Cox lists moves on legitimacy, licences and last resorts as Gove lashes out
At Water UK’s City Conference on Thursday, Ofwat chairman Jonson Cox laid the blame for recent damage to the sector’s reputation squarely at the door of the chiefs and boards of highly leveraged companies and told them to urgently fix it.
Cox spelled out Ofwat’s “emerging thinking” on what he described as three “tiers” of regulatory action in response to recent legitimacy challenges: tier 1, already underway; tier 2, to commence imminently; and tier 3, last resort actions that may be externally imposed should the sector not heed calls for change.
Tier 1 actions were:
Companies must address weak capital structures to maintain long term resilience and investment-grade ratings.
From 2017/18, companies must publish a comparison of returns on actual regulated equity compared what it would be under Ofwat’s notional financing.
PR19 business plans must show financial resilience for at least a decade.
Companies were challenged to bring forward progressive dividend policies to share financing outperformance. Cox mulled: a performance related dividend payout gateway; downward adjustments to notional structure base dividends for thin equity companies; matching bill reductions to dividends; and securing employee interests including addressing pension deficits pre-dividend.
Financial resilience and dividend policy to feature prominently in Ofwat’s initial assessment of PR19 business plans.
Ofwat is looking to further its work on corporate governance, including requiring a majority of independents on boards.
Tier 2 actions, which Cox called for rapid company feedback on and engagement in, involved potential licence amendments. One was to embed a duty to put customers’ and society’s interests at the heart of the business; another was “a standard obligation to maintain an investment- grade rating, appropriate ‘lock-up’ procedures if the company loses its investment- grade status and standard ‘ultimate controller’ requirements.” Cox indicated to City Conference delegates that the Ofwat board was “considering asking the Secretary of State for support…to rationalise and make simpler the process for bringing about licence changes” should they not voluntarily consent.
Tier 3 concerned last resort moves. Cox said: “In the public context of the failure of public services under a private franchise, the government may ask ‘Is the 25 year notice period on a company for revocation of its licence too long?’ As regulators, we may ask, ‘Is it still appropriate to allow companies to set actual capital structures so far removed from our notional structure?’ Other critics may ask ‘Should a company that takes a more aggressive structure receive a different cost of capital?’ We’re not proposing to go there, but unless the industry moves forward on the steps I have indicated above, and achieve a ‘re-set’, these existential questions may be pressed on us.”
Elsewhere at City Conference, secretary of state Michael Gove delivered a deliberately blunt address to the gathered industry leaders in which he berated them for operational failures, tax payments, dividends, gearing and – particularly personal given some were in the audience – CEO salaries. He said delays in addressing these matters would not be tolerated and that he was prepared to hand Ofwat “whatever powers are necessary, and back them in any action they need to take, to get the water companies, all of them, to up their game and further lower consumer bills”.
Water UK chief executive Michael Roberts argued water companies are putting public interest first and dealing firmly with issues which threaten trust. He cited as examples public commitments by three companies to close their offshore arrangements and Yorkshire Water’s action to deleverage.
Full coverage of the Water UK City Conference will be in the March issue of