The Secretary of State for Environment, Food and Rural Affairs Michael Gove has written to Ofwat Chairman Jonson Cox to raise concerns about the corporate behaviour of water companies.

The Minister said the water sector had “rightly come under even closer scrutiny in recent months” with growing concern about the behaviour of water companies.

The use by some water companies of opaque financial structures based in tax havens and high gearing is deeply concerning, he said, adding that he shared the Ofwat Chairman’s concern that some water companies had “for many years been making excessive profits.

Acknowledging Ofwat’s efforts to increase the transparency of the sector and the trust customers can have in it, Gove said:

“We both agree, however, that there is more to be done.”

He singled out behaviour which undermined trust, including:

• Off-shore financial arrangements
• Securitisation
• Highly geared structures
• High levels of executive pay
• High dividend payments

The Environment Minister has asked Jonson Cox to investigate further and respond with his findings and any recommendations.

The Government would consider what changes could be made if the current regulatory framework does not provide Ofwat with the powers necessary to tackle these kinds of behaviour properly, he said.

Ofwat to provide update on progress and next steps by early April

In reply, the Ofwat Chairman said it was entirely reasonable,” when companies adopt more aggressive structures than customers are paying for”, that Ofwat and customers want companies to be transparent about their financing and returns and explain them clearly.

He went on to explain that Ofwat was already pushing companies on a number of fronts, including engaging intensively with the most highly leveraged companies.

Referring to Ofwat’s public action in respect of Thames Water last year, Cox said he had called on companies which have taken on aggressive financial structures, to demonstrate that they are on a sustainable financial footing. Other efforts included:

• The forthcoming price review will also require companies to demonstrate that their plans are financially resilient now and over the long term.
• Ofwat is increasing expectations on companies' corporate governance arrangements and increasing transparency on company returns, with companies to publish a comparison of their actual returns to investors and what those returns would be under the structure the regulator uses in setting customers' prices.
• Highly leveraged companies will have to explain to their customers how the higher returns from their regulated companies look fair.

Committing to providing Michael Gove with an update on progress and next steps by early April, Jonson Cox said:

“As we both recognise, there is more to do to ensure that we have a thriving water sector that can hold the trust and confidence of customers and wider society. “