Ofwat to consult on mandatory licence changes to tighten ring fencing

Ofwat has confirmed it will consult under section 13 of the Water Industry Act on modifying water company licences to strengthen the regulatory ring fencing framework.

The section 13 consultation will include ring-fence modifications decided on this month and consulted on in November, as well as the conclusions from its General policy on change of control and its application to Thames Water consultation of May 2018. The intention is to bring all licences up to the industry leading standard so all customers enjoy an equivalent level of protection, and to improve accountability, transparency and legitimacy.

Ofwat intends to:

• insert a “must ensure” requirement into all licences with respect to appointees maintaining an investment-grade credit rating. This replaces the requirement for “reasonable endeavours” to this end in some licences;

• clarify the licence definition of “issuer credit rating” (which is already required) by explicitly including on the face of the licence both a Corporate Family Rating and an alternative rating agreed with Ofwat following a written request;

• update each licence with the most up to date ring-fencing certificates provision. These provide assurance that the appointee has adequate facilities, systems, financial resources and management resources to enable it to carry out its regulated activities for at least another 12 months;

• insert a requirement for company boards to report material issues to Ofwat as soon as they become aware of them;

• insert the provisions related to its earlier Change of Control Conclusions into all licences;

• incorporate changes made under licence simplification into proposed licence wording; and

• insert a cash lock-up provision in all company licences, which would restrict the company from making some payments, such as dividends, in particular circumstances such as loss of an investment grade credit rating.

Only Bristol Water, Welsh Water and Wessex Water do not have a cash lock-up. There were a number of objections on this; Ofwat has dismissed them, except to commit to further explore concerns raised about the equivalence of the cash lock-up trigger for the two companies that are exempt from the requirement to maintain an investment grade credit rating – South West Water and Hafren Dyfrdwy. Their licences allow their boards to produce annual certification instead.