Ringfencing

AAA

DEFINITION of 'Ringfencing'

When a regulated public utility business financially separates itself from a parent company that engages in non-regulated business. This is done mainly to protect consumers of essential services such as power, water and basic telecommunications from financial instability or bankruptcy in the parent company resulting from losses in their open market activites. Ringfencing also keeps customer information within the public utility business private from the for-profit efforts of the parent company's other business.

INVESTOPEDIA EXPLAINS 'Ringfencing'

The parent company can also benefit from ringfencing; bond investors prefer to see public utilities ringfenced because it implies greater safety in the bonds. Also, the parent company is usually freer to grow its non-regulated business segments once a ringfence is in place. Individual states are chiefly involved with ringfencing utilities within their borders, as no federal mandate is currently in place requiring that all public services be ringfenced.

A high-profile success story on ringfencing occurred during the Enron meltdown of 2001-2002; Enron acquired Oregon-based Portland General Electric in 1997, but the local power generator 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 amidst massive accounting scandals.

RELATED TERMS
  1. Utility

    1. An economic term referring to the total satisfaction received ...
  2. Enronomics

    A fraudulent accounting technique that involves a parent company ...
  3. Parent Company

    A company that controls other companies by owning an influential ...
  4. Chinese Wall

    The ethical barrier between different divisions of a financial ...
  5. Insider Information

    A non-public fact regarding the plans or condition of a publicly ...
  6. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
RELATED FAQS
  1. How do you calculate shareholder equity?

    Shareholders' equity is listed on a company's balance sheet and measures its net worth. A company's shareholders' equity ... Read Full Answer >>
  2. What is the difference between earnings and profit?

    Earnings, specifically retained earnings, and profit are often used as synonyms in corporate finance, although they are different ... Read Full Answer >>
  3. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  4. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
  5. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  6. What does an unfavorable variance indicate to management?

    In managerial accounting, an unfavorable variance is discovered when a company's management performs a comparison between ... Read Full Answer >>
Related Articles
  1. Active Trading

    Guard Your Portfolio With Defensive Stocks

    Find out how these securities can protect you from a market bust.
  2. Options & Futures

    Common Bond-Buying Mistakes

    Avoid these errors made daily in bond portfolios everywhere.
  3. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  4. Personal Finance

    Financial Tips For People Who Hate Finance

    For people who hate financial planning, there's usually one big problem – which you can fix. Do it now.
  5. Investing

    Seven Investing Books For Your Summer Reading List

    It’s almost 4th of July, the season of summer reading. Picking up a book during your holiday can be a great opportunity to learn more investing.
  6. Fundamental Analysis

    Understanding the Profitability Index

    The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness.
  7. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  8. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.
  9. Fundamental Analysis

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
  10. Investing Basics

    Calculating Unlevered Free Cash Flow

    Unlevered free cash flow (UFCF) is the free cash flow of a business before interest payments.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!