Ofwat has today launched a consultation on new measures for the 2019 price review which will see customers share the financial gains made by water companies with high levels of debt. The regulator has also set out more details on the transparency expected on shareholder dividends and executive pay.
This marks the latest step by Ofwat in its agenda to reform the water sector, to tackle concerns about some of the financial behaviours which have undermined public trust and to put customers at the heart of water companies.
One of Ofwat’s proposals is for customers to share any financial gains water companies make from adopting high levels of gearing. Some water companies have replaced equity in their business with cheaper debt, which can result in higher returns for shareholders, without an equivalent benefit for customers. Ofwat wants companies taking this approach to share resulting gains with customers.
As part of today’s consultation, Ofwat is also asking for views on proposals that would require water companies to be more transparent about their dividend policy and explicitly set out, in their business plans for the forthcoming price review, how their approach to paying dividends relates to the service they provide to customers.
There is also a proposal for more openness about the performance related element of executive pay, with companies needing to demonstrate how any performance related component of executive pay is a reward for delivering in customers’ interests, not just shareholders.
Rachel Fletcher, Ofwat’s Chief Executive, said:
“We are continuing to push water companies to go further, faster in reforming some of their corporate behaviours and to focus on re-establishing public trust. We are making moves on three fronts to get a better outcome for customers.
“First, any company with high levels of debt which boosts their returns, will be expected to share gains with customers. Second, companies need to ensure dividend policies are transparent and make sure they’ve met their obligations to customers before making dividend payments. And, third, we want to see that water company executives are rewarded for delivering for customers, not just shareholders.
“The common element at the heart of all three of these new measures is the customer. Water companies should be left in no doubt that this agenda of reform to put customer interests’ front and centre will continue apace.”
As part of the consultation, Ofwat is providing additional clarification on how it expects companies to demonstrate financial resilience in their business plans.
The consultation runs until 17 May.