An Opposition Day debate has been scheduled for 5th December on bonuses for water company executives. The debate will be opened by Sir Keir Starmer MP and Angela Rayner MP.

New powers for Ofwat announced in 2023

On 20 March 2023, the economic regulator for the water industry, Ofwat announced new powers to enable it to stop a water company paying dividends to its shareholders if it would risk a water company’s financial resilience. These powers would also enable it to take enforcement actions against water companies that do not link dividend payments to the company’s overall performance.

On 29 June 2023, Ofwat confirmed new plans to “ensure customers no longer fund executive bonus payments where they have not been sufficiently justified” through increasing its guidance relating to pay and dividends.

More detail is set out in Ofwat’s guidance on protecting customer interest on performance related executive pay (June 2023), which outlines the scope and application of the performance-related executive pay recovery mechanism. In short, this is a mechanism through if they are unable to demonstrate that their decisions meet Ofwat expectations (see Ofwat’s guidance on its ‘reconciliation rulebook’ for more information as to how cost reconciliation works in practice).

Ofwat intends this mechanism to increase scrutiny of executive pay awards in company decision making, saying that “as a monopoly provider of essential services, [water companies] need to demonstrate greater accountability”. This recovery mechanism will be applied under the PR24 final methodology.

Ofwat does not have an explicit power to ban or curb executive bonuses, and it can only do so if this would contribute to its duties as set out in the Water Industry Act 1991. These duties include ensuring that water companies are financially resilient.

Government supported the announcement of these powers (March 2023). The Labour party stated that it would give Ofwat powers to ban the payment of bonuses to water company executives who discharge sewage (October 2023).

Supporting publications

The House of Commons Library has previously published a briefing on Economic regulation of the water industry in England and Wales (2020), which provides an overview of how water companies are regulated through the price review process which sets customer bills and water company service targets every 5 years.

The House of Lords Industry and Regulators Committee report (May 2023, PDF) includes a chapter on debts, dividends and financial resilience.

Ofwat recently published its assessment of protecting customer interests on performance related pay for 2022-2023 (November 2023, PDF), which found that companies need to do more to explain how the targets they have used for this are stretching and how overall performance has been taken into account. The report found that performance related pay frameworks at most companies met Ofwat expectations “regarding alignment to delivery for customers and the environment”.

The Public Accounts Committee has published oral evidence on the work of Ofwat (November 2023, PDF) which includes reference to Ofwat’s new powers.

Related posts