States of Jersey Owned Utilities Governance Review.

Corporate Finance – Government and Infrastructure

States of Jersey Owned Utilities Governance Review

Key Findings Report

10 June 2010

This Key Findings Report has been prepared on the basis of the limitations set out in the Governance Review Scope and Approachon pages 15 and 16 and the mattersnoted in the ImportantNotice over the page.

1234567

Deloitte LLP is authorised and regulated by the Financial Services Authority. © 2010 Deloitte LLP

Important Notice

Deloitte LLP ("Deloitte") is providing advice to the States of Jersey (the "States" or the "Client") and no one else, on the terms set out in the Project Initiation Document ("PID") dated 4 February 2010 (the "Contract"), in connection with the States' review of the governance and ownership arrangements in respect of the States' shareholdings in its Strategic Investments (the "Review") and will not be responsible to anyone other than the Client for providing advice in relation to the Project.

This document, which has been prepared by Deloitte has been prepared for the sole purpose of providing a discussion document to the Client on the progress of our work in relation to the States' governanceand ownership arrangements of the States' owned Utilities.

The information contained in this document has been compiled by Deloitte from information provided by the States and discussions with members of the Boards of the Utilities: Jersey Post International Limited, JT Group Limited, The Jersey New Waterworks Company Limited and The Jersey Electricity Company Limited. This document also contains confidentialmaterialproprietary to Deloitte.

Accordingly, no representation may be placed for any purposes whatsoever on the contents of this document or on its completeness. No representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of Deloitte or by any of its partners, employees, agents or any other person as to the accuracy, completeness or correctness of the information contained in this document or any other oral information made availableand any such liabilityis expressly disclaimed.

All copyright and other proprietary rights in this document remain the property of Deloitte LLP and any rights not expressly granted in these terms or in the Contract are reserved.

This document has been prepared in the interests and for the needs of the Client and not those of any other party. Its contents do not constitute financial or other professional advice. Any such other party should seek its own professional advice in relation to its specific circumstances. To the fullest extent possible, both Deloitte and the Client disclaim any liability arising out of the use (or non-use) of this document and its contents, including any action or decision taken as a result of such use (or non-use).

Executive summary

Section Page Executive summary 3 Introduction 12 Current arrangements – Utilities' views 19 International governance of state owned entities 22 Recommended shareholder levers 29 Recommended shareholder model 36 Implementation of the preferred model 54 Appendices 59

Overview

• The States of Jersey (the "States") is the sole shareholder of Jersey Post International Limited ("Jersey Post") and JT Group Limited ("Jersey Telecom") and it is the majority shareholder of Jersey New Waterworks Company Limited ("Jersey Water") and The Jersey Electricity Company Limited ("Jersey Electricity") (collectively,the "Utilities"). Jersey Electricityis listed on the London Stock Exchange.

• States of Jersey Investments Limited ("SJIL") holds the majority of the shares in Jersey Telecom and Jersey Post as a nominee for the Treasury and Resources Minister (the "Minister"), whilst the remaining shares are held by individual States' employees with nominee agreements in place, holding them on behalf of the States and the Minister. Shares in Jersey Electricityand Jersey Waterare held directly by the Minister.

• The Minister, supported by staff within the Treasury and Resources Department ("the Treasury"), fulfils the shareholder role for the four Utilities. For the purposes of this report, the Treasury is referred to throughout as performingthe shareholder functionin respect of the Utilities,on behalf of the States.

Approach and methodology

• The Minister is seeking to implement a best practice' shareholder model which will enable the Treasury to exercise proper oversight over the States' investments in the four Utilities. Deloittehas been appointedto provideadvicein respect of an appropriate shareholder model in the context of Jersey.

• A fundamentalprincipleof good governanceis that there should be a clear demarcationof roles and responsibilities whereby:

The Boards of the Utilities are responsible and accountable for managing the operations and delivering the strategy, consistent with the shareholders' objectives;and

The Treasury is responsible for shareholder governanceand oversight over the Boards.

