(Bloomberg) -- The UK Treasury has blocked plans proposed by Environment Secretary Steve Barclay to extend a crackdown on water company dividends.

Barclay told executives at a meeting last month that significant sewage discharges may be punished with bans on investor payouts and bonuses. That raised concerns among company officials who said such action would deter investment or make it punitively expensive. 

“If you want to break the system and get poor environmental performance, that’s the way to do it,” David Henderson, chief executive of industry body Water UK, said Thursday at a conference in London.

A top Treasury official this week allayed those worries.

“The government has no plans to block water company dividends over illegal pollution events,” Gareth Davies, Exchequer Secretary to the Treasury, said in a Feb. 27 letter to industry representatives, who had previously contacted the Treasury about their concerns. 

Industry regulator Ofwat will already get new powers from next year to block dividends, but only if it assesses the payments could jeopardize a company’s financial health. Davies said in the letter, seen by Bloomberg News, that those powers would not be extended to include sewage spills, as Barclay proposed.

“Ofwat will continue to engage with water companies on how their powers and the requirements will be used in practice,” he added.

A spokeswoman for the environment department, known as Defra, declined to comment on the letter, but said “we are clear that the overall performance of the water sector is unacceptable, and we are taking steps to improve it for customers and the environment.”

Officials from the Treasury weren’t able to provide immediate comment on the letter.

The dispute comes when Thames Water, the nation’s biggest water and sewage utility, is waiting for a verdict on whether it broke regulations by paying millions of pounds to investors last year. 

A ruling is expected in weeks. A fine would further squeeze the debt-strapped utility and also choke off a crucial source of finance for parent company Kemble Water, which ultimately may trigger an administration process and the sale of Thames.

--With assistance from Philip Aldrick.

(Updates with comment from Water UK CEO and Defra from third paragraph.)

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