Ofwat sets out options to protect customers from water company financing risk

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Water regulator Ofwat has put forward options to strengthen water companies’ financial resilience in a new discussion paper.

The options are designed to require companies to have ‘robust’ finances and to better protect customers and the environment from the adverse consequences of financial risks taken by water companies.

The options also push companies to link their financial decisions to their performance. 

Ofwat interim Chief Executive, David Black, commented on the announcement: “Water companies need to be financially resilient and transparent about their financial structures.

“We have concerns on both fronts that need addressing. They need to be financially secure enough to make the investment needed in the essential service they provide, maintain critical assets and protect the environment. Without that, customers and the environment will lose out.

“Dividends should be linked to performance, and companies have to improve this if they want to rebuild the trust of their customers.”

Although the sector as a whole remains ‘strongly investible’, Ofwat is concerned that some companies have put risky financing arrangements in place and are not linking dividend decisions to performance for customers and the environment.

The options, which include raising the minimum standards of credit quality, strengthening expectations on dividend payments being linked to performance for customers, and increasing transparency.

These follow on from the recent Monitoring Financial Resilience report, where Ofwat raised concerns about the financial resilience of some companies in the sector. 

Alongside their new discussion paper, Ofwat has published an independent report prepared for the regulator by Professor Robin Mason and Professor Stephen Wright: ‘Mason & Wright’: A report on gearing, price controls and financial resilience.

The Executive Summary and Section 4 of that paper provides commentary relevant to this discussion paper; other sections of the Mason & Wright paper are relevant to a forthcoming discussion paper for PR24 on Risk and Return. 

Ofwat welcomes views on their ‘Financial resilience in the water sector’-discussion paper by 31 January 2022.

More information about this discussion paper and how to submit feedback is available on the Ofwat website.