Ofwat raises the bar for inter-firm loans

Water companies will only be granted consent for inter company loans if Ofwat is clear the arrangements will serve customer interests.

Ofwat last week published guidance updating its policy on requests for consent for derogations from the regulatory ring fencing framework, alongside a conclusions document following its 2019 consultation. It said water companies wanting to enter financial arrangements which are ordinarily prohibited, such as inter company loans from the water company up to the parent company, will receive consent only if the arrangements clearly serve customers’ interests.

This could include direct customer benefits (such as bill reductions), or indirect benefits (such as arrangements that improve efficiency). It said the guidance set “a high bar” for companies to clear before such arrangements will be approved.

Ofwat said it has received support from the sector on the guidance and pointed to companies that have already started unwinding legacy arrangements, including:

• Anglian arranged the full repayment of its £1.6bn inter company loan

• £220m of Thames Water’s inter company loan was repaid

• Southern Water ensured the settlement of £682m of its inter company loan

• South Staffordshire Water arranged the early repayment of a £15m inter company loan before its contractual maturity date.