Water firms face tighter 'ring-fence'

OFWAT, the water industry watchdog, yesterday announced new proposals aimed at tightening the 'ring-fence' around the core activities of Britain's privatised water utilities.

The proposals are intended to prevent any cross-subsidy between the core water and sewage business and other commercial areas in which the privatised companies are involved.

The plans are in response to a growing trend among Britain's water companies to diversify into new sectors not regulated by Ofwat.

There are fears that this expansion could be financed at the expense of water customers, who have seen their bills rise sharply since privatisation.

Ofwat said the proposals would enable it to assess more effectively transactions between the companies' core business and other parts.

Under current rules, water companies are expected to consult the regulator before going ahead with any diversification. The plans would make this a formal requirement.

The proposals would also require the companies to tell Ofwat of any diversification plans that might affect their ability to finance their core business.

They would also have to give Ofwat details of individual transactions involving associated companies if these exceeded 0.5 per cent of turnover or pounds 100,000, whichever was greater.

In addition, the companies would be required to disclose annually dividends paid to, or received from, any associated company and the reasons for which these were made.

Andrew Stone, water analyst at Daiwa Research, said: 'The propsoals follow a statement from Ofwat about a year ago. They are relevant to future dividends of the water companies.

'When the companies pay higher dividends out of their non-regulatory business, Ofwat will be able to check whether these increases are genuinely coming from the non-regulated side.'

The regulator has given water companies and other interested parties until 2 October to file any formal response to the proposals.