Gove offers regulator powers to take harder line on tax, gearing and pay

Environment secretary Michael Gove last week gave Ofwat the green light to request new powers to tackle water company behaviour that he considered undermining of customer trust in the sector. In a letter of 31 January to Ofwat chairman Jonson Cox, Gove cited specifically:

  • offshore financial arrangements.

  • securitisation.

  • highly geared structures.

  • high levels of executive pay.

  • high dividend payments.

First noting Ofwat’s activities in this space already and in particular Cox’s leadership, Gove said “there is more to be done”. He wrote: “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. I would therefore be grateful if you could investigate these matters further and come back to me with your findings and any recommendations.”

Cox replied the same day by letter to thank Gove for his offer of help and to suggest reverting by early April “with an update on progress and our next steps”.

Cox took the opportunity to highlight what Ofwat has already done in the legitimacy space, including pressing for greater transparency generally and “engaging intensively with the most highly leveraged companies”. Cox added that responses from such firms would inform the April discussion. He listed specific Ofwat initiatives as:

  • Calling on “companies which have taken on aggressive financial structures to demonstrate that they are on a sustainable financial footing”.

  • Using PR19 to require companies to demonstrate their plans are financially resilient now and in the long term.

  • Ramping up expectations on companies' corporate governance arrangements.

  • Increasing transparency on company returns, “with companies to publish a comparison of their actual returns to investors and what those returns would be under the structure we use in setting customers' prices. Highly leveraged companies will have to explain to their customers how the higher returns from their regulated companies look fair.”