Ringfencing

What Is Ringfencing?

Ringfencing is the point at which a regulated public utility business financially separates itself from a parent company that participates in non-regulated business. Ringfencing happens when a portion of such a company's assets or profits are financially separated without fundamentally being worked as a separate entity.

Ringfencing prevents customers of public utilities from credit risks or openings of the parent company that might hurt customers' access to essential services. Ringfencing ought not be mistaken for setting up a ring-fence, which is a method of tax avoidance including offshore assets.

Figuring out Ringfencing

A ring-fence is a virtual barrier that isolates a portion of a subsidiary company's financial assets or operations from the remainder of the corporation. This might be finished to reserve money for a specific purpose, to reduce taxes on the individual or company, or to shield the assets from losses incurred by riskier operations embraced somewhere else in the corporate structure.

On account of public utilities, this is done mostly to safeguard consumers of essential services like power, water, and fundamental telecommunications from financial flimsiness or bankruptcy in the parent company coming about because of losses in their open market activities. Ringfencing likewise keeps customers' personal data inside the public utility business private from the revenue driven efforts of the parent company's other business.

The parent company can likewise benefit from ringfencing; bond investors like to see public utilities ringfenced in light of the fact that it suggests greater safety in the bonds. Likewise, the parent company is generally freer to develop its non-regulated business portions once a ringfence is in place. Individual states are predominantly engaged with ringfencing utilities inside their nation, as no federal order is right now in place requiring that all public services be ringfenced.

Genuine Examples

A high-profile example of overcoming adversity on ringfencing happened during the Enron collapse of 2001-2002. Enron acquired Oregon-based Portland General Electric in 1997, yet the power generator company was ringfenced by the state of Oregon prior to the acquisition being completed. This protected Portland General Electric's assets, and its consumers, when Enron declared bankruptcy in the midst of gigantic accounting outrages.

All the more as of late, in reaction to the 2007-2008 financial crisis, to prevent future taxpayer-supported bailouts of "too big to even think about falling flat" banks, U.K. authorities issued a series of new measures. One step included ringfencing as a crucial piece of post-crisis reform architecture. New provisions are pointed toward splitting "center" retail services, for example, store taking, from riskier investment banking units. As the rule just applies to U.K. banks, and not U.S. or on the other hand European banks operating in the U.K., pundits contend that this could put U.K. banks in a tough spot.

Features

• Ringfencing is utilized to protect the credit risk of a public utility from the risks of its parent entity.
• This happens when a bigger corporation possesses a regulated utility as a subsidiary, however the parent entity likewise claims and works non-regulated businesses.
• Ringfenced utilities may likewise appreciate greater credit quality for bonds or different securities issued by them.
• The goal is to keep utility customers free from disruption in case the parent company of such a utility encounters a negative credit event like bankruptcy.