• The effectiveness of the shareholder governance arrangements, irrespective of the specific shareholder model adopted, relies on the Treasury being empowered with shareholder levers'. These would enable the Treasury to engage effectively with the Boards of the Utilities as an active and intelligent shareholder, holding the Boards and managementteams to account for deliveryof the shareholder's objectives.

• This report identifiesthe shareholder leverswhich are appropriate in the contextof Jersey based on:

A reviewof the existing governancearrangements through:

• Discussions with the Minister and the principal Treasury staff responsible for the shareholder governancearrangements;

• A reviewof the existing governancedocumentation– Articles of Association and Memoranda of Understanding ("MOUs"); and

• Meetings with members of the Boards of each Utility: Chairman, Chief Executive,Finance Director and a Non-ExecutiveDirector ("NED"); and

Drawing on global best practice in respect of corporate governance, notably the Organisation for Economic Co-operation and Development ("OECD") Guidelines and the experienceof exemplarshareholder arrangements in other jurisdictions, includingthe UK.

• Having identified which shareholder levers are required by the Treasury, it is important to establish a functional model which provides the shareholder with a formal structure through which it can exercises the levers in the context of Jersey. In recommending a preferred model, consideration has been given to the likely resource requirement and the steps to implementation.

Shareholderlevers

To successfully fulfil its shareholder function, it is important that the Treasury has the appropriate governance levers, whilst avoiding the risk of usurping the role of the Boards or becoming involved in the management of the Utilities. Recognising the specific context of Jersey and in line with best practice, the following shareholder governanceleversare relevant:

1. Ensureadherence to the UK Corporate GovernanceCode: all four Utilities

– The Boards should adopt the governance standard for UK listed companies, the UK Corporate Governance Code (formerly the Combined Code on Corporate Governance). The Treasury should consider and challenge any non-compliancewith the Code through activedialogue with the Utilities.

2. Participationin the appointment of the Chairman and oversight of the compositionof the Board

– The Chairman's role is fundamental in setting each Utility's direction and strategy. The Treasury, should have a role in the appointment of the Chairman and in overseeingthe compositionof the Board, in particular, its size and the skills and experienceof the Directors.

Jersey Telecom and Jersey Post: 100% owned by the Treasury

– The Treasury should be consulted by the Utilities on the proposed shortlist and the preferred candidate for Chairman, to ensure that the Minister and the Board are in agreement, in advance of the Chairman's appointment.

– The Treasury and the Chairman should agree the composition of the Board of Directors. The Utilities should consult with the Treasury prior to appointing the Chief Executive and any other new Directors to the Board and it would be appropriate for the incoming Chairman, Chief Executive, Finance Director and Non- ExecutiveDirectors to meet the Treasury before taking up their appointments,to discuss the shareholder's objectivesfor the Utilities.

Jersey Water and Jersey Electricity: the Treasury is the majority but not 100% shareholder

– The Utilities should consult with the Treasury during the Chairman's appointment process to ensure that the Minister is in agreement with the Board on the preferredcandidate, in advance of the appointmentbeing formalised.

– The Chairman should consult with the Treasury to ensure the shareholder's views on the composition of the Board are considered. It would be appropriate for the incomingChairman, Chief Executiveand Senior Independent Non-ExecutiveDirector to meet the Treasury on being appointed.

3. Participationin setting objectivesand agreement of strategy

– One of the key shareholder levers is the participation by the Treasury in setting the objectives and agreeing the strategy of each of the Utilities. The degree of involvementby the Treasury is dependent upon the States' shareholding in each Utility.

Jersey Telecom and Jersey Post: 100% owned by the Treasury

– The Treasury, with the Boards, should set and agree the overall objectives for the Utilities on an annual basis. The shareholder's objectives should be prioritised and potential conflicts (such as social provision requirements and profit maximisation) should be identified and clarified. Examples of social policy objectives which the Utilities have identified as potentially being in conflict with their ability to maximise shareholder value and where they would benefit from clarification, are providedas an appendix to this report.

Shareholderlevers (continued)

– In advance of the Annual Business Plan and longer term Strategic Plan being drafted, the Treasury should meet with each Utility to discuss and agree the Board's proposed strategy. Thereafter, the Utilities should be responsible for developing and delivering the Plans, subject to review and formal approval by the Treasury.

