Ofwat announces new powers to block water company dividends

The England and Wales Water Services Regulation Authority, otherwise known as Ofwat, announced new powers on 20 March that will enable it to stop the payment of dividends to water company investors if it would risk the financial resilience of the company. The new powers will also enable Ofwat to take enforcement against water companies that fail to link dividend payments to company performance.

The regulator is modifying water company licences in order to require suppliers to take service delivery to customers and in relation to the environment, as well as investment needs and financial resilience, into account when deciding whether dividends should be paid. Ofwat states that the changes will also require water companies to maintain a higher level of overall financial health.

The changes aim to reduce the risks posed to customers and the environment by a company’s financial health, which includes the ability for Ofwat to step in and pursue enforcement action against a company that is deemed to have not met the standards.

More specifically, water company licences will be modified by the regulator as follows: requiring companies to take account of service delivery for customers and the environment, as well as investment needs and financial resilience, when deciding whether to pay dividends; requiring companies to hold a strong credit rating and to stop them paying dividends if their financial health is at risk; and improvements to the transparency and consistency of company licences.

In December, Ofwat published its latest water company performance reports for 2021-22, which criticised some of the country’s biggest suppliers over the size of dividend payments compared to their financial performance. Both the regulator’s Water Company Performance Report 2021-22 and the Monitoring Financial Resilience Report 2021-22 highlighted areas where water companies are failing customers and the environment. Ofwat commented, at the time, that alongside improvement plans to address specific areas of performance failure, it would also be looking into whether poor performance by companies is suggestive of wider compliance issues.

Commenting on the new powers, 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.”