Water firms in England and Wales are facing the toughest restrictions on investor payouts since privatisation 30 years ago, the regulator has said.
Ofwat also said water firms would have to cut the average customer bill by £50 over the next five years.
It is also forcing firms to invest billions of pounds to improve their performance and reduce leaks.
Chief executive Rachel Fletcher said she was “firing the starting gun on the transformation of the water industry”.
“Now water companies need to crack on, turn this into a reality and transform their performance for everyone,” she added.
There has been widespread dissatisfaction with the performance of many water companies over the past few years. Criticism has centred around some high profile pollution incidents as well as leaks, water quality and high bills.
In January, a review of water companies’ performance found only three out of 17 water firms in England and Wales were of an acceptable standard.
Ofwat’s five-year plan, which comes into effect on 1 April 2020, has been hammered out over the course of this year. The draft determinations were set out in July.
But the latest announcement includes a tougher stance on the return on capital – a measure of the returns that can be paid to investors – in part because of lower interest rates which makes it cheaper for companies to borrow to invest.
“This is the lowest allowed return on capital since privatisation 30 years ago but is consistent with market expectations for returns in 2020-25,” Ofwat said.
Ms Fletcher said in an interview with the Today Programme that it would now be harder for companies to pay shareholders dividends.
“We are seeing increasingly the penny drop with companies, some announcing they expect no dividend in the next five years.”
Since becoming private firms rather than public bodies, water companies have been saddled with about £50bn debt and have paid £56bn in dividends to investors.
She said firms had the option of appealing to the Competition and Markets Authority over the price targets.
As it is cheaper for these companies to borrow, bills should come down, she said.
“We’ve said all along this was going to be a tough review,” she said. “We think this is the greenest package ever for water companies.”
Population growth and climate change will be the big challenges for them in the long term, she added.
What is Ofwat?
Water companies will be able to increase their returns to investors if they meet customer service target and increase their investment.
“Where a company outperforms our allowed costs or expected service levels it should earn a higher equity return; where a company underperforms our allowed costs or expected service levels it should earn a lower return,” Ofwat said.
In response the regulator drew up plans outlined in draft form in July which it said would mean “better services, a healthier natural environment and lower bills”.
Office of Water Services is the government regulator tasked with overseeing the privatised water market in England and Wales. Scotland has its own separate regulator, the Water Industry Commission for Scotland.
Ofwat monitors the market to see if it needs to intervene to protect customers and to set limits on the price they’re asked to pay.