Utility Week

UTILITY WEEK | 20TH - 26TH APRIL 2018 | 15 Policy & Regulation ments at the City Conference, announcing changes that will put public interest right at the heart of what we do. "The comprehensive series of financial and corporate initiatives will improve trans- parency, trust and customer confidence. These include simplifying our corporate structure, speeding up the removal of our Cayman Islands subsidiary, significantly reducing shareholder dividends to reduce gearing and to enable us to fast track invest- ment in resilience between 2018 and 2020." Meanwhile, towards the end of last year, Yorkshire Water and Thames Water both vowed to close their Cayman Islands sub- sidiaries. A spokesperson from Yorkshire Water says: "This is a welcome move from Ofwat and we strongly support the proposed steps to formalise the obligation for com- panies to act in the public interest and the proposals to improve financial resilience and transparency. "Yorkshire Water responded to cus- tomer concerns about offshore structures by announcing plans to remove Cayman Islands companies from its structure. That process remains on track and we expect it to be com- pleted around the time we report our finan- cial results in July. "We are also about to launch a consulta- tion with customers to better understand their expectations on financial transparency and what they would like us to publish and in what formats. Our early evidence from talking to customers strongly suggests that the more open we are about our finances and performance, the more customers trust us to deliver their essential public service." In his letter, Cox outlines that the regula- tor wants company licences to "reflect what is expected of those privileged to run and own public service monopolies". Ofwat says it "may potentially need support and new powers" to implement some of the changes it proposes. Environmental responsibilities A spokesperson from the Department for Environment, Food and Rural Affairs, says: "It is vital that concerns over poor corporate practice by the water companies are addressed. That is why the environment secretary asked Ofwat to inves- tigate what action should be taken to ensure high standards and responsible behaviour. We are grateful for Ofwat's report and will respond in due course." Emma Howard Boyd, chair of the Envi- ronment Agency, adds: "We welcome the secretary of state and Ofwat's call for water companies to act as diligently for their customers and the natural world as for their owners. Since 2005, the water companies have invested billions in the environment, but they are responsible for at least one serious pol- lution incident every week. They also need to do more to act on increased flood and drought risk from cli- mate change, in line with the ambition of the government's 25-year environment plan." Ofwat's chief executive, Rachel Fletcher, has since warned water companies must address concerns around corporate behav- iour alongside producing their business plans for PR19. She has written to the chief executives of all water companies to set out how the regulator will progress with plans to put the sector back in balance in the com- ing months. "Our goal is a thriving water sector that holds the trust and confidence of customers and wider society," she says. "The corporate behaviour of some companies, along with significant service failures, has damaged that trust." She adds: "Much of the input we need from companies in the programme of work occurs while companies are devising their business plans for PR19 and the next regula- tory period. The concerns around corporate behaviour and the damage to public trust mean this work cannot wait." Aer a lengthy rally, the ball is now firmly in the water sector's court. Cox and Gove's 'tennis match' In mid-January, Gove served up a threat to legislate against water companies over their use of offshore tax arrangements unless they started to behave in a "responsible fashion" aer a talk with Cox about the corporate prac- tices of some water companies. In an interview with The Sunday Times, Gove signalled he would support Ofwat's chair- man to act and would give him "new legal pow- ers", if necessary. He said: "The regulator has a responsibility to safeguard the public interest. If he [Cox] needs more, I'll do everything pos- sible to back him up." A spokesperson on behalf of Ofwat at the time responded: "We're pleased the secretary of state recognises what we are doing as a strong regulator. We have been leading the charge in confronting issues that can damage public confidence. Our approach of greater transparency and scrutiny is working. We are pushing companies harder than ever to make sure their houses are in order and that as pub- lic utilities, they deliver more of what matters for customers." Then, at the end of January, Gove put his thoughts down in writing in a direct letter to Cox, reiterating that the government was prepared to give the regulator greater powers to tackle poor practices in the industry. "The water sector has rightly come under even closer scrutiny in recent months with growing concern about the behaviour of water companies. The use by some companies of opaque financial structures based in tax havens and high gearing is deeply concern- ing. I also share your concern that some water companies have for many years been making excessive profits," he wrote. Gove thanked the regulator for "pressing companies hard" to change behaviour "not least where it has a direct bearing on their cor- porate, financial and operational resilience". He stressed there is "more to be done" and listed behaviours that undermine trust, includ- ing offshore financial arrangements; securiti- sation; highly geared structures; high levels of executive pay; and high dividend payments. In response, Cox described it as an "immense privilege" for a company to hold a monopoly public service licence and said it "must not be taken lightly". He said the forthcoming price review, PR19, will require companies to demonstrate that their business plans are financially resilient now and over the long term. Cox told Gove Ofwat was expecting to get responses from all highly leveraged companies and would report back by early April to provide an update. Fast-forward a few months and Ofwat has now formally responded to the secretary of state with its proposed programme of reform to bring the water sector "back in balance" and rebuild public trust. However, the interim period wasn't exactly quiet as Cox took the opportunity to "think aloud" ahead of the deadline, at Water UK's 18th annual City Conference in London on 1 March. He outlined plans that included a radical overhaul of dividends, action on highly leveraged capital structures and changes to companies' licences. Hard on his heels was Gove, who also gave a keynote speech, in which he accused some water companies of exploiting their monopoly power by "playing the system". Gove also directly challenged the sector to be "transpar- ent and accountable". "Our goal is a thriving water sector that holds the trust and confidence of customers and wider society"

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