The most highly geared water companies could be forced to share up to £230 million with customers between 2020 and 2025, because of reforms confirmed by Ofwat today (31 July).

The regulator revealed changes to its PR19 methodology earlier this month, with a package of reforms aimed at ensuring that the decisions water company boards reach on debt levels, dividends and executive pay “align more closely with their customers’ interests”.

The reforms will mean any water company which continues to have debt “substantially in excess” of the level used by Ofwat to set price controls will be required to share any benefits they accrue with customers.

With just over a month to go until business plans must be submitted to the regulator, water companies must outline how they will approach sharing benefits with customers.

Rachel Fletcher, Ofwat’s chief executive, said: “With this package of reforms, we are reducing the incentives for financial engineering, making sure that any companies which do benefit from high levels of debt share any gains with customers. This is another step we are taking to secure a fairer deal for customers.

“At the same time we are ensuring that water companies are open and transparent about what they pay out to their top executives and their investors. This openness is essential for customers to have confidence in their water company.”

The reform package will also require water companies to clearly show how they are linking performance-related executive pay to “stretching performance” for customers. The sector will need to explain how decisions on dividends are made and how they relate to the delivery of companies’ obligations.

Fletcher wrote to the chief executives of water companies on 13 April to set out how the regulator would progress with plans to put the sector “back in balance”.

The consultation, which launched in April, proposed measures which would see customers share financial gains made by water companies that have high levels of debt.

Ofwat also set out more details on the transparency expected around shareholder dividends and performance related executive pay in companies’ business plans for PR19.

The consultation formed part of a programme of work to rebuild trust and confidence in the water sector.

Business plans for the 2020-2025 period must be submitted to Ofwat by 3 September.

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