the water report 2017 - sqs.com · 25 feature anglian water’s innovation shop ... may seem like a...

JULY/AUGUST 2017

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Ofwat's PR19 team on price control design, business plans, customer outcomes, cost e�ciency and �nanceability.

INSIDE WICS' SRC21 DECISIONS|ROSS ON FUTURE REGULATION|CEO STEVE ROBERTSON ON HIS FIRST YEAR AT THAMES WATER

COMPETITIONWATCH❙ Large customers are engaged and switching...but the market lacks wow factor. ❙ Emerging issues three months on from go-live.❙ Pennon Water Services' boss Richard Stanbrook on simplicity and service. ❙ Southern seeks retail partners on water efficiency.

WATER REPORTTHE

POLICY|REGULATION|COMPETITION

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THE WATER REPORT July/August 2017 3

COMPETITIONWATCHWATER

REPORTTHE

EDITORÕSCOMMENTEDITORÕSCOMMENT

CHALLENGE AND COLLABORATIONInevitably this month, all eyes are on PR19 (our coverage is on p8-15). The headline summary is that it is looking pretty tough for companies. There are few surprises in the methodology as the key aspects have been well consulted on. But taking the package as a whole, it poses a real challenge for the industry. A few examples: the opportunity to earn outperformance rewards does not make up for lower base returns; e�ciency baselines incorporate an element of frontier shift; and average performance is likely to incur ODI penalties.

Clearly Ofwat is doing its utmost to tip the scales more in favour of the customer, both �nancially and in terms of ‘fairness’. On the latter, witness in particular new debt indexation, tax cost pass through, and the move to CPIH.

Receiving less widespread attention is WICS’ latest work on its next price control for Scottish Water, SRC21 (see p16-18). It is fasci-nating to compare and contrast the two regulators’ approaches. Sure, the situations are not identical but nonetheless both regula-tors want the same thing: sustainable, resilient water and wastewa-ter services for the long term at the best possible price for custom-ers, delivered by innovative and e�cient companies. But they are going about it in di�erent ways.

PR19 is characterised by challenge: a tough regulator indicating its intention to hold prices down while demanding step changes in performance, with complex incentive mechanisms to oil the wheels. SRC21 is characterised by collaboration: a trusting regulator openly accepting upward price pressure on the back of rising investment which it sees as needed to do the right thing by future as well as cur-rent customers.

Ofwat and WICS have taken di�erent stances on other matters too. Whereas PR19 promotes more markets SRC21 dismisses them. On customer involvement, Ofwat has emphasised that customers must be welcomed as participants in the delivery of water servic-es, and has reinvigorated the Customer Challenge Group role but retained its �nal say on company business plans. WICS meanwhile has given the green light to the Customer Forum again to negoti-ate direct with Scottish Water. Assuming Ofwat stays on its current trajectory under whoever succeeds Cathryn Ross as chief executive in 2018, it will be fascinating to see whether challenge or collaboration delivers the best results.

Editor: Karma Loveday e:[email protected] t:07880 550945Art Editor: Numa Randell e:[email protected] t:07754269168Managing editor: Trevor Loveday e:[email protected] t:07949 579641Subscriptions: [email protected] Website: www.thewaterreport.co.ukAddress: The Water Report, 68 Church Street, Brighton BN1 1RLPublisher: Kew Place Limited

4 INTERVIEW Every challenge is an opportunity for Thames Water CEO Steve Robertson.

8 REPORT PR19: Overview and business plan assessment.

10 REPORT PR19: Multiple controls and new markets.

12 REPORT PR19: Customers and outcomes.

14 REPORT PR19: Cost e�ciency and �nance.

16 REPORT WICS’ initial SRC21 Decision Papers on the capital programme and prices.

19 REPORT Ofwat CEO Cathryn Ross on the future of independent regulation.

20 SQS urges revenue assurance action.

22 REPORT Unlocking the value of customer data.

24 NEWS REVIEW Wessex buys Flipper; EA reports on industry.

25 FEATURE Anglian Water’s Innovation Shop Window.

26 INTERVIEW Galliford Try’s water MD Ian Jones.

29 NEWS REVIEW Waterwise’s UK water e�ciency strategy.

30 NEWS REVIEW Alternative routes to abstraction reform.

31 REPORT Large customers engaged but deals lack wow factor.

34 REPORT The market, three months on.

36 INTERVIEW Richard Stanbrook says Pennon Water Services is in pursuit of scale.

38 REPORT Southern Water looks to partner with retailers on water e�ciency.

|CONTENTS

Karma Loveday, editor,The Water Report

Feedback, comments and suggestions very welcome.

Contact me on [email protected]

or 07880 550945.

July/August 2017 THE WATER REPORT4

INTERVIEW|STEVE ROBERTSON, THAMES WATER

It is coming up to a year since Steve Robertson became chief executive of �ames Water. To the casual observer, the job may seem like a poisoned chalice; a number of incidents have put �ames in the spotlight for all the wrong reasons

since Robertson started in September 2016. But he says the re-ality is much more balanced. “�ere are a lot of strengths in this business and we’ve got some really good historical perfor-mance but we need to remember that in our region we have a lot of growth, we have got the implications of climate change, and we’ve got some legacy performance issues, especially in the service area, that need addressing.”

On the strengths side, he praises the company’s sta�, many of whom have given years of dedicated service. He says the struc-ture of the organisation is �t for purpose and he likes what he sees the company doing on customer engagement – from the 60,000 water saving home visits completed, to schools work and how plans are shaping up for PR19. “I think we are quite close to being state of the art in that,” he observes.

Robertson highlights two areas in particular as falling short. First, the customer experience. While many indicators including complaints, SIM score and debt recovery are showing improve-ments, “if you look at how �ames Water has played in the cus-tomer services league tables …you can’t be happy if you are the CEO of the business with where we sit.” And second, infrastruc-ture. Network failings have attracted much of the recent bad press. Eight major trunk main bursts in London have brought the dual horrors of �ooding and supply outages. Meanwhile the

company missed its 2016/17 annual leakage target for the �rst time in ten years. Robertson knows he has his work cut out ad-dressing these issues and needs to make sure “we fully exploit all the options and opportunities of having the totex regime”.

Rising to the challengeWhile they are a priority, responding to the regulatory ‘requests’ recently made of �ames by Ofwat chairman Jonson Cox do not feature as a headline challenge, for the simple reason that the company has no di�culty meeting them. �e company notes that even the seemingly intrusive direction to review the compo-sition of the �ames board to ensure its independence and trust-worthiness is already required following recent Ofwat reforms of corporate governance. So on the face of it, Cox’s ‘de-mands’ seem relatively modest – though �ames points out that nevertheless they will re-quire considerable work to make sure that customers expectations are met in full. Under Robertson, �ames has already voluntarily moved to improve customer communications (see below), and to make its �nancial arrangements and investor returns clearer – for instance it has recently published Our taxes explained and Our �nances explained, two book-lets setting these aspects out in plain English.

Meanwhile, tying management rewards to performance for cus-tomers as well as investors is al-ready in place and very much in keeping with the general direc-tion of regulatory travel for PR19

EVERY CHALLENGE IS AN OPPORTUNITYSteve Robertson is facing Thames Water’s adversities head on and is determined to learn as much as he can from them to inform future strategy and delivery.


STEVE ROBERTSON, THAMES WATER|INTERVIEW

(see p12-13). And �ames’ Customer Challenge Group has al-ready requested joining up operational and �nancial reporting. Robertson responds: “I’m going to do it and actually I’m think-ing about what more can we do in that space. �at would be a minimal level from me. I want to think more imaginatively about how we engage with customers about our performance.”

Even the board composition request doesn’t jar. Robertson: “I think the point of Jonson’s comments is to say ‘look, you’ve got new investors coming in; you’ve got a chairman at the end of his tenure with the new chairman to be appointed; pay attention to the people who are coming in’. And from my point of view that’s �ne.” He points out that a number of new appointments have been made in the past few months anyway including indepen-dent non executive director Nick Land as well as new investor representatives a�er Borealis Infrastructure and Wren House ac-quired Macquarie’s 26.3% stake in the business on 31 May 2017.

He o�ers that the new recruits are “smart and have a long term view of the

business” which is not out of kil-ter with Cox’s priorities. “And

as time goes on, the board will evolve as well and over the next couple of years, there’ll be some members of the board who will reach the natural end of their tenure.” He adds that of course it will be “up to Jonson to take a view” on whether the new chairman and recomposed board de-liver his objectives, “but I

think we are in the process of doing exactly that”.

More generally, Robert-son is sanguine about

Ofwat’s – somewhat unusual – pub-

lic pleas. Cox’s comments were framed around the publication of �ames’ �nancial results and operating performance summary (see box, p7). While the leakage target miss was company spe-ci�c, �ames is far from alone in the industry on some of the other aspects in the line of �re – investor returns, gearing, man-agement rewards and balancing customer/�nancial interests. Yet Robertson does not object to being singled out: “We are who we are, we operate where we operate, we are the largest integrated water company, so I’m afraid you have to accept that when things happen, it’s going to be high pro�le. And if you think about the accumulation of the events that have happened – the big bursts before Christmas; we had a incident on Christmas Day at Hamp-ton; we have had lots stu� around the performance around leak-age etc etc – and when you mix all that together then by de�ni-tion you can expect public scrutiny.”

Nor is Robertson perturbed by this public scrutiny. “One of the things about running an infrastructure business is don’t do it, especially a business like �ames Water, if you’re going to get wobbly and angsty about the public scrutiny. I don’t start adopt-ing the ‘Oh it’s not fair…’ line. I have zero angst about the public nature. I only care about the substance and the outcomes.”

AmbitionSo what substance and outcomes might we expect to see? Rob-ertson is ambitious. “�ese moments represent an opportunity and a litmus test for us. When some bad stu� happens, you either use it as an opportunity to engage and as point of motivation to reset agendas etc or you pull the blinds down, shut o� your phone, hide under the desk and hope it goes away.” Clearly opt-ing for the former, he continues: “�e question is, what are we actually going to do di�erently, and how quick and how radical will we be? We can all agree about the direction; the question is how much do we embrace, how fast do we embrace and how far do we go? As you probably get the impression from me… I think we need to challenge ourselves…and the things that I was talking about earlier as areas of weakness that we need to ad-dress, are exactly those things that Jonson pointed out.”

Some changes have already been made, notably in the senior management team. Along with Robertson himself, the company has a new CFO and a new customer services director, as well as some

key internal promotions. Robertson notes he is delighted that some of these top roles have gone to women.

He is also keen to progress work that started be-fore he joined. A good example is implementing the new billing platform. “�at’s started and of course these are notoriously tricky programmes and we need to make sure that we land that; it’s a big focus,” he explains. Similarly he reports �ames has successfully implemented a new digital platform and needs to work now on “how we actually utilise it in terms of the website and for customer interaction; we need to make sure that we fully exploit that.”

It is a similar story on the delivery side of the business. Robertson’s predecessor Martin Baggs put three innovative and collectively incentivised delivery alliances in place: the eight2O alliance, the infrastructure alliance and the transformation and technology al-


liance. �e focus now will be on re�nement. “I don’t think that fundamentally we will be throwing everything up in the air,” Robertson asserts. “I think that getting a good set of partners working together is great and very bene�cial for us. But equally it would be wrong for us to say we can just sit back. Good things don’t happen just because you put a bunch of ingredients in and give it a bit of a shake then sit back. Good things happen through continually learning. And we are in a process of learning; these constructs are very ambitious and are quite di�erent. And what we need to do is to treat them like that.”

Customer centricityRobertson also intends to take the good work �ames has done on customer engagement to the next level, which will include developing the theme of customer participation. “One of the things I want to change is the way that we – philosophically – are addressing our customer base. In a sense they [customers] are very deep stakeholders inside this business…�at’s an area where we’ve been really focusing down and we’ve been making progress on so that when we build our business plans we have demonstrably intelligent well-informed customer input. And for our customers to input sensibly we have to be transparent and share, not just go ‘well what do you think’?”.

