Ofwat has today (3 July) announced changes to its 2019 price review (PR19) methodology, following a consultation with stakeholders.
Water companies will be required to set out proposals to share benefits with customers if its gearing level is materially more than the notional level underpinning price controls.
Companies must also explain in business plans how dividend policies in 2020-25 take account of how companies deliver for customers over PR19 and set out how performance related executive pay will reward stretching delivery for customers.
Launched in April, the consultation proposed measures which would see customers share financial gains made by water companies that have high levels of debt.
The regulator 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 announced by Ofwat’s chief executive Rachel Fletcher in a letter to all water company CEOs on 13 April.
Fletcher said: “The decisions some water companies have made on dividends, financial structures and top executive pay have damaged customer trust. We have looked in detail at the incentives we give water companies.
“Through the measures we’ve announced today, we are strengthening the incentive on companies to improve their performance for customers and cutting the rewards that come from financial engineering. This is an important step in making sure water companies put customers’ interests and those of future generations, at the heart of all the decisions they take.”
Ofwat will undertake an initial assessment of each company’s approach to benefit sharing as outlined in business plans, which must be submitted by 3 September 2018.
The regulator will consider intervention at the draft determination stage (April 2019) if it believes the company’s approach to benefits sharing is inadequate.
The Consumer Council for Water (CCWater) has welcomed the announcement from Ofwat, calling it a “long-overdue” attempt to rebuild confidence in the sector.
CCWater’s chief executive, Tony Smith, said: “It is vital that water companies’ financial behaviour is legitimate in the eyes of customers, and that shareholders and executives are not seen to be rewarded for poor or mediocre performance.
“We welcome this announcement by Ofwat, which is a long-overdue effort to redress the balance and restore trust in the water industry.”
A Water UK spokesperson, added: “The water industry is totally committed to providing customers with an excellent service and world-class quality water, and companies have invested £150 billion since privatisation to improve the industry.
“Ambitious plans will be revealed in the autumn which will improve the service even further, cut leakage, and see bills falling in real terms.”