Ofwat has given the go-ahead to United Utilities to provide working capital through a series of loans of up to £100 million for a period of 5 years to its non-household retail activities joint venture with Severn Trent Water.
The decision to grant consent follows a period of what Ofwat describes as “working level discussions.” United Utilities then formally requested consent on 15 April 2016 - the water company’s licence states that it needs consent from Ofwat to make such loans
Outlining the reasons for its consent, Ofwat said that United Utilities and Severn Trent have explained that the transaction is being entered into in preparation for the opening up of the English nonhousehold retail sector to full competition from April 2017. The JV will have its own management and operate independently of the appointees’ wholesale businesses, the aim being to create a more efficient organisation focused solely on nonhousehold retail activities and customers.
As part of the transaction that will create the JV the water companies are now seeking to provide loans on an arm’s length basis to the JV so that it has access to the working capital required for it to provide non-household retail services to customers.
Ofwat said its main considerations in assessing the request were how customers will be protected, whether the loans would be consistent with United Utilities’s obligations for arm’s length trading, the ability of the firm to continue to comply with its licence obligations and the impact of the loans on its finances.
Severn Trent Water’s own licence does not contain a full set of financial ring fencing conditions and so it does not require formal consent to make loans from its appointed business to the JV. However, the regulator said the firm has provided similar assurances to those given by United Utilities in relation to customer protection, competition, licence compliance, financing and resilience and that it would have been "prepared to grant such consent had it been formally required."
The transaction is also subject to merger control procedures and a phase 1 investigation by the Competition and Markets Authority (CMA) under the Enterprise Act 2002 is currently underway. Ofwat said its consideration of United Utilities’s request for consent to the loans is without prejudice to the outcome of the CMA’s review of the impact of the transaction on competition.
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