And that raises the issue of what the CEO describes as “a set of Russian dolls” in relation to company/customer relationships – that no aspect can really be looked at in isolation; rather one thing leads to another and all parts of the package are linked. So good customer engagement hinges on well informed customers

which hinges on transparency. Robertson: “It’s very important for us to engage externally and it’s very important to make sure that we are being exemplary in terms of our transparency with all our stakeholders especially our customers. One of the things that I think we could do better… is we can step back and say ‘if you look hard enough you can �nd out everything you need to �nd out about the business’, or we can be more proactive in making sure that it is really easy to understand stu� about the business.”

Aside from more transparent formal reporting, Robertson sees a strong role for social media here too. In his short time at at the company, improving �ames’ social media engagement has been a priority and the company’s Customer Challenge Group has already noted the success. He comments: “We didn’t have 24-hour social media coverage; and we tended to be very outward focused rather than interactive. Again I think we’re beginning to �nd our tone of voice; I don’t think we’re there yet again and I think that’s an area we can focus on. And also associated with that, use of digital channels full stop in terms of operating with our customers, I think there’s quite a lot we can do to develop in that space.”

Well informed customers that give insightful feedback will support the development of a truly customer centric business,

Robertson continues. “�at customer centricity needs to be in all the decision-making – whether it’s the [business] plan or how we handle an event or incident. It’s something that we need to focus on and it needs to be an area of continuous improvement and learning.”

Leakage and burstsRobertson is of course also prioritising addressing the infra-structure issues that have blighted his �rst year. An independent report into the trunk main bursts concluded there were no sys-temic failures to address, but that the company should prioritise higher risk �xes and improve its network monitoring capability. It is now investing £97m extra in this up to 2020 and is strate-gically considering how to deal with this asset class. Robertson notes: “It’s always tricky because you need to make the decision: when is it right to stop �xing it and start replacing it?”

�e leakage target miss was signi�cant. Robertson explains in part it was due to the bar being far higher this AMP; in part due to the Infrastructure Alliance taking longer to get up and running than envisaged. What with catching up with the leak �x backlog and trying to keep up with this year’s targets, he “doubts very much” whether �ames will hit its interim AMP6 targets, though he feels “pretty con�dent” it will be back on track by 2020.

But again he intends to extract a positive from a negative and will take the opportunity to learn lessons – and not only about the mobilisation period for a complicated structure like the In-frastructure Alliance. “I think there’s more to it than that. We need to think quite hard about what it is telling us about the con-dition of our network, the distribution of the leaks and how we handle customer side leakage more e�ectively – 30% of leakage is customer side and I think that we’ve got some good policies – we actually will go and �x it for free. But I think one of the learning areas for us is how to engage with our customers over customer side leakage better.” He adds: “We shouldn’t be too simplistic about this…When you have the aspiration to make another big step change in performance, you really need to be thinking very hard about exactly what you need to do to make it happen. And if it isn’t happening, really get underneath the underlying reasons why that is and then take corrective action.”

Similarly, Robertson sees lessons to learn from other targets it missed last year. �e company incurred £18.4 million in ODI penalties, partially o�set by £3.2 million rewards. He is very sup-portive of the ODI policy. He is not particularly ru�ed by the economic impact on the business (the penalties are small in rela-tive terms). “But I’m angsty about the fact that we didn’t hit some of the targets that we should’ve hit. A lot of them were relatively minor misses, but a miss is a miss. And while I know leakage was the big headline, you also need to apply the same thinking to some of the other areas as well.”

Looking at all the infrastructure issues in the round, Robert-son doesn’t �nd fault with �ames’ risk management capabili-ties: “I think we’re actually pretty good at risk management to be honest.” But he sees scope to be able to better predict the state of the network, including through innovative and technological means. “If we think about the internet of things and big data ana-lytics and automation and think about how that whole world can be applied to our business, I think there’s more we can do around that.” On the wastewater side, he points out “massive strides”

We can all agree about the direction; the question is how much do we em-brace, how fast do we embrace and how far do we go?



have been taken already both on the plant side and on modelling and monitoring the network – “but still you can’t sit back”. It is worth noting that the £20m pollution �ne �ames was hit with in the year was for historic spills and that the company has been at pains to explain its practices are now fundamentally di�erent.

Finally, not to lose sight of the bigger picture, Robertson and his team are planning a deep strategic review. “You can’t let these things happen and not ask some fundamental questions around that. �at’s the bigger challenge: making sure that we’ve got the right strategy across the whole of the business.”

Water resources, NHH and PR19Finally, we catch up on a few other important and topical issues. Firstly, his views on the water resources position; a long running subject for �ames. As CEO of the company that serves Lon-don – densely populated and hugely important nationally and internationally – security of supply is never far from Robert-son’s mind. He confesses: “When I came into the industry and I looked at the relative position of the southern part of the coun-try versus other parts of the country in terms of their resilience from a storage perspective, I was pretty shocked.” He has come to understand how we got to the current position, but argues: “People who aren’t in the water industry don’t understand that. �ey really don’t. And I didn’t. It’s like: why would you have 100 days resilience in the southern part of the country and 500 or 600 in other parts? Why would you do that? You just wouldn’t.”

He appreciates the need to “use the full toolkit” on resources, which includes demand management, improving leakage, catch-ment management and greater re-use of e�uent as well as supply enhancement. On the latter, he questions: “Do we need to have a disaster? Do we need to have a major event? Do we need to have something very bad happen before we are galvanised into mak-ing the right decision. Or are we smart enough to get aligned around a fact-based view of what needs to be done and actually get on with it?”

For his part, Robertson intends to keep his foot on the gas both operationally and in terms of stakeholder engagement. He points out too that environmental and ecological impacts need to be “taken seriously as well as part of this equation”. Is he opti-mistic about supply side progress in his tenure? “Right now I am sort of equivocal. I think that probably we are in a better place now than we have ever been for the past 20 years…but until it’s done, it’s not done.”

On non household retail, Robertson like everyone else in the industry is relieved the market has had a smooth start and seems genuinely pleased with how the transfer of �ames’ business customers to Castle Water has gone. But his experience in other markets, particularly as a wholesaler serving some 400 retailers, tells him we are only in the foothills of the challenge. He men-tions in particular sharpening up the wholesale/retail interface as one example. “On the one hand, we’ve got a bunch of retailers who have got to di�erentiate and on the other hand, we need to have as much standardisation in the wholesale supply chain as possible otherwise life becomes very, very di�cult if you want to work across multiple wholesalers. Working out those competing tensions in a way that ends up with a better set of products and a better sets of experiences for our business customers is some-thing we’ll have to work really, really hard at.”

And �nally, PR19. We met to do this interview on 10 July,

the day before Ofwat released its dra� price review methodol-ogy (see p8-15). He explained that his approach will be to try to match up the methodology with what he knows to be company reality.

“�e message I’m driving inside the business, and actually what is demanded by our board, is we need to take a long-term view in the business and take up a strategy that supports that.” His �rst task on reading the methodology will be to consider �ames’ activities on Ofwat’s four themes (a�ordability, resil-ience, customer service and innovation) and his second to work out how best to align �ames’ desire for long term optimisation with the regulator’s priorities: “How will this [methodology] play into that [corporate strategy] and how can we work with this methodology to absolutely make sure that it’s consistent with that approach?”

On �nanceability, does he anticipate �ames will need to re-spond directly to Ofwat’s well trailed support for signi�cantly lower base returns? “We’ll see what the detail is. But the over-all �nancial construct of the business will not get turned upside down by anything that comes out…�e idea that says one day we will wake up and go ‘Ah, you know, it would be quite nice if we were just leveraged to 70%, that would be really cool’. It’s not going to happen. You can set the direction but you have to put it in context of reality and of what we’ve got to do.” TWR

Financial highlights❙ £605 million underlying operating pro�t (2015/16: £742.2 million). ❙ £71.1 million pro�t before tax (2015/16: £511.2 million), due to fair value loss on �nancial instruments, increased costs and lower property sales. ❙ Capital expenditure of £1.1 billion on network and infrastructure, with around £12 billion invested in last 12 years. ❙ £100 million in dividends paid to external shareholders (2015/16: £nil).

Operational highlights❙ 2016/17 leakage reduction target missed by 47 million litres per day, which represents 1.8% of our average daily production. First miss for ten years. ❙ £18.4 million in ODI penalties (£8.6m on leakage plus smaller sums for supply interruptions of more than12h, security of supply index, sewer �ooding and discharge compliance), partially oªset by rewards of £3.2 million for improving on supply interruptions of less than four hours (£3.1m) and reducing the number of properties aªected by odour.❙ Transformed approach to preventing pollutions following oªences at six sites in the Thames Valley between 2012 and 2014, resulting in a £19.75 million �ne in 2017. “We’ve been more proactive in our wastewater network maintenance, changed our management structure in the aªected region and invested heavily in our infrastructure and control systems leading to a 42% reduction in incidents since 2013.” ❙ 99.96% drinking water quality compliance.❙ 267GWh of energy from sewage produced, best performance to date.❙ Largest water e�ciency programme in the industry. Measures including the installation of 146,000 smart water meters and 60,000 Smarter Home Visits pro-duced an annual saving of 22.2Ml/d, ahead of target.

Customer service highlights❙ 94.5% of complaints resolved �rst time, up from 90.9% in 2015/16. ❙ At £374 a year, customers continue to bene�t from the third lowest average combined water and wastewater bill in England and Wales. ❙ £14.6 million reduction in bad debt expense caused by customer non-pay-ment. ❙ SIM score moved from 76.7 to 77.3 points out of 100.

PERFORMANCE SUMMARY 2016/17



REPORT|PR19 DRAFT METHODOLOGY

Ofwat’s four themes for its PR19 dra� methodology published on 11 July – cus-tomer service, long term

resilience, a�ordability and innovation (see box) – came as no surprise. �e reg-ulator’s top team had been trailing them for some weeks in speeches and, just ahead of the launch, on Twitter. But the document itself really hammers home the message that these are the priority is-sues: the themes are woven through the paper and head up each chapter.

But how should a water company look-ing at these headline messages set about hitting the optimum mix, given that trade o�s will almost certainly be needed? Se-nior director of Water 2020 David Black won’t be drawn to rank the four themes. “�ey’re all important,” he says. “�ere’s no prede�ned idea about where the bal-ance sits.” He elaborates that the four themes are “all about the customer, now and in the long term” and says he sees “lots of opportunity” from lower �nancing costs and greater e�ciency to deliver for customers in the round. Nor does Black seem to buy the argument that a�ordabil-ity and resilience in particular are pulling

in di�erent directions.”A�ordability for all is important, so average bills are impor-tant,” he says. “And it is important to ad-dress resilience. But resilience is not just about the spend – there are a range of op-tions to mitigate the e�ect on bills.”

Exceptional to abysmal So companies will need to plough through the detail and make judgements, �rmly in consultation with their customers, about how best to deliver great customer ser-vice and long term resilience within the envelope of an a�ordable-for-all bill. �e fourth theme, innovation, could at least in part be the key to the other three and will clearly be highly prized by Ofwat when it assesses business plans.

Four business plan grades have been earmarked for PR19, up from the two –enhanced and standard – used at PR14: ❙ Exceptional status will be awarded to plans that are high-quality with signi�cant ambition and innovation for customers.❙ Fast track status will be given to plans that are high-quality and do not require material intervention to protect customer interests, but which are not ambitious and innovative enough to attain exceptional status.

PR19: FROM ENHANCED TO EXCEPTIONALBusiness plan innovation and ambition will set the best apart from the rest while disincentives will be applied at the bottom.

❙ Slow track status will be given to plans where material interventions are required in some areas to protect the interests of customers.❙ Signi�cant scrutiny status will be given to plans which fall well short of the re-quired quality and where major interven-tions are required to protect the interests of customers.

Ofwat reserves the right not to use all categories but wants to have them avail-able. Black says he “really hopes some plans will make the exceptional category”; meanwhile there is “no reason why any-one should end up in signi�cant scru-tiny” but the regulator wants to have the category there – perhaps as a deterrent as much as anything.

