Ofwat clamps down on dividend payments for water suppliers who won’t clean up their act
Ofwat will be able to stop the payment of dividends to water suppliers if they risk the financial resilience of companies, under new powers announced today by the watchdog.
They will also now be able to take enforcement action against suppliers that fail to link dividend payments to performance.
The water regulator is modifying company licences, which will require suppliers to take account of service delivery for customers and the environment, alongside investment needs and financial resilience, when deciding whether to pay dividends
It will also demand companies hold a strong credit rating, to stop them paying dividends if their financial health is at risk.
Ofwat argues this will improve the transparency and consistency of company licences.
The licence changes are also designed to both incentivise those companies experiencing financial health challenges to engage with Ofwat quickly, and to allow Ofwat to intervene when companies fail to take such steps themselves.
The changes will require company boards to take account of their performance – for customers and the environment – when deciding whether to make dividend payments.
It will also require companies to maintain a higher level of overall financial health.
Ofwat is aiming to reduce the risks that a company’s poor financial health may pose to customer interests, alongside its ability to invest to protect the environment.
If the company falls short, Ofwat will be able to step in and take enforcement action.
The regulator also wants to improve the attractiveness of investing in water and wastewater companies – to encourage more funds towards the industry.
It hopes incentivising companies to strengthen their financial health will allow the sector to focus on the investment and performance improvements needed to protect customers and the UK’s waterways.
Ofwat chief executive David Black 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.”
Today’s decision follows Ofwat’s proposals to clamp down on dividends announced last summer.
Earlier this month, it was reported that Thames Water had been forced to draft in advisors to evaluate its financial situation, amid growing concerns that the group will not be able to fix its £14bn debt mountain.
Meanwhile, Ofwat has also ordered water suppliers to toughen up plans to secure reliable services in the coming decades.
If they fail to come up with more ambitious strategies, City A.M. understands Ofwat could cut the funding and profit allowances for suppliers for the upcoming price review.
The watchdog is also working with the Environment Agency on a wide-scale into all water and wastewater companies over sewage treatment and dumping.