Regulatory dispute

Additional information about the regulatory discussions and contract performance:

To ensure the shareholders AS Tallinna Vesi are able to be fully informed of the regulatory and contract discussion the company has reorganised the information on its website. Furthermore some additional documents have been disclosed to ensure the greater visibility and to facilitate open and fact based discussions.

The information disclosed on 25 May was split between Tariff application and WACC discussions, however as a resulf of our changes the information about the Regulation is available in the following structure:

  1. Privatization process
  2. Administrative agreements
  3. Regulatory discussion
  4. 2011 tariff application
  5. WACC discussions
  6. Contract performance and investor returns
  7. 2010 tariff investigation
  8. ICSID materials
  9. ICSID award

The focus of section 1 is to enable all shareholders to understand how the CA’s tariff methodology has been developed. ASTV would like to point out that the professional questions sent to the regulator were raised with a view to ensuring that the privatisation contract and the interests of all stakeholder groups were taken into account. ASTV would like to highlight the extremely short time period for developing the methodology. The Estonian Authorities elaborated the methodology in less than 3 months, whereas according to the World Bank recommendations the implementation of such regulation requires consultation with all stakeholders and the standard time frame is 1,5 to 2 years. In addition we would like to highlight the lack of consultation, and the unwillingness of the Competition Authority to consider any of the points raised by the water industry in the elaboration process of its methodology.

In section 2 we highlight our approach to the tariff application. ASTV applied on the basis of the Services Agreement that is in compliance with PWSSA. In addition, to assist the Competition Authority, we sent an independently verified analysis of the profits made by ASTV in the first ten years of the contract, and completed all the tables required by the CA’s recommended methodology.

We would like to highlight that AS Tallinna Vesi asked the independent expert Oxera to confirm the real rates of return on invested capital after the privatization. During the period from 2001 to 2010 the average real rate of return has been 6.5%. Oxera’s analysis can be found from the section 2.

In section 3 we comment on the CA’s approach to calculating the WACC (or rate of justified profitability). Here we would like to highlight the fact that ASTV sent a significant number of questions to the CA to better understand the logic behind its methodology. To date a large majority of these questions are still unanswered.

In section 4 we have focussed on the performance of the contract since 2001. Here we have looked at the aims of the privatisation in terms of improvements in the quality of service, and the financial returns made by the investor on the 85m Euro paid for 50.4% of the equity in 2011.

We would highlight that the investor has fulfilled all is obligations to increase the quality of the water services in Tallinn since privatization. The considerable and independently verified increase across all service levels has been illustrated in the table Operational performance disclosed in this section. For example the water quality has been increased from 43.5% to 99.5% and leakage level has been reduced from above 32% to a level below 22% after privatization.

In addition we have prepared a simple model with the investor cash flows as per the privatization contract . From the disclosed models it can be seen that the IRR for investors from dividends only has been -5.4 %, and when including the capital restructuring the IRR would be only 1.7%.

AS Tallinna Vesi believes it is the responsibility of government authorities in any EU member state to ensure that any changes in law, or implementation of such laws must be done in such a way as to ensure that complies with EU legislation and basic legal principles. This is especially the case when an investor has signed a long term contract in good faith, and in return for the increase in quality of services and capital it has invested, has a justified expectation of the returns permitted over the period of the contract.

AS Tallinna Vesi summary of the disclosure and dispute materials.