Ofwat has set out proposals to restrict water companies from making payouts to shareholders if their credit rating is at risk.
The regulator has today confirmed a package of measures including a common set of standards aimed at strengthening water companies’ financial resilience.
They include “cash lock-up” conditions meaning that if a water company is at risk of losing its investment grade rating, it is barred from making pay-outs to shareholders or removing money or assets from the business.
Currently three companies – Wessex, Bristol and Welsh Water – do not have a cash lock-up provision in their licence, while South West Water and Hafren Dyfrdwy are currently exempt because of an alternative provision to update the board each year on their ability to achieve the rating.
Ofwat said the changes, which were subject to consultation at the start of the year, were intended to further safeguard customers’ interests by ensuring water companies remain financially robust and continue to attract investment.
The regulator published its response to the consultation this morning, saying there had been broad agreement from the 18 responses to strengthening the regulatory ring-fencing framework and consistency of licences.
The package of measures will also see licences updated to require that companies “must ensure” an investment grade credit rating is maintained “at all times”. Currently many licences only commit to “reasonable endeavours” to keep their rating. Concerns were raised by some respondents to the consultation that this could result in companies automatically breaching their licences as a result of factors outside their control. However, Ofwat stressed it would take account of the circumstances in deciding on any enforcement approach.
Chief executive Rachel Fletcher said: “Water companies must provide resilient services to their customers. To do that, they need to be financially resilient. To help secure that, we want to introduce clearer, consistent requirements and protections.
“These protections will give greater assurance to customers about all water companies’ financial stability and long-term resilience.”
As part of the changes, Ofwat is also introducing a provision that requires company boards to alert the regulator “when they become aware of any circumstances that might materially affect the appointee’s ability to carry out its regulated activities”.