Clearly it will be ambition and innova-tion that will separate the elite from the next best. Black points out this is a break with PR14. �en it was all about the qual-ity of the plan. �is time around, a high quality plan alone will get you to fast track status but to be exceptional “you must go above and beyond and really shi� the frontier forward”. �ere seems to be con-siderable �exibility around which areas Ofwat will reward frontier-shi� in. Black provides some examples: “It might be the frontier on cost, or on outcomes, or on re-silience.” Ofwat believes innovation and e�cient risk management will be key to delivering any such ambition. And that both innovation and ambition will hinge on understanding customers’ needs better and operating more e�ciently – which point towards companies collaborating more with customers, other stakeholders and in some circumstances each other.

Plans in the top two tiers will receive early dra� determinations in March/April 2019 instead of July 2019, with ex-ceptional plans also bene�ting from a �-nancial reward (0.2% of RORE) and the reputational kudos of being elite. Will these rewards be su�cient to incentiv-ise companies to really push themselves? Bear in mind that PR14 enhancement can be viewed as a double-edged sword: great

THE TIMELINE FOR PR19 11 JULY 2017

PR19 draft methodolgy consultaton published

JULY-AUGUST 2017

Continued engagement

through consultation

period

30 AUGUST 2017

PR19 draft methodolgy consultaton

closes

3 SEPTEMBER 2018

Companies submit

business plans to Ofwat

MID DECEMBER

2017 Final PR19

methodolgy published

JANUARY 2019 Initial

assessment of business plans

published

MARCH-APRIL 2019 Draft

determinations (exceptional

and fast track plans)

APRIL 2019 Companies

submit revisions to

buiness plans (signi�cant

scrutiny and slow track)

JULY 2019 Draft

determinations (slow

track and signi�cant scrutiny)

DECEMBER 2019 Final

determinations published


The PR19 top team: David Black, Aileen Armstrong and John Russell


PR19 DRAFT METHODOLOGY|REPORT

to get the upfront bene�ts, but a truly stretching plan may mean missing out on some performance based rewards. Black says those choices are ultimately for com-panies to make, but he senses “an appetite from some companies to push forward in this price review”. He adds that this time around, outperformance will be more re-warding (through beefed up outcome de-livery incentives (ODIs) and cost sharing mechanisms and so on – see p14-15) so companies will be motivated to deliver as well as plan to the best of their abilities.

For the �rst time, plans in the bottom category will face disincentives – in the form of reduced cost sharing rates and potentially capped ODI rewards (see p12-13). Black explains it can be di�cult for Ofwat to know whether it is e�ectively protecting the interests of customers if the evidence a company presents is poor; the disincentive is intended to send a clear message to companies that there will be a cost to such slackness.

Business plan assessmentOfwat’s initial assessment will focus on the following nine areas: engaging cus-tomers; addressing a�ordability and vul-nerability; delivering outcomes; securing long-term resilience; targeted controls, markets and innovation; securing cost e�ciency; aligning risk and return; ac-counting for past delivery; and securing con�dence and assurance.

Again, Black won’t rank the list, saying they are “all relevant factors”. Other than ambition and innovation, the key desir-able characteristic is a “high quality plan” which Ofwat de�nes thus: “A high-quality plan will mean that a company’s propos-als are e�cient, resilient, a�ordable and include stretching performance commit-ments that really deliver for customers. It also means that the company provides a high degree of con�dence that the busi-ness plan will be delivered. A high-quality business plan will also provide a focused and persuasive vision for the future with clear evidence appropriately used and with well set out and robust reasoning to support the company’s proposals.”

Ofwat seems to have made a concerted e�ort to be more transparent about the process it will use to assess plans than at PR14; it came in for criticism from some quarters about its enhanced choices last time around and why they had made the cut. Black remarks: “We’ve not exactly set

out a scoring approach” but have set out “what criteria we will look at and how tests will be done”.

Simpli�cation and assuranceUnlike in PR14 where there was no pre-scription around how business plans should be presented, this time around Of-wat has set out a framework within which companies should work. �ere is a clear plea to keep things short(ish) and simple. Ofwat admits the free hand it gave the in-dustry at the last review made it “di�cult to �nd the relevant supporting evidence in the business plans;” an acknowledge-ment perhaps that the policy of “letting a hundred �owers bloom” as someone at the time put it resulted in a bit of an over-grown garden that it was di�cult to wade through. �e framework for PR19 features:❙ A single main document of no more than 200 pages for water only companies and 300 pages for water and sewerage companies.❙ Signposted areas for Ofwat to refer to when carrying out its initial assessments.❙ Clear explanations of proposals, sup-ported by strong evidence. ❙ A summary of how the plans will de-liver the PR19 themes and the UK and Welsh Government strategic policy state-ments.❙ Excluding the very small companies, all �rms must complete a common data table for each price control, to support consis-

tency and comparability. ❙ An expectation that plans will be pub-lished in their entirety with only “very good reasons” to justify the excise of in-formation.

Ofwat has allowed more freedom on assurance, asking companies and boards to provide an assurance statement that demonstrates the plan and the underpin-ning data are high quality, resilient, and in line with statutory obligations. Compa-nies will be able to submit their data ta-bles, narratives and commentaries using a new secure data capture platform. TWR❙ See p10-15 for further PR19 analysis.

❙ Great customer service that shows real innovation, reliability and responsiveness, matching the experience that customers get from the best companies in other sectors.

❙ “Long-term resilience in the round.” This is about considering all aspects of resilience – �nancial resilience, resilience of corporate structures and operational and systems resilience.

❙ Aªordable bills that oªer value for money and the scope for price reductions if this is what customers want.

❙ Innovation and new ways of working. This will include working with customers to co-create and co-deliver; greater use of markets; changing culture and building on best practice from the water sector and other sectors.

“MORE OF WHAT MATTERS IN PR19” – THE FOUR THEMES

THE PR19 JIGSAW: HOW IT ALL FITS TOGETHER

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The industry has known since Ofwat published a decision document in May 2016 that multiple price con-trols would be a feature of PR19. As

widely consulted on, there are to be four main wholesale controls: one each for the new water resources and bioresources markets and one each for the remaining wholesale water and wastewater activities. On top of that, there is to be a standalone control speci�cally for �ames Water’s Tideway activities.

Ofwat will set wholesale controls using a “building block” approach, for a period of �ve years (see diagram). �ese blocks incorporate:❙ Returns and depreciation of the Regula-tory Capital Value (RCV)❙ An assessment of e�cient totex during the 2020-25 period❙ Funding expenditure to be recovered within the period (determined by the pay as you go ratio; and expenditure added to the RCV and recovered in future periods (through future returns and depreciation).❙ An allowance for corporation tax.

From 1 April 2020, RCV will be split so half remains indexed to the retail price in-dex and the remainder, plus all RCV addi-tions, will be indexed to a more customer-friendly index, which Ofwat is proposing should be CPIH (see p14-15).

Weighted average revenue controls will be used for non competitive retail, with the jury out on arrangements for the com-petitive retail segment.

Wholesale: network plus controls�e water and wastewater network plus controls will be set on broadly the same basis as the wholesale water and waste-water controls at PR14. Network plus water will contain all the water RCV not allocated to the water resources control

(which will be done using an unfocused approach). Likewise, network plus waste-water will contain all the wastewater RCV not allocated to the bioresources control (which will be done using a focused ap-proach). Each company will propose its own allocations of RCV between the con-trols for Ofwat to review.

A couple of speci�c considerations to mention are:❙ Developer services charges – Ofwat proposes including these within the scope of the network plus revenue controls but with an adjustment mechanism for changes in the volume of developer ser-vices over 2020-25, to be applied at the end of the period.❙ Water trading incentives – Ofwat pro-poses to maintain PR14 water trading in-centives, both export and import, for new water trades agreed in 2020-25. It notes the incentives have little a�ected AMP6 plans, but suggests this may be because the incentives were only con�rmed a�er dra� water resources management plans had been submitted. “2020-25 may be the �rst time we can fully assess their impact,” it says. Payments will re�ect the move to separate controls.

Wholesale: new market controls �e methodology crystallises Ofwat’s plans for introducing water and biore-sources markets. It reiterates that water trading is slow; removing barriers, en-couraging third parties to sell water into public supply and – further down the line – enabling third parties in England to supply non household water retailers di-rect (the bilateral market) could all bene�t customers. In bioresources, the regulator believes there is scope to drive e�ciency from increased optimisation of activities across the companies – and, again looking

PR19: MULTIPLE CONTROLS AND NEW MARKETSOfwat’s draft methodology has con�rmed its direction of travel on markets and controls, and �eshed out new detail.

further ahead – greater participation from �rms operating in wider waste markets.

Both new markets will feature infor-mation requirements to enable others to identify opportunities to o�er services, if they can provide them at a lower cost and/or a higher quality. In addition for water resources, water companies will be required to produce a bid assessment framework “to create more clarity and con�dence to third parties that their bids to supply water resources, leakage or de-mand management services will be as-sessed fairly”.

Unless resolved, external factors look set to hinder the development of both these new markets. �e government’s de-cision not to progress primary legislation to enact abstraction reform at this time will undoubtedly constrain the potential of water trades, while an ongoing wrangle over the di�erent regulations that govern food waste and sludge could hold up cross sector collaboration and codigestion. Of-wat’s senior director for Water 2020 David Black admits there could be “increased opportunity” without these dark clouds on the horizon. But he sees neither as “an absolute barrier to the development of these markets”. �e message being: make progress where you can.

�e water resources control contains a number of features to cater for the future development of a bilateral market: ❙ Bilateral market entry should trigger an in-period revenue adjustment. Ofwat comments: “Otherwise, customers would be funding duplicate investment in water resources and we would be protecting companies from exposure to the bilateral market.” �e adjustment uses water re-sources yield as a measure of capacity.❙ Access pricing – companies must sub-mit proposed access prices as part of their business plans. �ey need to show how their proposed access prices align with their own costs and how they will help fa-cilitate the bilateral market on an equiva-lent basis. Further details on these aspects are promised for autumn. ❙ Exposure to utilisation risk – despite opposition from most companies, Ofwat is to press on and expect the industry to share the risk of large scale under or over investment in capacity. It said: “We ex-pect water companies proposing signi�-cant investment in new water resources to also propose long-term risk sharing arrangements as part of their business



plans for us to review. �is is a targeted and proportionate approach and allows the arrangements to be tied to the nature of the investment over the long term.”

Among Ofwat’s proposals for the biore-sources market are:❙ �e return and depreciation on e�-ciently incurred investment will be recov-erable in the 2020-25 period. Post-2020 investment incorporates all investment – there is to be no distinction between maintaining existing bioresources treat-ment capacity and building new capacity.❙ More details on how allowed average revenue will be calculated for each charg-ing year have been shared. ❙ A penalty will be applied for signi�cant inaccuracies in sludge volume forecasts in companies’ business plans for variations greater than ±3% from the forecast used in setting the revenue control. Revenue will be returned to customers where �ve year total sludge volumes are greater than 7% of those used in setting the revenue control. �ese adjustments will be applied as part of the 2020-25 reconciliation at PR24.

Wholesale: direct procurementDirect procurement – the plan to require water companies to procure high value project services and �nance competitively rather than under their own auspices – remains work in progress but more detail has surfaced. Ofwat has retained its view that companies should consider direct procurement for relatively discrete, large-scale enhancement projects expected to cost over £100 million based on whole-life totex. �e methodolgy provides some guidance on the most suitable projects and Ofwat states explicitly that it expects companies to consider using direct pro-curement for suitable projects when busi-ness planning, with particular focus on tenders that are likely to deliver the great-est customer bene�t.

�e methodology considers and sees the merit in a number of tender mod-els – for example, those including and excluding initial design, and those that use an ‘early’ and ‘late’ approach. It will allow companies the �exibility to choose and will consider as part of its initial as-sessment of business plans whether the proposed tender model will deliver the anticipated bene�ts.

