High levels of payments to bosses and investors by water companies have damaged customer trust, the regulator Ofwat has said.
It has published new rules that will force firms to explain how executive pay is linked to performance and to prioritise customers’ interests.
It comes as the bosses of several water firms prepare to be quizzed by MPs.
The company chiefs will be facing the Environment, Food and Rural Affairs Committee later.
Ofwat chief executive Rachel Fletcher said: “The decisions some water companies have made on dividends, financial structures and top executive pay have damaged customer trust.”
She added the move was “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”.
The Consumer Council for Water welcomed Ofwat’s move. Its 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.”
He called it a “long-overdue effort” to redress the balance and restore trust in the water industry”.
Ofwat’s new rules will govern the period 2020 to 2025.
Companies paying dividends above 5% will have to explain why that is in customers’ interests – and not just the interests of investors.
They will also have to explain how the amount they are paying their executives benefits customers.
Water companies have to submit their business plans covering 2020 to 2025 to Ofwat by 3 September 2018.
Ofwat will then scrutinise these, and step in to protect customers if necessary.
Companies with a particularly high form of debt, known as gearing, will need to share financial gains from that gearing with customers.
Ofwat said that, based on information from 2016-17, companies with more than 70% gearing in the water sector were Thames Water, Anglian Water, Southern Water, Yorkshire Water, Affinity Water, South East Water, and SES Water.
There has been a growing outcry over the level of profits at water companies.
Their performance was deemed inadequate during the recent cold snap caused by the “Beast from the East”, with Ofwat saying the companies had failed their customers.
It has also fined Thames Water £120m for failing customers through its management of water leaks in its area.
The BBC’s business editor, Simon Jack, says Thames Water has been the “poster boy” for an industry that many feel has failed on the promised benefits of privatisation, such as efficiency, and has delivered only to shareholders and executives.
For example, he points out, between 2006 and 2015, Thames paid out £1.1bn in dividends but zero in corporation tax as it offset interest payments on billions in borrowings against profits.
However, the company is already planning to follow a number of the new rules laid down by Ofwat.
Thames Water’s chief executive has already given up a £3m bonus and future payouts will be related to hitting leakage targets and customer satisfaction, rather than financial returns.