Ofwat guidance makes it clear most intercompany loans will be blocked

Ofwat has clamped down on intercompany loans at water companies with new draft guidance.

The guidance, open for comment until 3 September, makes it plain that Ofwat will only consider derogations from ring-fencing licence conditions if they serve customer interests or bolster financial resilience.

Such derogations include inter company loans from regulated businesses to their parent companies. These require permission from Ofwat and the regulator pointed out it would be unlikely to give consent for them in future.

The move is the latest in Ofwat’s programme of work to make sure water companies are financially resilient and act in customers’ interests. Following previous case by case interventions, some companies are already unwinding relevant arrangements. Anglian Water has ensured the repayment of a £1.6bn intercompany loan, Southern Water has arranged the repayment of £628m of an intercompany loan, Thames Water of £250m of an intercompany loan and South Staffordshire Water the repayment of a £15m intercompany loan.

Ofwat chief executive Rachel Fletcher (pictured) said: “Today we are setting out guidance, which is very simple: we won’t allow companies to take on financial arrangements if they are not in customers’ interest and do not help the company’s financial resilience. There is a high bar for companies to clear and we want to set it out plainly for all to see.”