Unlike Ofgem with OFTOs, Ofwat has decreed it will not run any tenders. “Com-panies will be the purchaser and will run

the procurement process, then manage the competitively appointed provider (CAP).” It adds that it expects appoin-tees to run a fair and open procurement process and not to bid into the process in their own area.

In terms of contract term, the regula-tor advises 15-25 years. Companies will be allowed to recover the cost of tender-ing a project under base totex allowances under their existing price controls. �eir licences will be amended to allow them to recover the CAP’s revenue from their customers.

Finally in the wholesale controls space, catchment markets get a �eeting men-tion: “In addition to promoting markets in water resources, bioresources and direct procurement, water companies should also consider that greater use of markets in other parts of the value chain. For example water companies could make greater use of markets in catchment management.” Black comments that such initiatives are enabled by the totex framework and do not need special provision beyond it.

Retail controlsPR19 retail controls are complicated by the division between competitive non household and monopoly household re-tail, as well as by the absence of switch-ing opportunity in Wales for all except the

largest (50Ml) water customers. For domestic customers, the intention

is to continue to use a weighted average revenue control, where appropriate taking account of di�erent costs by customer type for residential retail activities in England and Wales. An average revenue control will also be used for business retail customers in Wales not subject to competition.

Ofwat is going to continue to consider setting price controls for business re-tail activities of incumbent England and Welsh companies that are subject to com-petition. It does not plan to set price con-trols for companies that have exited the market as the former customers of these companies are protected by the retail exit code. A small number of monopoly wa-ter companies have not exited the market and hence their customers do not have the backstop protections of this code. Of-wat is still considering what form of price regulation should apply here.

Finally, the regulator is consulting on three-year retail price controls, on the grounds that business retail competition in England could yield valuable informa-tion – for instance on the cost of retail activities and the broader service bene�ts for customers. Ofwat says a three year control would enable bene�ts to be passed on to customers more quickly than a stan-dard �ve year control.

THE BUILDING BLOCKS OF THE WHOLESALE REVENUE CONTROLS



The customer understandably sits front and centre of the PR19 meth-odology. Ofwat had previously set out its approach to customer en-

gagement in its Customer engagement policy statement and expectations for PR19. To recap, this demands companies un-derstand their customers better through a “step change” in customer engagement using a wider range of techniques than at PR14. And on top of the seven principles of good customer engagement in play at the last review, Ofwat has added seven more, including customer participation (its Tapped In work from March); engage-ment on long term resilience; engagement with business end customers on wholesale services; better use of customer data (its Unlocking the value of customer data work from last month, see report p22-23); and communications expectations.

Customer engagement will of course be central to the assessment of business plans, with support provided by Custom-er Challenge Groups.

Aªordability and resilience�e regulator has been highlighting since at least March (when Jonson Cox spoke to Water UK’s City Conference) that it sees signi�cant scope for bill reductions and/

or investment in service for 2020-25 from bargain basement �nancing costs and e�ciency savings. Anyone who hoped growing evidence of the need for greater resilience would mean prices would be entirely trumped by investment will have been disappointed by the regulator’s on-going prioritisation of a�ordable bills for all. It wants to see plans that are a�ord-able and value for money, with companies demonstrating understanding of how dif-ferent customer types will be impacted and making an e�ort to keep bill pro�les as well as levels under control.

It also wants evidence of long term af-fordability. �e methodology paper says: “We, as well as customers and the CCGs, want to see companies being fair to future generations. Companies should make ap-propriate decisions on investment and costs to ensure they are not storing up problems for subsequent price control pe-riods and future customers.”

Finally, there is an expectation to bet-ter help those who struggle to pay. Ofwat notes only 1% of all customers are on social tari�s, although 11% of English customers and 15% of Welsh customers spend more than 5% of their disposable income on water bills. According to the paper: “Companies need to o�er a range

PR19: CUSTOMERS AND OUTCOMESCompanies are charged with balancing aªordability and resilience for customers, and will be put to the test with stretching outcomes and incentives.

of assistance options and be more pro-active in getting those to customers who struggle, or are at risk of struggling, to pay their bills. �ey need to work with other organisations to help these customers.”

�e initial assessment of business plans will scrutinise each of these three aspects of a�ordability against �ve principles us-ing both qualitative and quantitative mea-sures.

On top of this, for the �rst time vulner-ability will be an explicit part of the price review. Ofwat plans to use qualitative information to assess how business plans support customers in circumstances that make them vulnerable, based on chal-lenges it set in its 2016 Vulnerability re-port. �is will include scrutiny of how companies use data and engage with oth-ers to support those in vulnerable circum-stances and how targeted, e�cient and e�ective companies’ measures to address vulnerability are. CCGs are expected to assist here and provide an independent assessment of company e�orts.

Moreover, vulnerability has been ear-marked as an area for bespoke perfor-mance commitments (PCs - see below), backed up by a requirement for �rms to develop common measures for address-ing vulnerability, and to report on the data they gather.

However, while keeping bills a�ord-able is a priority, the methodology is equally clear that companies must also deliver services that are “resilient in the round” – which in Ofwat’s eyes means operationally, �nancially and corpo-rately resilient. �e a�ordability and re-silience demands together amount to a real challenge for �rms. Ofwat has pro-duced seven resilience principles to help companies understand what it expects of them (see box). Its initial assessment of business plans will seek to establish �rst, how well the company has identi�ed and prioritised risk to systems and services; second, how well it has assessed and selected mitigation options; and third, whether customers support company proposals.

�e theme of resilience is woven throughout the methodology, featuring prominently, for instance, in the sections on outcomes and cost assessment. Ofwat gently reminds companies too that it will only fund activities additional to those funded under previous price controls: in short, it won’t allow customers to pay twice.

PROPOSED COMMON PERFORMANCE COMMITMENTS FOR PR19

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Outcomes �e outcomes framework will govern how all of this, and more, translates into actual deliverables for customers. �e methodology cements Ofwat’s message when it consulted on outcomes late last year: that PCs will be more stretching and outcome delivery incentives (ODIs) will pack more of a punch.

On a practical level, the ten common PCs consulted on in November have evolved considerably. �ere are now 14 common commitments in the frame, with standard de�nitions (see diagram).

�ese cover the most important issues for customers such as reducing leakage, supply interruptions, the environment, resilience and asset health. �ese com-mon PCs enable customers and stake-holders to understand the performance commitment levels companies are signing up to, compared with other companies.

�ere is also a greater focus on resil-ience than was apparent in November: two common PCs are devoted to resil-ience and a further four to asset health. Senior director of Water 2020 David Black comments: “We’ve been working with the sector on developing these, to standardise asset health measures… the common metrics make it easier and more transparent to measure asset health across the companies… We’ve also got common PCs around resilience and this is very much to try to look forward.”

Bespoke PCs are also permitted, though a number of must-cover areas have been earmarked, including: vulnerability, envi-ronmental impact, resilience and the Ab-straction Incentive Mechanism.

Stretch and SIMOfwat is expecting companies to stretch themselves across the board, but is setting some particular parameters for certain common PCs. For supply interruptions and sewer �ooding, for instance, it ex-pects companies to set their PC levels at least at upper quartile performance level in 2024-25. Black explains: “PR14 had very much a historical approach to upper quartile performance. Now water compa-nies should be looking at where they proj-ect upper quartile will be so that in 2025, customers aren’t paying for something that was e�cient in 2017.”

On leakage, the regulator has told com-panies to set more stretching PCs than last time around: “We expect companies

to justify their proposals against options including a 15% reduction by 2025 or up-per quartile performance on leakage per property per day.”

�e Service Incentive Mechanism is in for an overhaul too. Black says: “SIM has been a success and there has certainly been improvement. However there were signs of convergence… and there is evidence that the sector is still lagging behind perfor-mance in other sectors. We see that from the UK Customer Service Index (UKCSI) and evidence coming out of the retail review. We really want companies to press forward [as] customer service is one of the themes of the review so we thought very hard about how we can de�ne an incentive to encourage companies to stretch in this space.”

�e SIM will be replaced by two new mechanisms:❙ C-MeX – for domestic customers. Com-panies are to be assessed on both perfor-mance with customers who make contact and more general customer satisfaction. More contact channels including social me-dia are to be factored in too and in period incentives will be applied. Higher rewards will be available for companies which dem-onstrate upper quartile performance in comparison to other sectors in UKCSI.❙ D-MeX – �is new measure will gauge developer satisfaction. Phone surveys are likely though the mechanism is still in de-velopment.

No measure has been proposed to gauge retailer satisfaction with wholesal-ers at this stage.

ODIs�ese performance incentives are to be beefed up considerably. �e overall range for value of ODIs will be increased to -3% to +3% RORE (this is the upper end and it is unlikely a company would hit the extremes; Ofwat recommends a range of +/- 1%-3%). PR14 design restrictions are to be removed and �nancial ODIs and in-period incentives are to be the default where customers are supportive (with companies expected to smooth bill impacts). End-of-period ODIs will a�ect revenue rather than Regulatory Capital Value. Ofwat will also encourage compa-nies to provide contextual information on performance, such as league tables.

Earning rewards will be challenging; Ofwat says average performance is likely to incur a penalty – it suggests �rms “are able to manage this risk by ensuring they

deliver for customers”. However super rewards are to be available for frontier-shi�ing performance on common PCs: “We will encourage companies to propose enhanced, higher, rewards for signi�cant performance improvement which moves the industry forwards as part of their ODIs for the common PCs,” the paper says. “�is proposal mimics how a com-petitive market rewards and spreads in-novation. �e enhanced rewards should be accompanied by increased penalties for very poor performance.”

Black elaborates on the super rewards policy: “�is is very much linked to the innovation theme and what we can do to promote more innovation in the sector.

One of the barriers to innovation is that when companies look at options that are less tried and tested, o�en these new ways have greater potential. We really wanted to recognise that when companies do a brave thing and push the boundaries beyond what is delivered today, that the compa-nies should be entitled to take a higher level of reward…It is very much focused on payment by results so where innovation succeeds, companies get a higher return but where it doesn’t succeed, customers shouldn’t have to pay for that.” TWR

❙ Resilience must be considered in the round and over the short, medium and long terms. ❙ Resilient ecosystems and biodiversity underpin many of the key services provided by companies.❙ Resilience decisions should be informed by engage-ment with customers.❙ Companies should consider a full range of mitigation actions including collaboration with other companies. ❙ Plans should provide best value solutions for the long term. ❙ Choices on resilience should inform outcomes.❙ Board assurance on the above is needed.

OFWAT’S RESILIENCE PRINCIPLES

It is very much focused on payment by results

so where innovation succeeds, companies

get a higher return but where it doesn't succeed,

customers shouldn't have to pay for that.



In the preceding pages, we have dis-cussed what Ofwat wants companies to deliver for customers at PR19 and what it expects of them. In the �nal part of

our analysis here, we look at how the regu-lator plans to incentivise companies to de-liver and the returns it will allow them to earn for the risk they will be taking.

�e driving logic behind the regulator’s plan is to align the interests of compa-nies and their investors with the interests of their customers. �is means a greater proportion of reward hingeing on de-livery of what matters to customers. For companies – some more than others – it’s all looking pretty tight.

Cost of capitalAs usual Ofwat will set the cost of capital for wholesale services by allowing a re-turn on RCV, in reference to an e�cient notional capital structure. �e cost of cap-ital will be set at company level, then the cost of capital for each wholesale control set with reference to this.

PR19: COST EFFICIENCY

AND FINANCE

2020-25 will feature lower base returns and more powerful service

performance incentives, together with demanding

cost e�ciencies.

INCENTIVE MECHANISMS IN MONETARY TERMSINCENTIVE IMPACT ON 2015/16 COMBINED

AVERAGE HOUSEHOLD BILLANNUALISED BENEFIT

Exceptional business plan £2 £5m

ODIs (plausible maximum) £20 £45m

Totex (10% outperformance) £10 £35m

New debt (10bp outperformance of index) £1 £1m

C-MeX (new SIM) £4 £10m

Base returns will be lower, driven by the availability of low cost �nance. Ofwat intends to publish its initial view on the PR19 cost of capital much earlier in the process than at PR14; when it publishes its �nal methodology in December this year.