– The Strategic Plan should set out clearly definedkey performanceindicators ("KPIs") against which performancecan be measured.

Jersey Water and Jersey Electricity: the Treasury is the majority but not 100% shareholder

– The Treasury should engage with Jersey Water and Jersey Electricity to communicate its objectives as shareholder and to understand and challenge the strategies of those Utilities, to the extent they are inconsistent with the Treasury's objectives.

– In accordance with best practice, the Boards would be expected to ensure equal access to corporate information for all shareholders. In addition, Jersey Electricitymust avoidany breach of the UK Listing Rules.

– Jersey Water and Jersey Electricity set the tariffs charged to customers. Unlike Jersey Telecom and Jersey Post, these Utilities do not operate under license agreements awarded by the Jersey Competition Regulatory Authority ("JCRA") and the JCRA does not regulate their prices. The Treasury currently performs a dual role of owner and quasi-regulator of those Utilities in the event the prices are challenged. These functions should be clearly de-lineated within the Treasury. The Treasury's ability to determinethe Utilities'pricing and tariff arrangements are not shareholder levers.

– Arguably, this dual role of shareholder and quasi-regulator could create conflict within the Treasury and consideration should be given to how this could be resolved.

4. Performancemonitoringand intervention

– Good shareholder governance requires the Treasury to monitor the performance of each of the Utilities and intervene to challenge any underperformance. In extremis, where the Treasury is dissatisfied with performance and has lost confidence in the Board's response, this could lead to the shareholder seeking to replacethe Chairman or Chief Executive.

Jersey Telecom and Jersey Post: 100% owned by the Treasury

– The Treasury should meet quarterly with the Utilities to review financial performance against their Strategic and Annual Business Plans, holding the Board to account for deliveryand meetingthe shareholder's objectives.

– In so doing, the Utilities and the Treasury should agree the information to be provided to the shareholder. The shareholder should focus on reviewing the Utilities'performanceat a strategic level,based on agreed KPIs and should not usurp the role of the Boards or the Executiveteams.

Jersey Water and Jersey Electricity: the Treasury is the majority but not 100% shareholder

– Performance monitoring of these Utilities should be based around quarterly meetings to discuss emerging strategic issues and reported financial performance against earnings guidance. In assessing the performance of Jersey Electricity and Jersey Water, the Treasury should develop and agree appropriate KPIs and benchmark performancemeasures with the Utilities.

Shareholderlevers (continued)

5. Consultationon remuneration of the ExecutiveDirectors: all four Utilities

– To deliver shareholder value, it is essential that the objectives of the management team are aligned with those of the shareholder. In the context of the States' shareholdings in the Utilities, this is best done by aligning the delivery of the shareholder's objectives with the Directors' remuneration and incentivisation arrangements.

– Whilst the shareholder does not have the power to reject the proposed remuneration packages, on a shareholder vote (the vote being non-binding on the Utilities), the Treasury could make clear its displeasure in the event that a remuneration package was put in place that was outside industry norms or did not properly align the shareholder's and the managementteam's objectives. Accordingly:

• The RemunerationCommitteeof each Utility should consult with the Treasury on their remunerationstrategies.

• The remunerationpackages should be clearly linked to deliveryof the Strategic Plan and the shareholder's objectives,based on clearly definedKPIs.

• The Treasury should be consulted on the remunerationpackages prior to formal Board approval,to ensure the shareholder's views are considered.

6. Consultationindetermininganappropriatecapital structure and dividendpolicy: all four Utilities

– Ensuring an appropriate capital structure is a means by which a company delivers shareholder value. Surplus capital which is not required for reinvestment in the business, should be returned to shareholders by way of a share buy-back or dividend.

– The shareholder has a role to play in ensuring that the Utilitiesadopt an appropriate capital structure, notably in comparison to their peer groups.

– The Treasury should participate in discussions with the Utilities, challenging the Boards to demonstrate that their capital structure (level of financial leverage) is optimal,based on appropriate industry comparators.

– The Treasury should also engage with the Utilities on their annual dividend policies, challenging them to increase the payout where capital is not required for reinvestmentin the business, makinguse of industry benchmarks, as appropriate, to support the debate with the Utilities.

