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Ofwat proposes to use its new licence modification powers

Ofwat plan to use their new modification powers to protect water company customers especially those most vulnerable.

The Environment Act 2021 placed new provisions in the Water Industry Act 1991, giving Ofwat broader powers to modify water company conditions of appointment. The new powers allow Ofwat to modify appointment conditions of undertakers in England without needing the consent of the undertaker concerned (subject to the undertaker’s ability to appeal to the Competition and Markets Authority against a proposed modification).

In a recent City Briefing, Ofwat’s Chief Executive announced that Ofwat intends to utilise those powers to introduce modifications in respect of two areas.

The first proposal is for a high-level licence obligation to provide binding commitments on how water companies treat their customers, and in particular those who are most vulnerable. Ofwat sees this as complementing the customer experience incentive in the price review, enabling it to hold companies to account if they fail to provide adequate support for their customers.

The second area in which Ofwat is looking at licence changes is financial resilience. Ofwat has concerns regarding what it sees as inadequate financial resilience of some companies in the sector and the potential risk this poses for customers, stating that;

Customers of all companies need to be protected from risky financial structures and we will set out proposals to strengthen their regulatory ring fence under a separate consultation later this summer. Company board decisions on dividends and executive performance-related pay must demonstrably reflect performance delivered to customers and the environment. We have already taken significant steps to encourage companies to meet our expectations and those of wider stakeholders. We'll also consult on licence changes to give effect to these expectations on dividends, as part of the financial resilience consultation.

This second proposed modification follows Ofwat’s December 2021 discussion paper on financial resilience in the water sector, examining the importance of companies maintaining resilient financial structures, and which discusses options such as placing limits on gearing, raising the minimum standards of credit rating, regulatory incentives on financial structure and expectations on dividend policy.

We will provide further updates as additional information regarding these potential modifications becomes available.

For further information on Ofwat's proposals or to find out how we can assist you, contact our specialist water sector lawyers.