Setting the cost of equity for PR19 will look ahead to 2020-25 more than back. Ofwat says: “Our assessment of current evidence points to a much lower total market return, which is used to calculate the cost of equity, than the total market return set in PR14.”

As consulted on last year, there will be a �xed allowance for embedded debt but new debt will be indexed - this will reduce the scope for outperformance purely on �nancing criteria. Firms will still be able to outperform on the cost of embedded debt, but their situations vary accord-ing to their �nancing structures and the timing and tenor of their debt issuance. Ofwat observes: “�e di�erence between the e�cient cost of debt for the notional company and the cost of debt embedded in company balance sheets will drive a range of �nancial outperformance and underperformance in 2020-2025. �is is consistent with our view that the risk as-sociated with such choices lies with inves-tors and not with customers.”

New in the methodology published earlier this month were details on the me-chanics of a possible indexation mecha-nism. Ofwat proposes to set an upfront al-lowance for the cost of new debt, derived from iBoxx indices that is subsequently subject to a reconciliation adjustment for movements in the benchmark index.

For retail price controls, Ofwat will allow companies to earn a margin over their retail costs to provide their return.

Incentives package Incentives can take three main forms: �-nancial, reputation and procedural. All of these will be in play for PR19, with Of-wat looking to motivate stretch, reward

well managed risk, and penalise slop-piness in both business planning and delivery performance. To complement lower base returns, Ofwat will increase the proportion of revenue at risk from service performance using a package of incentives. Clearly this cannot be re-garded as a straight swap for companies, as higher base returns bene�t all where-as performance incentives only bene�t the winners. �e move is likely to lead to more obvious polarisation in perfor-mance across the sector.

We have discussed elsewhere in our coverage many of the key �nancial in-centives that will be used, namely re-wards/penalties for business planning calibre; outcome delivery incentives; the two new customer service mechanisms; and the opportunity to outperform �-nancially. �e missing piece of the incen-tives jigsaw is totex outperformance (see box). A new cost sharing mechanism will be in play, under which companies who outperform get to keep a greater share of that outperformance than those who under perform (the mechanism will also be used to penalise business plans needing signi�cant scrutiny).

�e table shows a useful example Of-wat supplied to illustrate the e�ect of the incentive mechanisms in monetary terms.

In�ation, tax and reopenersOfwat is proposing the following: ❙ In�ation – it had already decided to move away from RPI indexation; the question was would revenues and 50% of RCV from 1 April 2020 be indexed to the consumer price index (CPI) or the consumer price index including hous-ing costs (CPIH). �e regulator comes down on the side of CPIH, noting the Of-�ce of National Statistics has announced its intention to make CPIH its preferred measure of in�ation and that it is a more legitimate index for customers. �e paper says: “On balance, we propose to adopt CPIH, subject to the UK Statistics Agen-cy re-designating it as a national statistic, before we publish our �nal methodol-ogy.” Senior director of Water 2020 Da-vid Black comments that investors have poured over the move away from RPI “but there hasn’t been the same degree of debate around CPI or CPIH so I will be interested to hear what people think about that proposal.” ❙ Tax – a new mechanism will pass



through material changes in tax to custom-ers. Customers will bene�t where there are reductions in tax rates that were not antici-pated at the time of the price determination. ❙ Re-openers – there will be a high evi-dential bar. “�ere is no presumption that the Noti�ed Items that apply in 2015-20 should remain for 2020-25.”

FinanceabilityOfwat’s position as stated above in refer-ence to embedded debt holds true for wider �nancing matters too: “Companies should not expect customers to bear the costs of resolving �nanceability constraints arising from a company’s choice of �nancial struc-ture or ine�cient �nancing strategy.”

For its part, the regulator will assess �nanceability at appointee level by refer-ence to a notional structure that under-pins the cost of capital. It will publish an indicative view of notional gearing alongside its �nal methodology in De-cember 2017. �e dra� methodology however signals: “At this point in time we are minded to set it no higher than 62.5% [the PR14 level]. We have, for example, observed a downward trend in debt to en-terprise value for listed utility and non-�-nancial corporates in the UK and Europe over the last four to �ve years.”

�ere will also be a cross-check to make sure there is enough cash �ow headroom in each wholesale and retail price control to allow each one to operate on a stand-alone basis. “If individual controls are not �nanceable on a stand-alone basis then we will consider whether we need to ad-

dress this to ensure that there is an appro-priate balance between customers of each price control.”

Some companies look set to struggle with the new arrangements; Ofwat appears to be expecting that some will need to act to address �nanceability constraints arising under the notional structure. Black com-ments: “I would expect that companies are already anticipating the price review; they will have tranches of debt that are matur-ing at various times… some will bene�t and others will face costs from that.”

�e table sets out the main options com-panies may pursue to address �nanceabil-

ity issues. One of these is the use of Pay As You Go/RCV run-o� levers. �ese allow companies to balance recovery of costs be-tween di�erent generations of customers.

More widely on this subject, Ofwat says it expects companies “to provide evidence setting out how they have identi�ed the natural levels for these rates for each of the wholesale price controls and to ex-plain clearly in their business plans why they depart from the natural rates. Com-panies will also need to provide evidence of customer support for their proposals and demonstrate how they have taken into account customer views.” TWR

This is yet another area where Ofwat wants to see a “step change”. It intends to challenge companies hard to be e�cient, including by looking for evidence outside the sector. Ef-�ciency baselines will incorporate an element of catch-up e�ciency and a frontier shift (dynamic e�ciency). The paper says: “We consider that companies should be e�cient from the start of the new regulatory period, and so will not allow for a gradual catch-up over each year of the price control.” Cost adjustments will be more symmetrical in PR19 than in PR14, allowing for downward, as well as upward, tweaks. Ofwat wants companies to submit information on their expected cost adjustment claims on 3 May 2018 – four months before business plan submission.

In what will no doubt be welcome news to the industry, totex menus – complex and little understood – are to be scrapped and replaced

by a cost sharing incentive under which com-panies who deliver more e�cient plans get to keep a higher proportion of outperformance than those who deliver ine�cient plans.

In terms of its cost models this time around, Ofwat is �rmly backing benchmarking. Its new PR19 approach has been developed in light of the PR14 experience and its trip to the Competi-tion and Markets Authority with Bristol Water. Its models approach the matter from both ends: evidence from top down aggregate wholesale econometric models will be complemented by granular models that benchmark business-unit costs and new resource controls. “Each approach has advantages and this dual ap-proach will help identify the e�cient level of costs,” the methodology says.

Enhancement expenditure is less easy to benchmark robustly so the regulator will take

a diªerent approach using benchmarks where feasible supplemented by forecast data. |n view of the uncertainties surrounding parts of the environment programme, Ofwat is consider-ing either to make an allowance against a conservative forecast of the likely scope of the programme, or to introduce a cost adjustment mechanism. “These proposals will ensure that customers only pay for environmental outcomes that are delivered.”

On the retail side, the plan is to move away from the Average Cost to Serve approach of PR14 and instead use an econometric approach to benchmark companies’ costs and set e�cient baselines, with no glide path to the e�cient frontier. On bad debt, Ofwat will benchmark wa-ter company levels of doubtful debt and debt management practices against other sectors to push the e�ciency frontier further.

COST EFFICIENCY

OPTIONS FOR ADDRESSING FINANCEABILITYOPTION USAGE COMMENTSUse of PAYG/RCV run-oª levers

The PAYG and RCV run-oª levers can be used to move revenue between control periods on an NPV neutral basis.

This approach is NPV-neutral in the long term, but alters the balance of bills between cur-rent and future customers. Where companies use this approach, we will expect to see evi-dence of customer support and be satis�ed that the use of the �nancial levers does not result in unaªordable bills.

Restriction of dividends

The use of dividend restrictions may be justi�ed where the company has a large investment programme and the company is seeking to mitigate the eªects on credit ratios.

Short-term restriction of dividends improves cash reserves and reduces net debt, which may mitigate impacts on some of the �nancial metrics (gearing, for example). This approach recognises the consumer interest, but restrict-ing dividends does not directly aªect interest cover metrics, so provides only limited bene�ts.

Equity injection An equity injection may be appropri-ate where a company has a particu-larly large investment programme relative to its RCV and needs to maintain notional gearing.

This approach may be reasonable where there is signi�cant RCV growth. Raising ad-ditional equity may prove challenging if the existing shareholders cannot meet the ad-ditional requirements.


REPORT|SRC21

As we have previously re-ported, the Water Industry Commission for Scotland has adopted the principles of

Ethical Based Regulation (EBR) for Scot-tish Water’s forthcoming price control – the Strategic Review of Charges 2021-27 (SRC21). �e regulator says it intends to conduct a transparent and collabora-tive price review, and – having signed a Cooperation Agreement with Scottish

CHART 1: ADJUSTMENT OVER THE 6-YEARS PERIOD 2021-27

Annual net new borrowing (£m) 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5405060708090

100

Annual price increase in 2021-27 (% normal)

CHART 2: ADJUSTMENT OVER THE 8-YEARS PERIOD 2019-27

Annual net new borrowing (£m) 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8405060708090

100

Annual price increase in 2021-27 (% normal)

SRC21: EXPECT UPWARD PRICE PRESSUREWICS’ Initial Decision Papers point to smoothing between control periods as a way of reducing price pressure borne of higher investment and reduced borrowing.

Water and Citizens Advice Scotland – that it is minded to adopt a business plan agreed between the water company and customer representative the Customer Forum (see box), provided this is con-sistent with regulatory decisions on the crucial aspects of the review.

�e plan is to share these regulatory decisions throughout the process. WICS will issue initial, revised and �nal Deci-sion Papers, re�ning as it goes, and it is

the last of these that Scottish Water’s busi-ness plan must be consistent with. WICS got the ball rolling last month by publish-ing a set of initial Decision Papers, which set out is current views on investment and prices as well as other aspects that will support trust and transparency through the EBR process.

Capital programme sizeWICS is entirely upfront in saying it an-ticipates Scottish Water will have to invest more at SRC21 and that this situation is likely to continue beyond that particular control period. According to its Decision Paper on the overall size of the capital programme: “At this time, we consider that a capital expenditure programme in a range from £3.4bn to £3.8bn could be considered broadly realistic.”

�is is driven by the dual pressures of capital enhancement spending and capi-tal maintenance spending. Enhancement spending, �rstly, is forecast to be broadly similar to levels in previous control peri-ods. WICS sees an ongoing requirement for further expenditure on enhancing drinking water quality and environmental performance “for the foreseeable future” including for instance to remove lead from the water supply system and to improve bathing water standards. It also notes a number of emerging risks in areas such as �ooding and network resilience; the need to consider the rural cost and service chal-lenge with a view to achieving compliance with UN Sustainable Development Goal 6; higher customer expectations – for ex-ample on response times, water pressure issues, taste and odour; and issues such as mitigating climate change and protecting against cyber crime.

Forecasting capital maintenance spending is harder, due largely says WICS to shortcomings in our collective understanding about asset lives and per-formance. Nonetheless the regulator has been clear in its view that the traditional approach of spending the least demon-strably needed is no longer �t for purpose. More work is needed and future Decision Papers will return to the topic, but it is “highly likely that a need for increased capital maintenance expenditure will be a signi�cant driver of a larger overall pro-gramme of capital expenditure”.

On top of that, there is further uncer-tainty regarding the speci�c issue of what investments may be required when exist-

■: possible combinations that should allow Scottish Water to manage its �nances appropriately and have a cash balance of c£50m at the end of the control period. ■: borderline combinations ■: Not feasible to deliver Scottish Government objectives. ■: Scottish Water would have too much cash.

