Ofwat consults on performance sharing rule for highly geared companies

Ofwat is consulting until 17 May on a package of amendments to its PR19 methodology to put the water sector “back in balance” in terms of public trust and confidence.

In its consultation:Putting the sector back in balance, the regulator has revisited the balance of risk and return in relation to a number of specific issues in response to challenges from government that companies are not acting in customers’ best interests.

Top of the bill is the scope for financing outperformance arising from high gearing. Ofwat has proposed a mechanism for benefits sharing with customers and told highly leveraged firms to adopt it or propose alternative sharing arrangements which deliver equivalent or greater benefits to customers in their business plans. It said: “We propose to intervene to impose a sharing mechanism for PR19 where we consider company proposals in their business plans do not adequately share financing gains with their customers.”

Elsewhere in the consultation, Ofwat set out new expectations for PR19 business plans around the transparency of policies on dividend and the performance related element of executive pay; and clarified how it expects companies to demonstrate financial resilience.

Companies are expected to factor the developments into their business plans ahead of submission on 3 September.