Water sector regulator Ofwat has today announced that it has modified the licences of 16 of the 17 water companies in England and Wales, who have accepted new ring-fencing provisions.
One element of the changes is to protect customers by restricting pay-outs to shareholders if the company is in financial distress.
Ofwat said the package of changes had been consulted on widely, and represents improvements to the licences of companies to ensure that the financial ring-fence provisions ensure water companies remain financially robust and protect the interests of customers.
All water companies, except Wessex Water, have accepted the safeguards - Ofwat said it was pleased that the protections have been adopted widely across the sector.
Rachel Fletcher, Chief Executive at Ofwat said:
“Today marks a positive step towards protecting customers’ interests and promoting financial resilience in water companies.
“We have consulted extensively on these measures and are encouraged that all but one of the water companies have consented to these important changes. These provisions will help to promote financial resilience and stability and so protect customers and long-term shareholders alike.”
The regulatory ring-fence provides an important protection for companies and their customers. Its purpose is to ensure that the regulated company maintains sufficient financial, management and other resources to enable it to carry out its water and sewerage services in a sustainable manner, and it protects the regulated company from the activities of other entities such as other group companies.
The companies’ licences were amended on 10 July 2020, and the amendments came into effect on 13 July 2020.
Modifications to the licences of the water companies include:
- inserting a new requirement to inform Ofwat when the regulated company becomes aware of arrangements which may lead to a change of control;
- modifying the requirement to use “reasonable endeavours” to maintain an investment grade credit rating, to a requirement that companies “must ensure” that an investment grade credit rating is “maintained at all times”
Wessex Water is the only water company that has not consented to the modifications. Ofwat explained this was because:
“It does not agree that it is necessary to have inflexible or pre-scripted solutions to deal with concerns regarding a company’s financial resilience. It says it has been the practice of the Board of YTL to withhold dividend payments where that could lead to a credit rating downgrade; and that this demonstrates that the protections and assurances that Ofwat seeks to obtain through licence modification are already in place through the basics of good governance and stewardship.”
The regulator said it was “disappointed” that Wessex Water had not given its consent and would consider how to proceed.
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