Ofwat has launched a consultation on its proposals to strengthen existing financial ring-fencing provisions to protect customers.

Photo:Rachel Fletcher Chief Executive Ofwat

The water sector regulator is looking to update the ring-fencing provisions contained in the licences of the 17 water companies in England and Wales, which, among other things, protects customers by restricting payouts to shareholders in certain circumstances e.g. if the company is in financial distress.

Currently, not all licences of the monopoly water companies have the same financial ring-fencing provisions in their licences. Ofwat said the package of changes would bring them all up to the same standard, ensuring that the interests of customers across England and Wales would be protected in the same way.

The changes would mean that all companies would have ‘cash lock-up’ provisions – thereby safeguarding the interests of all customers.

These provide that, if a water company loses its investment credit grade rating, it is barred from making pay-outs to shareholders or removing money or assets from the business.

The updated provisions are aimed at supporting the long-term viability of the company and its services, which benefits customers, companies and long-term shareholders.

Rachel Fletcher, Chief Executive at Ofwat said:

“Today, perhaps more than ever, we need to do all we can to look after customers’ interests and put arrangements in place to promote water companies’ financial resilience. Part of that means making sure that if a water company is facing financial difficulties, customers do not suffer.

“We have consulted extensively on these measures and are now looking to companies to agree to this greater protection for their customers.”

According to the consultation paper, while the changes are modest for those companies with the most up to date ringfencing provisions (Hafren Dyfrdwy, Portsmouth Water, Severn Trent England Water, South West Water and Thames Water), some companies will experience a greater change in the protections. the paper states:

"The cash lock-up provisions in the licence, which will be new for some companies, ensure that in the event of extreme financial distress, resources will only be able to be removed from the regulated business in certain specified circumstances or with Ofwat’s approval."

"Similarly, the provision enabling Ofwat to direct a company to enforce its Ultimate Controller undertakings, which is new for most companies, protects the company and customers from demands which might endanger the services being provided. In both cases these provisions should ensure the long-term viability of the company and its services, and thus have a positive impact for customers, companies and shareholders in the longer-term."

Deadline to submit comments - and for the companies themselves to indicate their agreement or otherwise to the proposed modification is 25 June 2020 - click here to download the consultation paper.