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READY RECKONER: IMPACT ON AVERAGE HOUSEHOLD BILL IN 2026-27 FROM A CHANGE IN THE BASE CASEAVERAGE HOUSEHOLD BILL CURRENT YEAR 2017-18 Projected 2026-27

Assuming 6-year adjustment period

Assuming 8-year adjustment period

Nominal £357 £444 £438Current prices £357 £371 £367

FACTORS WHERE AN INCREASE RESULTS IN INCREASING PRICESCASH OUT BASE CASE

(PER ANNUM)

ANNUAL CHANGEDURING 2021-27

Indicative impact of change on average bill in 2026-27

Assuming 6-yearadjustment period


Capital expenditure* £600m + £10m + £6.75 + £5.50Operating expenditure* £350m + £2m + £1.25 + £1.00Cost in�ation 2.0% + 0.10% + £2.50 + £2.00Interest rates 3.0% + 0.50% + £1.50 + £1.25

FACTORS WHERE AN INCREASE RESULTS IN DECREASING PRICESCASH IN BASE CASE

(PER ANNUM)

ANNUAL CHANGEDURING 2021-27

Indicative impact of change on average bill in 2026-27



Net new borrowing** £80m + £10m - £5.25 - £4.00Household growth 0.9% + 0.10% - £1.75 - £1.50Non-household growth 0.0% + 0.50% - £3.50 - £2.75

* Real terms (12-13 prices). We have used 2012-13 prices at this stage to allow comparison with the previous regulatory period. This will be updated later in the SRC process.**Outturn

ing PFI contracts expire at Scottish Wa-ter’s large wastewater treatment sites.

It should be noted that the forecast capi-tal programme increases come in spite of “strong evidence that Scottish Water has improved both its cost e�ciency and de-livery of capital investment over previ-ous regulatory periods”. WICS urges the company to continue to seek out ways to improve its e�ciency to keep the upward pressure on customers’ charges in check.

It is now for Scottish Water to set out its proposed capital expenditure programme and for WICS to comment on it in future Decision Papers.

Price impactAll else being equal, a larger capital pro-gramme suggests higher prices. But in a second initial Decision Paper, WICS �ags an additional factor to consider: that Scot-tish Water may well be able to borrow less in 2021-27 than at present. In its Com-missioning Letter for SRC21, the Scottish Government indicated the level of borrow-ing it will make available to the water com-pany will be lower than the current level of £120m a year. WICS reports: “It seems unlikely that the Scottish Government will make more than £100 million a year avail-able in the next regulatory control period, and possibly less.” It opts to use a �gure of £80m a year in its modelling.

WICS doesn’t mince its words in point-ing out: “�e combination of higher lev-els of investment and reduced borrowing could put material upward pressure on prices” – in fact WICS points out these are the two factors that have the greatest in�u-ence on customer charges of nine material inputs identi�ed (see box). It also observes though that “it could be prudent to borrow less. Borrowing more may reduce prices in the short run but such an approach in-creases prices for future generations.”

Smoothing options�e Commission o�ers a suggestion for reducing the price pressure, and that is via smoothing the transition between the current regulatory control period, which runs 2015-21, and the next which runs 2021-17. To illustrate the potential to the Customer Forum and other stakeholders, WICS has modelled two scenarios: the �rst assumes the current six-year SRC21 period runs its normal course, while the second assumes smoothing over the �nal two years of the current regulatory control

period (2019-20 and 2020-21) and the whole of the 2021-27 period.

WICS points out there is a wide range of potential charge outcomes that are pos-sible, depending on the programme of cap-ital expenditure agreed and the borrowing that is available. In the charts it models the di�erent combinations of annual charge increases and levels of borrowing that are consistent with delivering an investment programme in the middle of a £3.4-£3.8bn range. Chart 1 shows the options for a standard six year control (assuming price increases of about 1.2% nominal in both 2019-20 and 2020-21). Chart 2 phases over the eight years. WICS comments: “�is initial assessment shows that it will be possible, albeit challenging, to ensure that Scottish Water is funded sustainably.”

�e regulator has also produced a “ready reckoner” illustrating how chang-ing the timeframe could impact the aver-age household bill by the end of the next control period in 2026-27 (see tables). Scenario 1 (standard six year) would keep

customers’ charges slightly lower than under scenario 2 (eight years) for longer (until approximately 2024-25) but lead to higher bills by the end of the regulatory control period in 2027. WICS: “�e an-nual increase required in each year from 2021 to 2027 would be higher than un-der the second scenario. Under a base case assumption of £80 million of an-nual net new borrowing and our use of the Bank of England in�ation target, this scenario suggests annual charge increases

WICS sees an ongoing requirement for further

expenditure on enhancing drinking water quality

and environmental performance “for the

foreseeable future".

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of around 3.0% nominal each year from 2021-22. �is would suggest a projected 2026- 27 average household bill of £371 in today’s money and around £444 in our as-sumption of 2026-27 prices.”

�e second scenario (eight year smooth-ing) reduces the annual increase in charges that would be required and results in lower average charges at the end of the regulatory control period. “It should be noted, how-ever, that, under this approach, customers pay a little more during the 8-year period 2019-27 (less than £2.50 a year, for the majority of household customers). Under a base case assumption of £80 million of annual net new borrowing and our use of the Bank of England in�ation target, this scenario suggests annual charge increases of around 2.4% nominal each year from 2019-20. �is would suggest a projected 2026-27 average household bill of £367 in today’s money and around £438 in our as-sumption of 2026-27 prices.”

Maintaining trustTwo other Initial Decision Papers set down tools to increase transparency and improve communications with customers through the price control. �e Commission points out: “Customers’ charges may have to in-crease modestly. It will be increasingly important that Scottish Water explains to customers, communities and other stake-holders that it has considered the full range of potential solutions. �is will likely re-quire increased dialogue with local com-munities and other stakeholders about the issues to be addressed and their potential solutions.” Speci�cally it suggests: ❙ De�ning the capital programme – Scot-tish Water should only de�ne a project when an appraisal has been completed and money allocated. Producing a list of

projects which are little more than iden-ti�ed needs (as in a traditional Technical Expression) when there is considerable uncertainty “does not serve the customer interest well” and can cause di�culties for the company. ❙ Appraisals should be made available to stakeholders – Excluding from the ‘Tech-nical Expression’ de�ned needs which have not yet developed into projects would give Scottish Water more time and space to liaise with customers and com-munities about how these needs will be met. Building on the Service Improve-ment Reports Scottish Water supplied to the Customer Forum at the last price review, the company should prepare an overview of challenges and potential solu-tions to facilitate dialogue. ❙ Research asset condition to develop trust in improving levels of service – Un-derstanding asset condition is di�cult. WICS notes: “Perhaps the single most dif-�cult challenge is to understand the full range of possible failure modes of these

assets and their implications for the ser-vice that customers enjoy.” It says Scot-tish Water should set out a clear plan for developing its knowledge of its assets and report on progress. “Such openness could reasonably be expected to build trust with customers and communities.”❙ Develop the �nancial tramlines – �e Commission considers this mechanism, introduced at SRC15 to help maintain and make visual Scottish Water’s �nancial sta-bility, has been a success. “�e increased �nancial �exibility available to Scottish Water appears to have encouraged great-er innovation, closer joint working with stakeholders, and a move away from a bias towards capital solutions,” it says. For the next review it advocates two re�nements: swapping �nancial ratios for agreed cash balances as the tramline limits to make the whole mechanism more accessible; and for Scottish Water to produce an annual “�nancial performance and funding state-ment” to underpin stakeholder discussion on what to do with any surpluses TWR

WICS, in collaboration with the Consumer Futures Unit at Citizens Advice Scotland (CAS) has an-nounced its appointments to the Customer Forum for the Strategic Review of Charges 2021-27.

Peter Peacock, who chaired the Customer Forum last time around, has been reappointed. He is a former politician with extensive experience in consumer and public policy, and has served as minister and cabinet secretary in the Scottish Parliament.

Joining him are the following nine members: ❙ Bob Wilson, managing director of Anglian Water Business and with extensive water industry experience. ❙ Jo Dow, chief executive of Business Stream and with a career dating back to 2002 with the company and formerly Scottish Water.❙ Tom May, who currently leads Veolia's retail operations in Scotland and was formerly part of Scottish Water’s regula-tory team. ❙ Agnes Robson, a former senior civil servant with extensive experience in the public sector, particularly in the �elds of energy, health and urban policy.❙ Andrew Faulk, a consumer issues spe-

cialist with a background in construction and policy development and delivery.❙ Mairi Macleod, a com-munications industry specialist and previously a member of the Com-munications Consumer Panel.❙ Rachel Bell, a customer service professional with a

background in aviation.❙ Stuart Housden, who has worked with RSPB since 1976, including as director of RSPB Scotland and a board member. ❙ Sue Walker, whose professional back-ground is in water and land management and who has worked in the water industry and environmental regulation.

The Customer Forum must now work to reach an agreement with Scottish Water on charges and service level priorities that deliver best value for customers. Anne Lavery, the acting chief executive of CAS, said: “The Customer Forum will place consumers and communities at the heart of developing Scottish Water’s business plan for 2021-27. It is an innova-tive and world-leading model, as the role of the OECD in evaluating the process demonstrates. We are pleased to have recruited such a capable team for the task ahead.”

CUSTOMER FORUM MEMBERS APPOINTED

Inputs that materially aªect Scottish Water’s funding requirement (and, therefore, its charges) are:❙ Growth in the household customer base ❙ Growth in the non-household customer base ❙ Net new borrowing ❙ Operating expenditure ❙ Capital maintenance expenditure❙ Capital enhancement expenditure❙ Capital expenditure to increase the number of con-nections to the water and sewerage service❙ Cost in�ation ❙ Interest rates. The �rst three impact available cash; the �nal six impact costs.

WHAT IMPACTS PRICES?


FUTURE OF REGULATION|REPORT

A week a�er the publication of the dra� PR19 methodology,

Ofwat's chief executive since October 2013 Cathryn Ross announced she will leave the regulator to take up a non-water post in the private sector at the end of the year. Ahead of the announcement, at a lecture at the LSE at the end of June, she shared her view of the future of independent eco-nomic regulation. She identi�ed three key drivers for change. ❙ A changing public policy purpose – she said this entailed questioning what sort of society and economy we want and wrapped in rising consumer expectations; the need for utilities to be accountable; and even the recent close shave with na-tionalisation. “At Ofwat it has prompted us to go back to �rst principles… and ask ourselves the big question, which is ‘what are we for?’. Which, we concluded, is ulti-mately to ensure that the public have trust and con�dence in (privately-provided) water and waste water services.” ❙ Shi�ing roles of the key players – Ross observed that governments have become more interventionist: witness for example the Strategic Policy Statements they hand out to regulators and the emergence of the National Infrastructure Commission, which is an executive agency of Treasury. Meanwhile corporate law has charged company boards to have regard to matters beyond the narrow interests of investors. Ross observed: “But there is further to go on this. Investors… need to realise that in these public service sectors the long term sustainability of their investment rests on the – demonstrable – legitimacy of the company. In short we need to see more ‘en-lightened self-interest’.” �is thinking edges towards the principles of ethical regula-tion; Ross said she was a fan. She further observed a paradox in the role of custom-ers: competition was supposed to empower customers but complexity and bad experi-

ROSS SCOPES OUT “VERY DIFFERENT” FUTURE FOR INDEPENDENT REGULATION

Ofwat's outgoing CEO says regulation should embrace government intervention and think multi-utility.

ence has caused swathes to switch o�; meanwhile in mo-nopoly areas regulators have strongly encouraged compa-nies listen to customers more. ❙ A di�erent type of system – Ross observed the original top-down approach has giv-en way to a “much less linear, more multi-dimensional and

more multi- directional” set of stakehold-er relationships.

The way aheadRoss said independent economic regula-tion had a bright future, providing it re-sponds to the following key challenges: ❙ Rede�ning its relationship with govern-ment – “If as a country we are asking our-selves what sort of society and economy we want to be, it is hardly surprising that we are seeing government taking a keener interest and involvement in questions both of what gets delivered and how it gets delivered.” She identi�ed two issues speci�cally where government interven-tion is legitimate: distributional fairness and nationally signi�cant infrastructure.

