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Regulator clamps down on excessive water firm shareholder dividends

Paloma Kubiak
Written By:
Paloma Kubiak

Ofwat has been given powers enabling it to block water company dividends to investors, as well as allowing it to take enforcement action if firms fall short of rules.

The powers are all to do with making sure that water firms prioritise customer interest, protect the environment and maintain financial health above shelling out profits to shareholders.

As part of changes to water company licences expected to be implemented by 17 May 2023, Ofwat will have the power to block dividends where there is a question around the firm’s ‘financial resilience’ – that is, how it avoids, copes with and recovers from disruption, such as extreme weather or global events.

This means water companies need to hold a strong credit rating, and they also need to take account of their performance, both for customers and the environment when deciding to make dividend payments.

Ofwat said these changes “reduce the risk that a company’s poor financial health may pose to customer interests and its ability to invest to protect the environment”.

It added that if a company falls short, “Ofwat will be able to step in and take enforcement action”. It can currently fine companies up to 10% of their annual turnover as part of enforcement powers.

The move comes after Ofwat first launched a consultation around proposed curbs to water company dividends in July 2022.

‘Better hold companies to account’

David Black, Ofwat CEO, said: “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. 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.

“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.”

The changes have been made possible by the Government’s Environment Act 2021 which gave Ofwat new powers to change water company licences without consent from water companies.

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 pay-outs and make sure companies put customers first. This will apply when a company is not meeting expectations on performance or is facing questions over its financial resilience – and ultimately means we go further in holding water companies to account.”

Since 2015, the Environment Agency has levied fines of more than £142m through criminal proceedings.