7. Approval of major transactions: all four Utilities

– As owners of a business, shareholders have a role to play in approving major transactions, as it is their capital which is being invested. Accordingly, an important shareholder lever is the requirement for companies to seek shareholder approval for major transactions and those outside the normal course of business.

– The Treasury should approve any significant transactions or transactions outside the ordinary course of business, either as part of its approval of the annual StrategicPlan or by a separate business case for any additionalinvestmentopportunities identifiedduring the year.

– In relation to Jersey Electricity, the shareholder approval threshold is set out in the UK Listing Rules, whilst in relation to the other Utilities the approval threshold should be set out in the MOU between the shareholder and the Utilities.

– Proposed investmentsshould demonstratedeliveryof shareholder value,identifyingthe levelof investmentrisk and that the return on capital is appropriate.

Potentialshareholdermodels

• Having identified the appropriate rights, powers and shareholder levers, consideration should be given to which model or organisational structure best enables the Treasury to exercise its levers.

• Cognisant of the Treasury's shareholder governance objectives and drawing on international exemplar shareholder arrangements for state owned entities, three shareholder governancemodels havebeen identifiedwhich havethe potential to enable the Treasury to exercise its shareholder levers:

– Nominated Non-Executive Director: an individual would be nominated by the Minister to serve on the Boards of each of the four Utilities as an independent Non-ExecutiveDirector;

– Board of Boards: the Minister would appoint individuals to sit on a Supervisory Board' which would undertake some of the key shareholder functions on behalf of the Treasury; and

– Enhanced engagement with a dedicated resource within the Treasury: the resource within the Treasury which currently performs the shareholder role would be developedand enhanced to enable it to engage better with the Utilitiesas an effective,intelligentshareholder.

• The characteristics of the three models are outlined further within the Recommended shareholder model section of this report, together with detailed analysis of the relative merits and drawbacks of each model, focused on their ability to enable the Treasury to exercise its shareholder levers. The key conclusions of the analysis are set out below.

• Nominated Non-ExecutiveDirector

– The appointment by the Treasury of a Nominated NED could provide benefits in ensuring that the Boards of the Utilities function properly, but this would be to the extent that they do not already do so. The model would not provide a basis for the Treasury to improve its existing shareholder governance arrangements, merelythe Board governance.

– A Nominated NED would arguably not provide any additional benefit to the Treasury than the current arrangements. A Nominated NED could not report or be accountable to the Minister. The appointee's fiduciary duties as a Director would prevent a nominated NED from promoting the Treasury's views if not believed to be in the best interests of the Utility.

– A Nominated NED has the potential to undermine and duplicate the role and responsibilities of the Chairmen of the Utilities who meet regularly with the Minister to discuss the Utilities'strategic issues and obtain the Treasury's views.

– As a member of the Boards of the Utilities, the Nominated NED is unlikely to provide the same degree of independent challenge to the Utilities as could typicallybe providedby an "outsider" such as the shareholder or equity analysts.

– The Treasury could not delegate its shareholder governance responsibility to a Nominated NED. Under this model, the Treasury would continue to be reliant on the Boards of the Utilities and the governance they exercise, to manage the businesses in the shareholder's interests to keep it abreast of issues as they arise. To fulfil its shareholder role, the Treasury would still need to enhance its existing resource and expertise to enable the Minister to have informed discussions with the Chairman and the NominatedNED, particularlyin respect of strategy and financialperformance.

• Board of Boards

A Board of Boards would act as a Ministerial Advisory Board, accountable to the Minister. Such a model would be capable of delivering some but not all of the Treasury's requirementsas shareholder:

– The Minister would be reliant on the Board of Boards in the same way it is currently reliant on the Boards of the Utilities. The Treasury could not delegate its responsibility to perform the shareholder role to the Board of Boards.

– To be effective and add value, the calibre of the appointees to the Board of Boards would have to be greater than the individual Boards of the Utilities. This is likelyto havea high associated cost.