Rather than �ght against this, Ross said it should be welcomed and worked through: “We need to get used to it, and we need to work with government to �g-ure out our respective roles.” She extended this embrace to the devolved administra-tion governments and even hinted it may need to factor in metro mayors.

Ross said the relationship needed to ma-ture to become: “A relationship which sees us acknowledge that…government will have things to say and quite properly will have interventions to make. Which sees us help government to do what it is trying to do in these sectors transparently, and with the bene�t of our expertise, but which gives us permission to be critical friend (rather than a cheerleader). Because let’s face it, economic history is littered with ex-amples of, quite possibly well-intentioned, government interventions in markets that were not an unalloyed success.”

❙ Staying in markets for longer – Expe-rience suggests regulators will need to remain involved in competitive markets and intervene to ensure they perform for di�erent groups of customer. Ross: “�ere is no doubt that the di�erence in the experience between those who engage and get the best deal, and those who don’t, is increasingly seen as unac-ceptable. Especially if those who get the best deals are being subsidised by those who get the worst. It is a situation that just doesn’t deliver on that rede�ned public policy goal for the whole system – trust and con�dence.”❙ Demanding more of companies – Regu-lators should demand more of �rms at the macro level – including on service, corporate governance and transparency – but be less inclined to step in at the micro level. Ross said this “infantilises the sector”: “Rather than provoking and challenging and holding to account, the regulator ends up providing a safety net for companies and that isn’t what we should be doing at all.”❙ Multi-utility regulation – Regulators must not lose sight of what matters to cus-tomers and citizens: “We do need to re-�ect on the world as customers and those who provide services to them increasingly see it. And it is a world of multi-utility bundles, of connected home services and a more holistic view of the customer as a human being living a multi-dimensional life, rather than as a water bill payer, or a telecoms bill payer or an energy bill payer.” Pressed in questions, Ross said of multi-utility regulation “In some ways, it’s almost inevitable,” explaining this could be through structural change or other means. In fact, closer cooperation with Ofgem is already happening in the non household water market space. TWR


Ofwat has just published its draft methodology for PR19 and the key messages for water companies couldn’t be clearer: efficiency and innovation are expected as business as usual if bills are to be kept affordable and if resilient investments are to be funded. Bad debt must be reduced. Meanwhile, the service delivered to customers must be sharpened up – in part at least, through better understanding and more sophisticated interrogation of the vast amount of valuable data water companies are sitting on.

There has also been a clear steer from government that both debt and affordability need more attention. In its Strategic Policy Statement to Ofwat in March, DEFRA identified protecting customers as one of two key strands of activity going forward. Within that, a priority earmarked was: “Ofwat should challenge the water sector to go further to identify and meet the needs of customers who are struggling to afford their charges.” In particular it said “Ofwat should challenge companies to improve the availability, quality, promotion and uptake of support to low income and other vulnerable household customers” and do more to tackle bad debt –“We expect that companies will share best practice and take steps to significantly reduce bad debt and that Ofwat’s regulatory framework will incentivise this.”

These refreshed regulatory and political expectations point to the fact that there has never been a better time for water companies to up their game on Revenue Assurance. Revenue Assurance seeks to ensure that end-to-end business systems, processes and people are doing what they should be doing – ultimately, so the customer ends up

with an accurate bill they promptly proceed to pay. At the heart of Revenue Assurance is the retail life cycle – customer contact, billing, collections and debt management – but in fact it touches all aspects of water company business – from finance to IT, and from strategy to HR.

Revenue Assurance wins

Of course, billing and collecting the right revenue from customers for services provided should always be a business priority. But with Ofwat displaying little tolerance for sloppy data management and inefficient operation, Revenue Assurance seems an absolute no- brainer and offers a win-win-win for companies, customers and regulator.

Specifically, it supports:

• Operationalandfinancialefficiency– Systems and teams that collaborate effectively and coherently will increase operational efficiency. More bills will be right first time, reducing unwanted customer contact and leading to faster payment. Ultimately this will lead to a materially improved bottom line performance. Companies in other sectors which have undertaken Revenue Assurance activities report improved revenues, cash-flow and profitability. These wins are eye-catching enough for CFOs and FDs to act on Revenue Assurance without delay, even in the absence of regulatory encouragement but especially in light of it.

RevenueAssurance–a‘musthave’forPR19

• Dataaccuracyandinsight– With systems and processes stripped of duplications, miscommunications and misalignments, management teams will have an accurate and up to date view of what’s happening in their business. This will not only inform day to day decision-making, but the improved data quality and insight will stand companies in good stead as they seek to unlock opportunities borne of understanding their customers much better.

• Lowerbillsforall–As the situation stands, each household customer pays £21 a year to fund debt recovery and write-off activity. Meanwhile personal debt levels are high, the proportion of customers asking for help to make ends meet is growing, and water poverty affects almost a quarter of households. More efficient debt management – incorporating support for the can’t pays and maximising revenue collection from the won’t pays or the slow-to-pays – would reduce this £21 to the benefit of all.

• Bettercustomerexperienceandrelationships–Most customers’ primary communication with their water company concerns billing and payment. If this is inaccurate or inappropriate in any way, it can sour the relationship. If it is efficient and sensitive, it can be a solid foundation to build on.

Thewateropportunity

The revenue reality today for many businesses is far from this ideal. Analysis suggests com-panies across a range of B2C sectors lose 1.7 % of revenue to shrinkage and fraud; 54 % of such losses are never recovered.

Water companies are particularly exposed to unrecovered revenues and bad debt; in 2015 Ofwat put the cost of this at £ 2.2bn. On the domestic side, this partly relates to the ban on disconnection. We have yet to see how retailers fare on revenue collection in the new non-household market. But across the board, other factors are in play too. The quality of the data that underpins company operations is not strong and, although improving, companies’ knowledge of their customers is weak compared with sectors like telecoms. Legacy systems are commonly not optimal or integrated. And culturally, revenue management has been a poor cousin to companies’ rightful top priorities of good quality water and wastewater service provision; high customer service standards; and environ-mental considerations.


hile at first glance this makes gloomy reading, what it really means is that the size of the prize in water is substantial and well worth pursuing. A comparison with the telecoms industry is instructive. Telcos had a big push on Revenue Assurance in the late 1990s when we estimate revenue leakage of 6-10 % was common. Now Revenue Assurance is a business as usual activity and a well-resourced capability within companies, which typically sits directly under the CFO or chief customer officer. As an e ample, a project SQS ran for a leading European telco to address multiple legacy system and data quality issues resulted in leakage reduction of

. m per annum and the identification of a £ 1.5m revenue loss. Some headline aspects included: the identification of m of over-charges from suppliers; £ 5m recouped from back bills; £ 650,000 per annum of unbilled customers discovered; and £ 175,000 per annum of network savings through identifying gone-away” customers.

This telco example highlights that water companies could benefit both from recouping losses already incurred from revenue mis-management, and from putting in place more robust strategies for the future. The latter would yield per annum benefits and set companies up to improve their AMP6 performance and to face the challenges of AMP7 and beyond.

Tailored projects to comprehensiveprogrammes

While scale will play a role in any Revenue Assurance cost benefit assessment – put simply, the more customers you serve, the more you stand to benefit from investing in better revenue management – there are in fact Revenue Assurance activities suitable for every budget and appetite. Projects can be very targeted – for instance, focused on billing strategy, or collections strategy, or bad debt recovery. They can be tailored to address specific challenges companies face – say, to increase working capital. Trials can

be conducted on small data samples. Or at the other end of the scale, comprehensive programmes can be drawn up to address multiple data and systems issues, and revenue strategies planned for the future.

At SQS, our Revenue Assurance engagement model is designed to give our clients choice and confidence. e offer everything from consultancy services for defined periods on agreed terms to operational delivery of projects and programmes. We are also open to performing services on a risk/reward basis where there are no upfront costs to the client and instead we take a percentage of identified savings. Finally, we can build a sustainable ongoing capability through the transfer of skills and knowledge to an in-house team to continue the realisation of benefits.

We begin every project with a ‘discovery health check’, which typically takes a ‘sprint’ of two to four weeks. This involves our specialist consultants identifying and mapping key data, processes and systems and delivering a high-level leakage map and revenue recovery blueprint. The blueprint will present options together with an out-line of implementation and cost recovery timelines, and we will make preliminary recommendations for the company to consider.

Many water companies will know SQS from our work at the heart of business retail market opening, both with MOSL and market participants.This experience has equipped us with deep level insight on the people, pro-cesses and technology in water companies, leaving us uniquely placed to help you formulate strategies for revenue leakage and bad debt mitigation. Outside of water, our Revenue Assurance professionals have 20 years experience assisting companies realise bottom line benefits.

Don’tdisappoint

In PR19, Ofwat is looking for companies to shine; to deliver more for less; to serve

customers better; to measure up well against other sectors; and at the very least operate effectively and efficiently. Against a challenging economic backdrop borne of Brexit and welfare reform, and a political context in which a mainstream party has promoted nationalisation as a route to deliver better value for the customer, slack performance on something as ‘basic’ as recouping rightful revenue will go down like the proverbial lead balloon.

In short, recouping revenue better offers a win-win-win for PR19: for customers, lower average bills (or more service investment without price rises); for companies, greater efficiency and profitability and for regulatorsgovernment, improvement on some of their priority issues.

Luke Pelham and Tim Barnard are industry experts in the water sector at SQS, which has over 35 years experience in the utilities sector.

£ 2.2 bn was owed to water companies in 2014, up from £ 1.9 bn in 2010, while bills remained stable. Each household customer pays £ 21 a year to fund debt recovery and write-off.

The average amount of personal debt at the end of 2015 was £14,650. The

number of people needing help to manage their debts increased by 56 % between

2012 and 2015.

24 % of households in 2015 spent more than 3 % of income on water bills, and 11 % spent more than 5 %.

2010 2014Source: Ofwat

A ORDAB L T A DD BT– TAT T

£ 1.9 bn

£ 2.2 bn £

14,650

>3%

>5%

About

Digital change is inevitable, whether it is driven by the business, customers, the competition or regulation. Using continuous uality our end to endapproach

accelerates change, giving businesses agility to deliverfaster better cheaperoutcomeswithgreatercertainty

As a trustedadvisor independent of system integrators and technology providers, SQS is entirely focused on helping manage business and technology risks to achieve fit-for-purpose business outcomes.

Contact Luke and Tim today:Email: [email protected]: [email protected]: +44 207 448 4666Web: www.sqs.com/en/revenue-assurance-water.php


FEATURE|CUSTOMER DATA

Ahead of the publication of its price review dra� methodology, Ofwat last month published a report and held an accompanying launch event on Un-locking the value in customer data. Together these

were nothing short of a wake up call for the sector to keep pace with the times in valuing and using customer data better; both the document and the event were liberally sprinkled with best practice examples of what can be achieved if you only try.

Ofwat chief executive Cathryn Ross set the tone from the outset at the launch, opening her talk with a run through of someone’s an average day, featuring Spotify, Citymapper, the Starbucks app, FitBit, Hive, Amazon Dash, Net�ix and Shazam. �e style was light but the message serious: smart use of data can make customers’ lives easier and the water sector is being le� behind. Ross pointed out too, perhaps to convince any doubters, that interrogating data can have direct bene�ts for companies as well as customers “…not only to develop new products and services to meet customers’ needs into the future, but also to manage their networks and resources more e�ciently to keep costs down and improve resilience”.

�e upside from being a bit behind the beat is that the op-portunity for water is “massive,” said Ross, adding companies are extraordinarily well placed: “�e water sector is sitting on an al-most universal property data set because it supplies services into almost every household and business property in the country, services that are used by literally every person in the country and go to the heart of how people live. �e potential in that data to improve lives, to drive innovation, enable e�ciencies and im-prove resilience, is huge.”

