Ofwat has warned water companies it will block any financial arrangements that are not deemed to be in customers’ interests.
The regulator has published guidance on the regulatory ring-fencing framework, which states companies must seek consent before entering into certain financial arrangements.
The current system already prohibits companies from entering financial arrangements that are not in their licence agreements however Ofwat hopes regulatory ring-fencing will give protection to companies and customers.
It has issued guidance that relates to occasions when a company is expressly prohibited from entering into an arrangement without the consent of Ofwat.
Any company wanting to enter a financial arrangement will need consent from Ofwat before it could do so.
Ofwat said a company will need to provide a clear demonstration of how the arrangement would serve the customers’ interests before consent would be given.
Any arrangements that do not get prior consent could be blocked, as part of a package of work Ofwat is undertaking to strengthen companies’ financial resilience.
Ofwat’s chief executive, Rachel Fletcher, said: “We are setting out guidance, which is very simple: we won’t allow companies to take on financial arrangements if they are not in customers’ interest and do not help the company’s financial resilience. There is a high bar for companies to clear and we want to set it out plainly for all to see.”
Ofwat is consulting on new guidance around this process and setting out more clearly that such consent would be given only if these requests help the company to remain financially resilient and work in customers’ interests.
Following Ofwat’s interventions, some companies are already unwinding such arrangements. Anglian Water has ensured the repayment of a £1.6 billion intercompany loan; Southern Water has arranged the repayment of £628 million of an intercompany loan; Thames Water of £250 million of an intercompany loan; and South Staffordshire Water the repayment of a £15 million intercompany loan.
Fletcher said: “There is a clear framework in place to protect customers and their interests. Occasionally, water companies have reason to want to stretch beyond those conditions. When they do, we need to review it and consider the implications for customers.”