Shareholders at Thames Water, Yorkshire Water, and Dŵr Cymru Welsh Water will be forced to pick up the tab for executive bonuses after the water regulator determined that the sector had awarded “undeserved” extra payments worth £6.8m.
Ofwat said on Thursday that it had used new powers to ensure shareholders at the three companies paid for bonuses because they had not “adequately reflected overall company performance issues”.
Water companies have faced a wave of public anger and political backlash in recent years over leaks and sewage overflows as they have also come under increasing financial strain.
Nine water companies will not be allowed to use customer funds to pay bonuses worth £6.8m. Six voluntarily said that shareholders would pay, but Ofwat had to use its powers directly in the cases of bonuses worth £1.5m from Thames, Yorkshire and Welsh.
Thames, which is trying to agree an emergency funding package worth £3bn, tried to pay bonuses worth £770,000 to its chief executive and chief financial officer without any explanation of why they were justified, Ofwat said.
Yorkshire’s bonus payments were £616,000, while Welsh’s were £163,000.
Ofwat said separately that it had “elevated concern” about the financial resilience of South Staffs Water and Wessex Water as part of regular monitoring. Thames, South East and Southern remained the least resilient water companies.
The new bonus rules were proposed last year under the Conservative government as Ofwat, which regulates water companies in England and Wales, said firms were awarding bonuses that did not take into account performance issues.
Ofwat can currently only shift the burden on to shareholders, but it will gain new powers to block bonuses completely in a bill which is going through parliament.
David Black, Ofwat’s chief executive, said: “In stopping customers from paying for undeserved bonuses that do not properly reflect performance, we are looking to sharpen executive mindsets and push companies to improve their performance and culture of accountability.
“While we are starting to see companies take some positive steps, they need to do more to rebuild public trust.”
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The bonuses will be recovered by Ofwat reducing the amount that the three companies can charge through household and business water bills. That will effectively add to the £3bn that Thames Water is seeking to raise from new equity investors – on top of £3bn in emergency debt funding – as its current shareholders have said they will not put in more money. The costs at Yorkshire will be borne by its Hong Kong and Singapore investor owners, while at Welsh Water the Welsh government is the sole owner.
The other companies who agreed to use shareholder funds to pay executive bonuses were Anglian, Severn Trent, South West, Southern, United Utilities and Wessex.
The biggest payers of “unjustified” bonuses were United Utilities at £1.4m and Severn Trent at £2.6m, Ofwat said. However, they escaped mandatory action because the bonuses are paid by holding companies, rather than by the regulated subsidiaries.
James Wallace, the chief executive of River Action, said: “It is about time Ofwat put an end to water company chief executives enriching themselves at the expense of hard-pressed bill payers. It is long overdue to confront the corporate greed plaguing water companies – businesses that have consistently failed to safeguard our rivers, seas, and lakes.”