Beware of the regulators

A new focus on value for money for consumers is making the nature of regulatory risk more unpredictable.

Perhaps wary of an angry backlash from populations forced into a new age of austerity (witness the recent eruption of fury in Athens), governments may be discovering a new focus on delivering value for money for consumers – which may equate to greater unpredictability for infrastructure investors as they go about assessing their potential risk exposures.

Take a recent case in Germany, for example. Here, a recent regulatory change shifted the power to regulate water company charges from municipalities to state competition authorities. The change stemmed from a judgement reached in Germany’s constitutional court on a long-running dispute with a local utility accused of overcharging customers. Under the new rules, state competition authorities can now use price comparisons with other water companies as a basis for market abuse charges.

If a utility’s charges are found not to be in line with the industry average, they can be reduced by the state competition authorities. But losses in annual revenue may not be the ruling’s only consequence. The decision also strengthened a campaign to renationalise one of Berlin’s municipal utilities, in which Veolia and RWE bought a 49.9 percent stake in 1999.

The propensity for water regulators to impact business plans was also underlined by the most recent “settlement” produced by UK water regulator Ofwat in January this year. The settlement, which determines how much water companies can charge their customers over the next five years, was less harsh to companies than originally feared but still demanded they keep bills stable while massively increasing their capital expenditure.

Another reminder of this focus on value for money was delivered today, with the announcement that the UK’s National Audit Office will analyse whether the Highways Agency delivered a cost-effective solution when the M25 motorway Private Finance Initiative (PFI) reached financial close last June. Although it is not yet clear what will happen in the event that cost-effectiveness is found to have been lacking, it is further evidence of regulators taking a keen interest in the precise economics of public-private arrangements. 

In the upcoming June 2010 issue of Infrastructure Investor magazine, we shall be looking at how various types of risk impact infrastructure funds and their investment decisions. It’s no great surprise in light of recent developments that regulatory risk is high on the list of concerns.