernize systems, they’ve been criticized by Ofwat for posting profits and questioned by critics for paying low taxes as bills rise. Britain’s water companies have been urged to share gains with customers and seek more moderate bills ahead of a price review due to be concluded in December 2014.

Under the super-sewer plan, a special purpose vehicle whose likely investors would be wealth and infrastructure funds as well as Thames Water and its shareholders would be created that would receive any profits, with investment details not yet known.

Other Options?

There may be other options besides an expensive tunnel, BNEF said. There’s been no “in-depth” study of cheaper alternatives such as managing stormwater at the source and using more efficient technologies, according to the report.

“For the last 10 years the Thames Tideway Tunnel has been presented as the only feasible solution to London’s unacceptable sewage overflows,” BNEF Chief Executive Officer Michael Liebreich said. “This report shows that this is most likely not the case.”

Liebreich urged a study of such techniques, looking at their use by other cities, “before rushing ahead with an infrastructure project which risks handing an extraordinary windfall to investors at the expense of householders.”

Thames Water says on its website the sewer is “urgently” needed to protect the Thames from increasing pollution. It’s seeking final consent for the tunnel, which would follow the course of London’s river capturing untreated waste from the waterway’s most polluting overflow points.

Thames Water’s dividend policy has left it unable to fund the tunnel using capital reserves or by borrowing, according to BNEF. Ofwat on Oct. 16 rejected a plan by the utility with 14 million customers to raise bills by about 8 percent a year to buy land for the sewer. BNEF says adding 31 pounds to 35 pounds by the 2020s would match industry returns.

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