The water regulator for England and Wales is to use new powers to block companies from shareholder payouts if they fail to hit performance and environmental targets.
Ofwat, which in December heavily criticised some of the country’s biggest suppliers over the size of dividend payments relative to their financial performance, said the new rules would also mean water companies would “maintain a higher level of overall financial health”.
“When deciding on dividend payments to investors, water companies need to take stock of their performance for customers, the environment, and the company’s overall financial health,” said David Black, the Ofwat chief executive.
“Too often, this has not been the case. That is why we’re implementing changes that will allow us to better hold companies to account and take enforcement action when they get it wrong.”
The report was published after the Guardian revealed that the nine main water and sewerage companies had paid out £65.9bn in dividends in the last three decades. They have also taken on debts of £54bn since privatisation.
Ofwat, which is taking a tough stance with water companies after criticism that for years the firms have not been properly regulated, said its new rules would improve the attractiveness of investment in the sector as well as “protect customers and the health of our waterways”.
In December, Ofwat released a report that found poor performance was “the norm” at many water companies, in particular naming Northumbrian Water, Southern Water, South West Water, Thames Water, Welsh Water and Yorkshire Water.
The regulator is modifying water company licences to ensure they have a strong credit rating, with the power to stop them paying dividends if their financial health is at risk.
In addition, licences will be changed to require companies to also take into account “service delivery for customers and the environment” when deciding whether to pay dividends.
“We hope the introduction of these new powers will focus minds around company board tables on the importance of responsible decision making and openness with customers and other stakeholders. And if that isn’t the case, we will act.”
Last month, the government accepted a Liberal Democrat amendment to the UK infrastructure bank bill that would mean taxpayer money would be able to fund water companies only if they produce a costed and timed plan for ending sewage spills into waterways.
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Commenting on Ofwat’s new powers, the water minister, Rebecca Pow, said: “It is wrong for water companies to be responsible for environmental damage and poor performance but not face the penalties.
“It has been happening too often and it needs to stop. These new powers, made possible through our Environment Act, will enable Ofwat to clamp down on excessive cash payouts and make sure companies put customers first.”
This article was amended on 21 March 2023. Ofwat is the water regulator for England and Wales, not the whole of the UK as the headline and text of an earlier version said.
