Ofwat has today confirmed a package of measures to strengthen water companies’ financial resilience, by calling on them to adopt a common set of standards.

This includes strengthening requirements to maintain an investment grade credit rating and accepting restrictions on pay-outs to shareholders in certain circumstances.

The regulator has launched a consultation on the proposals which are aimed at strengthening the regulatory ring-fencing framework to bring all licences up to the industry leading standard via licence conditions which are consistent across the industry.

The proposals build on previous consultations and discussions in industry workshops, and specifically relate to:

• maintaining investment grade credit ratings and cash lock-up;
• providing ring-fencing certificates;
• reporting of material issues; and
• change of control.

The so-called cash lock-up conditions mean 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. Once the cash lock up is triggered, the firm cannot release any funds to its holding company or other associated businesses, including paying dividends, without Ofwat’s consent.

The consultation paper says:

“It is.. our view that the same standard of protection should apply consistently to every Appointee irrespective of business model, ownership structure or listing status. … We believe that a consistent and equivalent standard is most simply and transparently achieved when each company has identical licence conditions. “

According to the regulator, by proposing that companies must ensure an investment grade credit rating, greater clarity of expectations is provided to companies and a clearer decision making process for Ofwat.

The changes are intended to further safeguard customers’ interests by ensuring water companies remain financially robust and continue to attract investment.

Rachel Fletcher, Chief Executive at Ofwat 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.”

Deadline to submit responses to the consultation is 8 January 2019 – click hereto access the consultation document Consultation on strengthening the regulatory ring-fencing framework