– There is a risk that the Board of Boards is perceived to blur the accountability of the Boards of the Utilities, undermining the role and responsibilities of the individual Boards and in particular the role of the Chairmen of the Utilities. This could lead to the existing Directors resigning or becoming de-motivated and abdicatingresponsibility to a higher authority.'

– To enable the Board of Boards model to work effectively, the Treasury would need to engage in regular dialogue with the Board of Boards. It would need to exercise governance over the Board of Boards to ensure it was operating effectively and remained accountable to the Minister. This would require the Treasury to enhance its existingresource with the appropriate skills and expertise and could result in the duplicationof the shareholder's role and additional cost.

• Enhancedengagement with a dedicated resource within the Treasury

Establishing a dedicated, professional capability within the Treasury with experience of managing investments would enhance the current level of engagement between the shareholder and the Boards of the Utilitiesand would meet the Treasury's requirements of:

– Implementing a formal and transparent framework for the Treasury's engagement with the Utilities, with a clear demarcation of respective roles and responsibilities;

– Retainingthe accountabilityand independence of the Boards of the Utilities,ensuring the role of the Chairman is not undermined;

– Enabling the Treasury to be an active and intelligent shareholder, able to effectively exercise its governance levers to hold the Boards of the Utilities to account for the deliveryof the Strategic Plan and the shareholder's objectives;and

– Establishing a shareholder function which creates a "buffer" between the Boards of the Utilities and the Minister, distancing the Minister from direct decision- makingand reducing the risk of politicalinterferencein the day-to-day managementof the Utilities.

This model does not havethe drawbacks of the other two models.

It is also noteworthy that this is the model preferred by most of the Utilities, albeit they expressed concern that in enhancing the capability of its shareholder function,the Treasury should ensure that it did not seek to involveitself in the managementof the Utilities'operations.

Conclusion– the preferred shareholdermodel

• Establishing a dedicated, professional capability within the Treasury is the model which would deliver the optimal shareholder governance arrangements in the contextof Jersey.

• The Nominated NED and the Board of Boards models have inherent limitations in the context of Jersey. Both models would still require the Treasury to enhance its existing shareholder resource to be capable of engaging with the Nominated NED or exercising governance over the Board of Boards respectively. Otherwise there would be risk of the challenge that the Treasury had delegated its shareholder governancearrangements to the Boards.

• In establishing an enhanced shareholder function within Treasury, it should be recognised that the effectiveness of these governance arrangements would be dependent on the Treasury assembling a dedicated resource with the appropriate skills, experience and commercial expertise to be capable of performing the shareholder functionand commandingthe respect of both the Minister and the Boards of the Utilities.

• Although the cost of the shareholder function would be borne by the Treasury, it would be appropriate for the Treasury to consider the options available for the funding of the shareholder function, including the ability to recover the cost by levying a charge on the Utilities. In the cases of Jersey Water and Jersey Electricity, where the States is not the sole shareholder, the minority shareholders may oppose such a levy if they viewed it as being an additional dividend payable to the States. This is less likely to occur where the minority shareholders are inactive and recognise the benefit to them of the Treasury's enhanced shareholder function.

Implementationof the preferred shareholdermodel: Enhanced engagement with dedicated resource within the Treasury

A detailed assessment of the resource requirement and the steps to be taken to establish the enhanced shareholder function are provided in the Implementation of the preferred model section of this report. The key recommendationsare summarised below.

Resource requirement

Enhancedengagement by the Treasury to fulfilthe shareholder role would havea resource requirement comprising:

• Seniorindividual– initially,near full time

– The individualmust be capable of commandingthe respect of the Minister, the Boards and the Regulator.

– To be effective, the individual should be empowered to make decisions in relation to the States' holdings in the Utilities, referring to the Minister where appropriate.

– This individualwould require a financialand commercialbackground, with experienceof working in the privatesector and managinginvestments.

– The time commitment is estimated to be four or five days per week, although once the function is established, the role may reduce to part time of one to two days per week.

• Supportingresource – full time

– The senior individual would require access to a dedicated resource to support him/her, comprising either in-house staff within the Treasury, external advisers or a secondee to the Treasury.

– The expectedtimerequirement is likely to be fulltime.

