High levels of payments to bosses and investors by water companies have damaged customer trust, the regulator Ofwat has said.
It has published plans which aim to strengthen companies’ incentives to improve customer performance and cut rewards from financial engineering.
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”.
Ofwat’s new rules will govern the five years from 2020-25. will require water firms that take on lots of debt to show how it is rewarding its customers for the financial gains that could bring.
Companies paying dividends above a certain level will have to explain why that is in customers’ interests – and not just investors’.
They will also have to explain how the amount they are paying their executives benefits customers.
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.
It is already, though, following 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.