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What is Ring-Fencing?

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  • Written By: John Lister
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 December 2016
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Ring-fencing is a financial phrase which can have different meanings depending on its context. It can mean placing financial and legal barriers between a utility company and its parent group, or moving assets to another country, putting them beyond national controls and rules. It can also mean “earmarking” tax revenue for a specific stated purpose.

One of the most common uses of “ring-fencing” is to describe a regulated public utility business being financially separated from a parent company which deals in other activities. The primary reason for doing this is to make sure that supply of the service, such as electricity or water, is not threatened if the parent company experiences financial difficulties or even becomes insolvent. In most cases, ring-fencing will be carried out at the request or demand of a regulating authority; this is usually done by individual state governments in the US. One of the most prominent examples of ring-fencing was of local power companies which had been ringfenced and thus could continue supplying power after parent company Enron collapsed.

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There are other benefits to this form of ring-fencing. For example, a ring-fenced company may have to keep customer data separate from that available to the parent company. This reduces the chances that customers will be subject to unwanted marketing or even exposed to greater security risks. The protection from “contamination” with the financial difficulties of a parent company also means that bonds in the utility company are seen as safer and thus easier to sell to raise financing.

Another use of the phrase “ring-fencing” is when assets are transferred from one place to another. Usually this will mean moving them from one account to another, with the latter in a different jurisdiction, usually in a different country. This will most often be done to protect the assets from a claim by a creditor or to reduce tax liabilities. Such ring-fencing can be done both legally and illegally, with most countries having restrictions on how many assets can be ring-fenced and through what process.

Ring-fencing can also refer to a government committing to use the revenue for a specific tax to pay for a specific area of spending. This is also known as hypothecation. The tactic is often used when trying to make a potentially unpopular tax more acceptable to the public. For example, a new tax may be more palatable to the public if they know it will be spent on a product that has widespread support.

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starrynight
Post 2

@sunnySkys - I'm sorry that happened in your area. I do think that ring-fencing can be a positive thing though. Especially in the case of Enron, the example given in the article.

The company went under and that affected a ton of people. But at least people that were customers of the subsidiary company were still able to get their energy. I think the collapse of Enron would have been even more catastrophic if ring-fencing had not occurred.

sunnySkys
Post 1

I'm actually familiar with ring-fencing because a few years ago my utility company separated from their parent company in this fashion. The separation may have been good for the company but it certainly wasn't good for the customers. As soon as the separation went through the utility company just about doubled their rates.

Even though that was a few years ago people in my area still aren't over it! Energy bills really put the squeeze on a lot of peoples budgets since this happened. Mine included! Every time I hear the phrase "ring-fencing" I shudder just a little.

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