Michael Gove has signalled a crackdown on executive pay and offshore financial arrangements to address the “concerning” behaviour of water companies.
In a letter to Ofwat’s chairman, Jonson Cox yesterday (31 January), the environment secretary said the government was prepared to give the regulator more powers to tackle poor practices in the industry.
He wrote: “The water sector has rightly come under even closer scrutiny in recent months with growing concern about the behaviour of water companies. The use by some companies of opaque financial structures based in tax havens and high gearing is deeply concerning. I also share your concern that some water companies have for many years been making excessive profits.
“Concern about water companies’ behaviour will only deepen if the dry weather experienced in the autumn means that some water companies bring in hosepipe bans or other restrictions on customer use.”
Gove said Ofwat has a key role to play and thanked the regulator for “pressing companies hard” to change behaviour “not least where it has a direct bearing on their corporate, financial and operational resilience”.
He also acknowledged Ofwat has been “pursuing companies” to increase the transparency of the sector and the trust customers can have in it.
But he stressed there is “more to be done” and listed behaviours which undermine trust, including offshore financial arrangements; securitisation; highly geared structures; high levels of executive pay and high dividend payments.
Gove concluded: “If the current regulatory framework does not provide Ofwat with the powers necessary to tackle these kinds of behaviour properly, then the government will consider what changes could be made.”
He urged Cox to investigate the matters further and revert back with “findings and recommendations”.
In his response, Cox described it as an “immense privilege” for a company to hold a monopoly public service licence and said it “must not be taken lightly”.
“Companies need resilient capital structures to maintain resilient operations and the trust of their customers and the public,” he said.
Cox added: “It is 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 said the regulator is pushing water firms on a “number of fronts” including “engaging intensively” with the most highly leveraged companies, citing Ofwat’s public action taken with Thames Water last year.
Cox said the forthcoming price review, PR19 will require companies to demonstrate their plans are financially resilient now and over the long term.
Last year, Yorkshire Water and Thames Water, both vowed to close their Cayman Islands subsidiaries, with Yorkshire promising further action to reduce borrowing, simplify its finances and enhance service for customers. While Thames Water’s new chairman Ian Marchant will lead a wide-ranging review of the company’s corporate structure.
Cox said Ofwat is expecting to get responses from all highly leveraged companies and the regulator will report back by early April to provide an update.
Tony Smith, chief executive of the Consumer Council for Water told Utility Week the comments from the secretary of state echo the concerns it has raised about water companies’ financial structures, tax arrangements and financial outperformance.
He said: “Companies need to be far more transparent and explain how their financing is benefitting customers, as well as doing their utmost to avoid aggravating customers with further bill increases. Greater transparency is absolutely vital to improving the legitimacy of the sector in customers’ eyes.”