Ofwat to focus on credit ratings as it defends lack of debt limits for water suppliers
Boosting the financial resiliency of each water supplier is more important than taming overall sector debt, argued Ofwat.
The water watchdog told City PM it wants to prioritise demanding strong credit ratings and tough criteria for dividends at every supplier, rather than pushing for limits on debts across the industry.
Ofwat insisted they were “unequivocal” that companies must maintain their financial resilience, and that they have taken action when it has been needed
An Ofwat spokesperson said: “We are currently pushing forward new requirements to raise the bar further on financial resilience across the sector, despite fierce resistance from companies. We will continue to monitor financial resilience closely and take action where necessary.”
The comments follow criticism over Ofwat’s decision not to impose limits on soaring debts run up by water companies.
Research published in The Guardian revealed that firms have accrued borrowing debts of £54bn since privatisation in 1989.
This is an increasing concern amid an economic downturn and rising interest rates.
The debts have also been felt in customers’ wallets, with bill-payers coughing up 20 per cent of their water bill to service debt and pay-off shareholders, according to the Competition and Markets Authority.
Ofwat’s latest proposals for improving the financial resilience of suppliers include raising the so-called cash lock up-trigger, a mechanism to prevent firms paying out dividends if their business is at risk, and a requirement for companies to hold two issuer credit ratings.
It has recently taken enforcement action against some of the country’s largest water firms.
In 2019, Ofwat demanded Southern Water overhauled its management, which was made to pay £126m in penalties and refunds to customers following serious failures in the operation of its sewage treatment sites, and for deliberately misreporting its performance.
It also pushed Yorkshire Water into recovering two loans that it had made to other companies within its wider company group, totalling around £940m.
The regulator is currently grappling with sewage overflows and discharges, and has slapped six water companies with enforcement cases.
It also teamed up with the Environmental Agency to announce investigations into all water and wastewater companies last November.