The water regulator Ofwat said the fine will be paid by the company, not by its customers, and that it can pay no further dividends without approval from the regulator. Ofwat will also put controls on water prices from Thames Water to ensure the value that was lost through the dividend payment returns to the company.
David Black, Ofwat’s chief executive, said: “We are clear that dividends must be linked to performance for customers and the environment. We will not stand by when companies pay undeserved dividends to their shareholders.”
This is the first time Ofwat has used its powers to take enforcement action against a water company when its decision to make dividend payments does not properly reflect the company’s delivery performance for customers and the environment.
Leaky finances
Thames Water, which is owned by a consortium of institutional shareholders, has huge debts and recently announced a £3bn rescue loan to avoid coming under Government control.
The company is still trying to stabilise its finances, and has picked a private equity partner – KKR – as a preferred bidder, but is still looking at other options as well.
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A spokesperson said today that the equity raise process “continues” and that the company will review the Ofwat enforcement order and the penalties imposed today when considering its next steps.
Two investigations
Today’s penalties are the result of two separate investigations. The first is an investigation into wastewater companies and how they operate, manage and maintain their sewage networks, particularly in relation to storm overflows.
Ofcom proposed a £104.5m penalty for Thames Water for this in 2024 and has finalised it today.
This is the largest penalty Ofwat has ever issued.
Black said: “This is a clear-cut case where Thames Water has let down its customers and failed to protect the environment. Our investigation has uncovered a series of failures by the company to build, maintain and operate adequate infrastructure to meet its obligations.
“The company also failed to come up with an acceptable redress package that would have benefitted the environment, so we have imposed a significant financial penalty.”
The Thames Water spokesperson said the company “takes our responsibility towards the environment very seriously and note that Ofwat acknowledges we have already made progress to address issues raised in the investigation relating to storm overflows”.
The dividends investigation is separate and concerns dividends paid to shareholders in October 2023 and March 2024.
Ofwat concluded that £37.5m of dividend payments broke the rules on dividends being linked to performance and ruled that there was an “extraction of value” from the business, which Ofcom will recover via the fine and an adjustment to price controls on Thames Water in the future so that customers do not lose out.
Black said Thames Water is now in “cash lock-up”, meaning no further dividend payments can be paid by the company without first obtaining approval from Ofwat.
Thames Water’s troubles
Thames Water is already the least trusted water company for customers, according to figures from the Consumer Council for Water (CCW), which protects water customers.
Mike Keil, chief executive of the CCW, said overall trust in these businesses has reached a new low, with only 53% of consumers overall believing their bills are fair.
“Water companies have been entrusted with an unprecedented amount of customers’ money, so people need to see and experience a marked difference and are not going to tolerate more broken promises.
“Restoring people’s trust in the sector and belief they are getting a fair deal depends on companies not only consistently delivering on their commitments but also communicating really clearly to customers how their money is flowing directly to improve the things they care about, like the health of our rivers,” he added.
