Ofwat has published detailed requirements of what it expects water company Boards to provide on annual basis to confirm they have sufficient financial and non-financial resources to carry out their regulated activities.
Ofwat has published detailed requirements of what it expects water company Boards to provide on annual basis to confirm they have sufficient financial and non-financial resources to carry out their regulated activities.
The regulator has published new guidance for the water and wastewater companies in England and Wales in preparing their Ring-fencing Certificate (RFC) for the 2019-20 financial year and subsequently.
The RFC is a certificate stating that in the opinion of the Board of Directors the company has sufficient resources to enable it to carry out its regulated activities, for at least the twelve month period following the date on which the certificate is submitted to Ofwat.
The companies are required to publish their RFC annually alongside their annual performance report. They are also required to submit a new RFC to Ofwat within 14 days of the Board becoming aware of any material issue that could impact the company’s ability to finance its regulated activities. Each company is also required to submit a statement of the main factors that have led to the conclusion that resources are sufficient.
Ofwat has issued the detailed guidance following a review of the RFCs that companies published in March 2019 which identified inconsistencies in the format used and the level of detail provided.
To ensure a broad enough range of main factors have been considered, Ofwat expects the RFC to cover the following key areas:
- financial resources and facilities;
- management resources;
- systems of planning and internal control;
- rights and resources other than financial resources;
- contracting;
- material issues or circumstances;
- company-specific factors
The minimum set of factors Ofwat says should be considered for RFC include:
Financial resources and facilities
- Financial details, e.g. cash position, financial headroom, refinancing undertaken/planned;
- Credit related factors e.g. credit facilities, ratings, compliance with covenants etc;
- Business plans, long-term viability statements, etc.;
- Any relevant reports – internal or third-party.
Management resources
- Management skills, experience and relevant qualifications;
- Recruitment process, staff engagement;
- Succession planning for key management/staff;
- Independence of Board.
Systems of planning and internal control
- Governance procedures; risk management frameworks, oversight procedures;
- Systems for maintaining supply / business continuity, stated action plans;
- Policies to prevent fraud and other unethical behaviour; whistleblowing policy;
Rights and resources other than financial resources
- Corporate missions and/or values;
- Technology and other systems for ensuring checks and balances;
- Policies to encourage an integrated approach and ‘systems thinking’;
- Planning systems;
- Assets maintenance / insurance factors.
Contracting
- Position/status of key contracts in place;
- All contracts between the Appointee and all associated companies checked for compliance with licence requirements on standards;
- Note on transactions between the Appointee and any associated company;
- Compliance with licence provision on cross-subsidies between the Appointee and any associated company
- No guarantees or cross-default obligations given without Ofwat’s written consent.
The regulator also says the RFC should be forward-looking based on current information and plans.
Where a company is known to be facing significant challenges with its business, Ofwat expects to see clear explanations to justify why resources are “nonetheless sufficient to sustain the business including actions that the company is taking to address those challenges.”
The guidance states:
“If the business has faced significant challenges in the past or if adversities are expected in the future, it is important for the company to include factors covering the activities that they are undertaking to solve or mitigate the issues.”
Ofwat said it will continue to monitor RFCs that are published in the APRs for 2019-20 and future years.
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