Implementationof the preferred shareholdermodel: Enhanced engagement with dedicated resource within the Treasury (continued)

Cost of resource requirement

• Based on the cost of comparable resource within the Shareholder Executive in the UK, the combined direct salary costs of the enhanced resource is estimated to be in the region of £200,000 to £250,000 per annum. Depending on the level of activity of the Utilities, such as diversification into new products or markets, the shareholder function would expect to be supported by external advisers on an ad hoc basis. The budget requirement for advisers' fees is likely to be similarly in the region of £60,000 to £120,000 per annum (equivalentto £15,000 to £30,000 for each Utility).

• The cost of external advisers may be higher in the early stages of implementing the enhanced shareholder arrangements as the shareholder develops a deeper understanding of each Utility and establishes a core base of data and supporting analysis. The cost is likely to vary by Utility, depending on the Treasury's existing relationshipwith the Utility,the complexityof each Utility and their current performance.

Steps to implementation

• The key steps required to establish an enhanced shareholder functionwithin the Treasury comprise:

– Agreementof the mission, remit,accountabilityand budget of the shareholder function;

– Appointmentof the shareholder function: developmentof role descriptions, candidate interviews;

– Consultationwith the Chairmen and Boards of the Utilities: ensuring the Boards' support for the enhanced shareholder arrangements;

– Draftingof the formalframework for engagement: MOU/ Principles of Ownership;

– Agreementof the timingof meetings and annual informationrequirements;

– Implementationof an appraisal process for the shareholder function.

• The effectiveness of the enhanced shareholder function relies on the Boards of the Utilities being appropriately constituted and effective. In the first six months of the new arrangements, the Minister, with the shareholder function, should review and discuss with each of the Chairmen of the Utilities, the strength of the current Board, its compositionand its operatingeffectiveness. Any required enhancements or revisions should be agreed and implemented.

Introduction

Section Page

Background

• The States is the sole shareholder in Jersey Post and Jersey Telecom and it is the majority shareholder in Jersey Water and Jersey Electricity. Jersey Electricityis listed on the London Stock Exchange. The Utilitiesprovideservices which are essential to lifeon the Island and its economy.

• States of Jersey Investments Limited ("SJIL") holds the majority of the shares in Jersey Telecom and Jersey Post as a nominee for the Minister, whilst the remaining shares are held by individual States' employees with nominee agreements in place, holding them on behalf of the States and the Minister. Shares in Jersey Electricity and Jersey Water are held directly by the Minister. Whether the States' shareholdings in the Utilities are held by SJIL or the Minister should not affectthe shareholder governancearrangements.

• The Minister, supported by staff within the Treasury, is fulfilling the shareholder role for all four of the Utilities. For the purposes of this report, the Treasury is referredto throughout as performingthe shareholder functionin respect of the Utilities,on behalf of the States.

Treasury's shareholder governance role

• The Minister, Senator Philip Ozouf , stated in his election speech that he wanted to challenge the four Utilities to deliver "better financial and non-financial returns for Islanders" and to see "a better system of accountabilityand transparency."

• In November 2008, Mr Christopher Swinson, Comptroller and Auditor General, published a report entitled: "States Owned Companies - Accountability" in which he commentedon the levelof accountabilityand rights and interests of the States as the major shareholder.

• The Treasury is seeking to implement a best practice shareholder model which will enable it to exercise appropriate oversight over its investments in the four Utilitiesand to ensure that the objectivesof the shareholder and the Board are aligned.

• The Treasury's objective of greater accountability is an integral aspect of good shareholder management. It forms the basis of the Treasury's wider objective to establish a clear ownership model and governance framework for the Utilities. Fundamental to this model is the responsibility and accountability of the Boards of the Utilitiesfor the managementand financialperformanceof the companies and for the deliveryof the key services upon which Islanders are reliant.

The Treasury's shareholdings in the Utilities

• The distinction between the Treasury being the majority rather than sole shareholder in two of the Utilities is important and has implications for the means by which the Treasury is able to exercise governance over the Boards of the Utilities. International best practice under the OECD Guidelines of Corporate Governance of State Owned Enterprises has as a fundamental principle that the state and state owned enterprises should recognise the rights of all shareholders and ensure equitabletreatment.

