Commentary on provisions of the Act Section 1: Rules about remuneration and governance
This section inserts provisions into the Water Industry Act 1991 ("the 1991 Act") that enable Ofwat to make rules about pay and governance in the water industry and require it to do so on three topics.
	Ofwat already has a wide power to set conditions of individual water company appointments and licences, but changes to those conditions require case-by-case consideration and the procedure for them can be cumbersome (including rights of appeal to the Competition and Markets Authority). This section establishes a single set of rules to apply to water companies generally across the industry, which can be made and revised more easily than individual conditions.
	The first topic the rules will have to address is performance-related pay (new section 35B(2)(a)). The rules will set standards that companies will have to meet in a financial year in order to be able to make awards of performance-related pay to chief executives and directors for that year. Those standards will be worked up by Ofwat following consultation, but they will have to include standards relating to consumer matters, the environment, financial resilience and criminal liability (new section 35B(3)(a)).
	The section allows the new rules to override employment contracts (potentially including existing contracts) and may require the recovery by companies of performance-related pay awarded in breach of the restrictions: new section 35B(3)(d) and (e). The rules can apply from the 2024-25 financial year: subsection (4) of the section.
	The second mandatory topic for the rules is the fitness and propriety of chief executives and directors (new section 35B(2)(b)). Ofwat will use the rules to set standards of fitness and propriety (and potentially other types of standards) which chief executives and directors will have to meet in order to be appointed or stay in post.
	While the bonus and fitness rules apply principally to chief executives and directors (as reflected in the above explanation), Ofwat has the power to extend them to cover other senior roles within water companies: new section 35B(5).
	The third mandatory topic is consumer involvement in corporate decision-making (new section 35B(2)(c)). Companies are required to put in place arrangements for involving consumers in the wide range of decisions that have a material effect on consumer interests (the term "consumer matters", used in the section, is defined in section 27A(13) of the 1991 Act). The precise nature of those arrangements is for Ofwat to determine when it draws up the rules, but new section 35B(6) gives examples of what they might include.
	The rules will be enforced first by Ofwat directions and then, if the directions are not complied with, the existing enforcement machinery provided by sections 18 to 22 of the 1991 Act (which involves the giving of enforcement orders enforceable by the courts). Ofwat has a wide discretion about which steps to tell a company to take to bring itself back into compliance with the rules.
	Ofwat are required to provide a draft to the Secretary of State of the first rules to be issued under new section 35B of the 1991 Act at least seven days before they are issued.
	New sections 35C and 35D provide for consultation about the rules, except in cases involving minor or urgent variations. The procedure is modelled on existing procedures followed by Ofwat when making codes or rules about bulk supplies: see sections 40C and 40G of the 1991 Act.