There has been an increased level of interest in capital structures of certain infrastructure businesses, many of which tend to be subject to economic regulation. There are several reasons which explain this increased interest. First, in some regulated sectors, shareholders have made higher returns than assumed by regulators when setting regulated charges by making greater use of debt financing. Second, the choice of capital structure could reduce financial resilience, and we have seen a number of company failures in recent years (Monarch, Carillion).
We are seeing some regulators respond to these debates. Ofwat recently set out decisions on measures designed to ‘put the water sector back in balance’. These include a requirement on water companies with relatively high levels of debt to share with customers some of the benefits perceived to be accruing to equity investors.
The issues Ofwat’s decisions aim to address are of relevance to other regulated sectors. While in principle, capital structure choices are a matter for management, there are instances where these choices are relevant to policy-making. This brief statement sets out our views on these issues.
Where the Secretary of State intervenes in a media merger, Ofcom has a duty to advise the Secretary of State on whether the merger is in the public interest via the application of the public interest tests under the merger control regime set out in the Enterprise Act 2002. The Secretary of State will then decide whether to refer the merger to the Competition Commission.
This guidance is designed to provide general information on the procedures that will be used by Ofcom in advising the Secretary of State on the public interest test. It does not fetter the discretion of Ofcom to act in a particular way on a case by case basis.