Jersey Telecom and Jersey Post

• The Treasury holds 100% of the share capital of Jersey Telecom and Jersey Post and as the sole owner, the Treasury does not have to consider other shareholders in establishing an appropriate framework for exercisinggovernanceover the Boards of these Utilities.

Jersey Water

• The States holds 50% of the ordinary shares and 100% of the A' ordinary shares. The voting rights attached to the A' ordinary shares, whilst in the ownership of the States, are such that they represent twice the votes cast in respect of all other shares, both the ordinary and preference shares. The States effectively controls 83% of the voting rights. The remaining shares in Jersey Water are owned by the Jersey Water Employee Share Scheme, other individuals and companies.

• This shareholding structure means that the Treasury is not able to exercise the same governance arrangements as it can in the case of Jersey Telecom and Jersey Post.

• The governance framework needs to recognise that the States is the majority but not the sole shareholder of Jersey Water and that the Treasury and Jersey Watershould ensure equitabletreatmentand equal access to corporate informationfor all shareholders.

Jersey Electricity

• The States holds all of the ordinary shares of Jersey Electricity which represents 62% of the equity capital. The remaining 38% of the equity share capital, A' ordinary shares, is listed on the London Stock Exchange. The largest shareholder after the States is Utilico Limited ("Utilico") which owns 52.5% of the A' ordinary shares, representing 20% of the equity share capital in Jersey Electricity.

• As Jersey Electricity is a listed company, the Treasury's governance framework, alongside recognising the rights of minority shareholders, needs to be cognisant of the UK Listing Rules.

Scope of work

Deloitte's scope of work is set out in the Project Initiation Document ("PID") dated 4 February 2010 (the "Contract"). Deloittehas been appointed by the States to:

• Reviewthe existinggovernancearrangements in respect of the States' shareholdings in the Utilities;

• Providean overviewsummary of relevantexemplar shareholder models;

• Provideadvicein respect of appropriate shareholder models in the context of Jersey, to meet the specific objectivesand requirements of the States;

• Consider the resources required to deliverthe preferred shareholder model; and

• Providea high leveloverviewof the steps required to implementthe preferredmodel.

In considering the appropriate shareholder model, this review also considers the scalability of the model to enable it to be applied to other States' owned enterprises, as required, for example the States' shareholding in the proposed States of Jersey Development Company Limited. The review does not consider the Waterfront Enterprise Board ("WEB") which was created purely for the purpose of developing the Waterfront and differs from the other States' owned companies, which provide commercial services beyond the day to day control of the States. The governance arrangements being considered as part of this review may also be relevant to the operationof the States' Trading Departments, however, these are outside the scope of this review.

Approach and methodology

• A fundamentalprincipleof good shareholder governanceis that there should be a clear separation of roles and responsibilitieswhereby:

The Boards of the Utilities are responsible and accountable for managing the operations and delivering the strategy, consistent with the shareholders' objectives; and

The Treasury is responsible for exercising shareholder governanceand oversightover the Boards.

• The effectiveness of the shareholder governance arrangements, irrespective of the specific shareholder model adopted, relies on the Treasury being empowered with shareholder levers'. These would enable the Treasury to engage effectively with the Boards of the Utilities as an active and intelligent shareholder, holding the Boards and managementteams to account for deliveryof the shareholder's objectives.

• This report identifiesthe shareholder leverswhich are appropriate in the contextof Jersey based on:

A reviewof the existing shareholder governancearrangements through:

• Discussions with the Minister and the principal Treasury staff responsible for the shareholder governance arrangements: the Treasurer, the Deputy Treasurer and the Strategic InvestmentManager;

• A review of the governance documentation currently in place between the shareholder and the Utilities, including Articles of Association and the existing MOUs with Jersey Telecom and Jersey Post; and

• Meetings with members of the Boards of each Utility: Chairman, Chief Executive,Finance Director and a Non-ExecutiveDirector; and

Drawing on global best practice in respect of corporate governance, notably the OECD Guidelines and the experience of exemplar shareholder arrangements in other jurisdictions, includingthe UK.