New powers made possible through the Environment Act will enable Ofwat to clamp down on excessive cash pay-outs and hold water companies to account
On the 20th of March, the government backed new plans for the water regulator Ofwat to take action against water companies that pay out dividends to their shareholders despite failing to meet the required performance standards.
The changes have been made possible by the government’s Environment Act 2021 which gave Ofwat new powers to change water company licences without consent from water companies.
As such, Ofwat is now modifying licences to require companies to:
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Take account of environmental performance and customer delivery when deciding whether to pay dividends.
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Hold a strong credit rating and stop them paying dividends if their financial health is at risk.
If a company falls short, Ofwat will be able to take enforcement action.
These changes will improve the environmental performance and financial health of water companies, as well as providing greater transparency with customers and stakeholders.
Water Minister Rebecca Pow said:
It is wrong for water companies to be responsible for environmental damage and poor performance but not face the penalties. It has been happening too often and it needs to stop.
These new powers, made possible through our Environment Act, will enable Ofwat to clamp down on excessive cash pay-outs and make sure companies put customers first. This will apply when a company is not meeting expectations on performance or is facing questions over its financial resilience – and ultimately means we go further in holding water companies to account.
Chair of the Environment Agency Alan Lovell said:
The announcement that companies must take environmental performance into account when deciding whether to pay dividends is necessary to restoring trust in the water sector.
As climate change and population growth increase the risks of flood, drought and pollution, the public are sceptical of profit going to shareholders. Ofwat’s decision will help water companies better demonstrate stewardship.
The government has taken further action in recent years to hold water companies to account for pollution, including:
- Hugely increasing monitoring of discharges, from approximately 10% of storm overflows monitored in 2015 to 100% by the end of this year. While storm overflows have existed for over a century, the government was the first to require water companies to comprehensively monitor so that the issue can be tackled.
- Making it easier and quicker for regulators to enforce civil penalties for companies that breach their licence conditions, with a consultation set to launch in the spring. Funding from all penalties and fines will also now be invested in schemes that benefit our natural environment.
- Securing record fines for water companies that break the law. Since 2015, the Environment Agency has secured fines of over £142m through criminal proceedings.
- Publishing the Storm Overflows Discharge Reduction Plan, which will require water companies to deliver the largest infrastructure programme in water company history - £56 billion capital investment over 25 years. Water companies are already investing £3.1 billion in storm overflow improvements between 2020 and 2025. This includes £1.9 billion investment into the Thames Tideway Tunnel super sewer, with the rest used to undertake over 800 investigations and over 800 improvement schemes to storm overflows.
- Demanding a clear assessment and action plan on every storm overflow from every water and sewerage company in England, prioritising those that are spilling more than a certain number of times a year, and those spilling into bathing waters and high priority nature sites.
The majority of licence changes will be implemented eight weeks after publication – by 17 May 2023.
