What Is Ringfencing?

Ringfencing is 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 activities. Ringfencing also keeps customer information within the public utility business private from the for-profit efforts of the parent company's other business.

Ringfencing Explained

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.

Example fo Ringfencing

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.

More recently, in reaction to the 2007-09 financial crisis, to prevent future taxpayer-funded bailouts of "too big to fail" banks, U.K. officials issued a series of new measures. One step included ringfencing as a vital piece of post-crisis reform architecture. The largest U.K. banks are in the final stages of polishing their ringfencing plans to meet regulator’s 2019 deadline. New provisions are aimed at splitting “core” retail services, such as deposit-taking, from riskier investment banking units.