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Letters to Managing Directors
MD 218 7 September 2006 NOTIFICATION OF INTENT TO INTRODUCE A CASH LOCK-UP PROVISION TO CONDITION F OF COMPANIES' INSTRUMENTS OF APPOINTMENT It is important for all regulated water and water and sewerage companies ("water companies") to maintain a robust and stable financial position because of the potential harm to consumers that would be caused were a company to lack the financial resources to maintain its assets and deliver agreed investment outputs. This was a central theme of the discussion paper "Financing Networks" issued by Ofwat and Ofgem in February 2006. Amongst other issues, this discussion paper also raised the question of whether regulators should seek to extend financial ring-fencing arrangements to all monopoly businesses and modify them to include a "cash lock-up provision". Ofwat has subsequently considered whether to modify the current "standard" ring-fencing conditions in water companies' instruments of appointment (the "licence") to include a cash lock-up provision. This letter is to inform you that we have concluded that there is merit in the gradual adoption by regulated water companies of cash lock-up provisions similar to those already applied to energy companies. However, we see no grounds for urgent change and will therefore only seek to introduce cash lock-up provisions into water company licences as and when suitable opportunities arise. In this regard we have announced our intention to introduce a cash lock-up provision into Thames Water Utilities Limited's licence following an announcement by RWE AG on 6 September 2006 that it is undertaking a capital restructuring of the RWE Thames Water Group of companies. Keith Mason  |
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