Ofwat makes PR19 changes to discourage gearing
Ofwat has announced a number of changes to its 2019 price review methodology to discourage what it calls ‘financial engineering' by water companies, including high levels of borrowing.
Following a consultation launched in April, the regulator has introduced a range of measures which will see customers share the financial gains made by water companies which have high levels of debt. It has also set out more details on the transparency expected around shareholder dividends and performance related executive pay in companies’ business plans for PR19.
The consultation, which saw strong interest from a number of stakeholders, formed part of a programme of work to rebuild trust and confidence in the water sector announced by Ofwat’s Chief Executive Rachel Fletcher in her letter to all water company CEOs on 13 April.
Under the changes, water companies will be required to:
-Set out proposals to share benefits with customers where companies have gearing that is materially above the notional level that underpins price controls;
-Explain in business plans how dividend policies in 2020-25 take account of how companies deliver for customers over the price control period; and,
-Set out transparently in business plans for customers and wider society, how performance related executive pay will reward stretching delivery for customers.
Ofwat will assess each company’s approach to benefit sharing in its initial assessment of each company’s business plan, all of which must be submitted by 3 September 2018. If proposed plans do not meet with their approval, Ofwat will consider intervention at draft determination stage in April 2019.
Ofwat Chief Executive, Rachel Fletcher said: “The decisions some water companies have made on dividends, financial structures and top executive pay have damaged customer trust. We have looked in detail at the incentives we give water companies. Through the measures we’ve announced today, we are strengthening the incentive on companies to improve their performance for customers and cutting the rewards that come from financial engineering. This is an important step in making sure water companies put customers’ interests and those of future generations, at the heart of all the decisions they take.”
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