Moreover, while it is critical that companies take good care of this data and behave responsibly with it, Ofwat made it clear that

it wouldn’t accept data protection concern as an excuse for poor utilisation. Ross said: “We know that companies are mindful of the obligations on them, for example under Data Protection regulations, and it is important they are. But those regulations – the need to use customers’ data – are not a blocker. To quote Liz Denham, the UK Information Commissioner, this is not a mat-ter of ‘privacy or innovation, it’s privacy and innovation’.”

Regulatory driversFor any who need a more formal motivator, Ofwat pointed out that use of customer data will feature in the scruntiy of business plans at PR19. According to the report: “When companies submit business plans in September 2018, we expect to see evidence of how companies are making better use of customer data over the next price control period, and the longer term.” It subtly points out too that while the message may not have been packaged up quite so obviously in the past, it has in fact run through a lot of Ofwat’s recent work – its Vulnerability focus report, residential retail study and wider customer engagement policy, to name a few.

To broaden out the need further, it is important to note that the General Data Protection Regulations will be implemented in the UK next year. Ross commented: “�ere are huge impli-cations for water companies. Not only will they give customers more control over their data, they will raise the bar on things like consent as well as allowing us as regulator to penalise those companies who are not in compliance.”

The basicsSo, what does the report call for speci�cally? First up: be good at the basics, which means manage data well. Ross set out Ofwat’s minimum expectations: ❙ Companies must understand and have knowledge of the data they hold. ❙ Accuracy and high quality data is essential. Experience in the business retail market has not �lled Ofwat with con�dence. Ross: “In April when we opened the business retail market, al-lowing business customers to choose their water provider, com-panies had to do a lot of work to get their data sets up to a certain

DIAMONDS IN THE ROUGH

Water companies are sitting on

hugely valuable but underexploited customer data sets – and Ofwat wants

them to start mining the information for the

good of all.

We were concerned that, during our engagement for this report, not many water companies were considering a data strategy.

PR14 FINAL DETERMINATIONS|REPORT


quality. More work than we expected. �is was very concerning to us and a sign that companies may have neglected their data sets for too long.”❙ Data must be kept secure.❙ Companies should have a considered data strategy. Ofwat casts this as the destination of good data management, towards which the other aspects tend. Ross pointed out too that the in-dustry doesn’t look like it’s in a good place on this: “We were con-cerned that, during our engagement for this report, not many water companies were considering a data strategy.”

�e report goes into more detail, de�ning each of these four data management expectations and illustrating them with case studies and examples.

InnovationProperly valuing customer data, however, does not stop with the basics, and much of Ofwat’s report is concerned with more ex-citing stu�. It urges the industry to stop viewing customer data purely as a billing tool and instead to use it to provide innovative products, technologies and customer services. Ross cited one obvious area that could be improved: “Currently there are only three water companies o�ering a smartphone app for customers to manage their account. We hope to see that change.”

Far reaching innovation is likely to require a mindset and corporate policy refresh, including opening up industry data to other parties. �e report o�ers the example of Transport for London, which made the decision in 2007 to pursue an open data policy. It has made available data including transport sched-ules, expected arrivals, disruption and real time road tra�c in-formation. Now, more than 42% of Londoners use a travel app powered by TfL data with over 600 apps and 12,000 developers.

Speaking at the launch event was David Beardmore, commer-cial director of the Open Data Institute. He set out the three states of data sharing as ‘closed’, ‘shared’ and ‘open’ (available to all) and stated his position as “data should be open where pos-sible”. Beardmore moved to head o� the argument that water is ‘special’ and therefore not suited to open data; he pointed out that a lot of sectors that have subsequently moved to open ar-rangements started o� with an equally cautious view. Now, many sensitive industries make some of the their data available, including pharmaceuticals, health and banking. What’s more, he

said, there is a ready-made community of innovators out there “ready to jump on it…innovators who think in completely dif-ferent ways to us.” Beardmore explained that some of the crucial messages to provide reassurance are that “you don’t need to go near personal data” and that “you don’t need to build a huge da-tabase” – it is generally about publishing data on your own site an providing access for all.

Beyond open data, Ofwat insisted there are further exciting possibilities. Ross: “�ere is a future where cutting edge ideas like blockchain, edge analytics or machine learning could be implemented in a water sector.” Asked whether companies are expected to take a leadership role in selecting innovations to pursue, or should they instead base their activities on customer preferences as PR19 dictates, Ross replied that both approaches are valid but “there is scope for a leadership role here”.

Customer empowermentOfwat �rmly nailed its colours to the customer participation mast in March when it launched its Tapped In report, which urged companies to treat customers as active participants in, rather than passive consumers of, water services. It believes data interrogation is a useful tool in the participation armoury – for instance it can help identify willing participants for engagement activities and to tailor those activities to each participant for maximum e�ect.

To broaden the scope out from participation alone, Ofwat references the Citizens Advice Personal data empowerment re-port (2015) in its data paper. “�is highlights an emerging trend which sees the value of data shared more evenly between con-sumers who generate data and organisations that use it. It found that while consumers wished to have greater control of their data, they were willing to share more information if the service was better tailored to their needs, or helped them make better decisions or save money – when there is a clear bene�t to them, and when companies are open about why they want this.”

Finally, it is worthy of note that Ofwat isn’t only concerned about delivering better services to the tech-savvy smart phone touting con-tingent; it is equally concerned for companies to use data to maxi-mum e�ect to empower and assist customers in vulnerable circum-stances. Much of the a�ernoon of the launch event was devoted to sessions from experts from both within and outside the water sector who shared the bene�t of their knowledge and experience. TWR


NEWS REVIEW|

Wessex plans to "do utility retail better" with FlipperWessex Water has entered another market with the purchase of en-ergy auto-switcher, Flipper. Cus-tomers who sign up with Flipper are automatically switched up to four times a year to the best en-ergy deal; the service continually scans tari�s in the market.

According to group director of strategy and new markets David Elliott, the acquisition is under-pinned by Wessex’s desire to help customers get value for money with ease. “It’s all about doing the right thing for the customer and o�ering both value for money and a hassle free way of managing util-ity bills.”

�e purchase is just the �rst step towards what Elliott de-scribes as “doing utility retail bet-ter”. He explains his company has long been exploring the possibil-

ity of o�ering a “concierge” ser-vice aimed at keeping customers on the best utility deals for them – be it cheapest price or any other criteria they might specify. It had pursued Flipper, which o�ers this service in energy only, for a while and was fortunate enough to buy it out of administration for a good price last month a�er the com-pany experienced a short term �nancing issue.

Now the auto-switching spe-cialist is part of the Wessex stable, the plan is to support Flipper to o�er customers a wider range of services using its established model. �is involves an upfront membership fee, but therea�er no commission and no hidden charges. “�e ambition is to oper-ate in the serviced home space,” Elliott explains, with Flipper man-

aging all utility services on its cus-tomers’ behalves. “We are keen on growing the disruptive model,” he continues, adding that ultimately the service would like to have suf-�cient buying power to request special tari�s in the markets it op-erates in.

�e plan is to generate this scale from a number of routes. Wes-sex Water’s regulated customer base is an obvious place to start promoting Flipper’s services, as is Water2business’ non household customer base. Elliott points out too that as it is the Wessex hold-ing company that has bought Flip-per rather than the water services business, out-of-area customers are very much in scope too. Build-ing relationships here could be bene�cial should the household water market open in due course.

has plead-ed guilty to one single charge of providing water that was un�t for human consumption between 30 July 2015 and 18 August 2015, following the cryp-tosporidium incident at its Franklaw Water Treatment Works, Preston. Sentenc-ing will take place on 21 August.

is looking to recruit up to three new non executive board members. Applications are welcomed up to the end of August.

has been �ned £600,000 for pol-luting a Staithes water-course with sewage.

NEWSIN BRIEF

But the growth plan extends to attracting new types of customer to Flipper as well, with a particu-larly keen eye on a�ordability. Elliott gives the example of social housing tenants, for instance. “Are they paying appropriate tari�s or are they paying too much? We could operate a buying club and help them reduce their costs.”

He links the work too to Wes-sex Water’s wider strategy – for in-stance, to the regulated business’ industry leading work on social tari�s and helping customers to pay; and to the group’s EnTrade catchment trading platform. Re-garding the latter, Elliott com-ments: “We are investing in new ways of engaging customers and communities using digital plat-forms – that’s a growing trend for us.”

Flipper’s key sta�, including chairman Nigel Evans and direc-tor Stephen Smith, are staying on to continue the company’s devel-opment with the support of Wes-sex’s investment.

Wessex Water and United Utilities have come joint top of the Environment Agency's 2016 Environ-mental Performance Assessment, published this month. Each achieved a four star overall performance rating, indicating industry-leading achievement. �e table summarises the full results.

www.gov.uk/environment-agency LIT 10664 Page 11

Table 1: Water and sewerage companies – Environmental Performance Assessment (EPA) 2016







2016 green performance league


With innovation in the spotlight this month as one of the key themes of Ofwat’s PR19 dra� meth-odology, it is �tting to linger a little by Anglian Water’s “Innovation Shop Window” – a hotbed

of new ideas the company and its partners are trying out in a real world location. Speci�cally, that location is the Newmar-ket catchment and the underpinning idea is that more may be achieved and faster by concentrating innovation in one place rather than spreading it out.

Matt Kirk, programme manager for the Shop Window and Anglian’s head of asset planning, explains the idea came about as the company grappled with how to disseminate successful innovations – which had hitherto been trialled in isolated environments – across the wider business. This led to the notion of “dressing the best we have to offer and making it visible” – and the Shop Window was born. The idea quickly evolved into not only displaying successful in-novation but also encouraging it.

Today, a year and a quarter a�er the �rst trials got underway, almost 100 organisations ranging from supply chain partners and universities to charities and businesses have been welcomed to use the catchment as a showcase or test bed. So far, there have been 62 separate projects, 44 of which have either been complet-ed already or are currently live. In return, Anglian asks partners to collaborate in the spirit of the Shop Window and for �nancial support for it.

Kirk comments on the already very evident bene�ts of con-centrating all this activity in Newmarket. “We’ve seen synergies emerge in terms of technologies, processes and ways of work-ing, which has delivered greater bene�t than if all these initia-tives were segmented and spread out,” he says. “We’ve been able to learn quicker what works and what doesn’t. Dedicating this catchment to innovation has also given people the freedom to try things in a way they many not otherwise have done. So many innovators have been attracted to come here and that has bred a wider culture of innovation.”

Pressing challengesTo give all the activity a focus and to ensure it is used construc-tively to address the pressing, real world challenges Anglian is facing, the team has identi�ed a number of goals (see box) in-novators are asked to address.

Kirk accepts the goals are aspirational and hugely chal-lenging, but reports successes that are already transforming the way Anglian works. He o�ers the use of thermal imag-

ing leak detection drones as an example. �e company had previously used thermal imaging in hand held units to detect customer side leaks, and had used drones for other purposes. But the two ideas collided in the Shop Window and thermal imaging drones are now being deployed and �nding network leaks that had proved elusive. In some cases, this has enabled scheduled mains replacement work to be cancelled, saving money and carbon.

However not all Shop Window initiatives involve product design; emphasis is placed too on Newmarket customers par-ticipating in the co-creation of innovative solutions. Kirk refer-ences the 80l/p/d goal. �e company embarked on an in-depth research study to understand the catchment and its customers better, delving into subjects such as how they feel about water as well as more practical usage traits. It is now running six separate trials, each tailored for di�erent customer segment, to attempt to reach the 80l target. �ese include families competing for a prize for consumption reduction; customers challenged to go as low as they can, supported by detailed usage information; and penal-ties for above-target usage. Kirk reports that all trials have been successful in reducing consumption, interestingly with penalties proving the least successful.

Fit for the futureKirk explains that Anglian is looking to roll out its Shop Window successes where possible across its region, beginning with em-bedding actions in its PR19 business planning. “We are champi-oning innovation as a way to meet our challenges going forward, not just for PR19 but across a much broader horizon.” He adds that in many ways the Shop Window work tends towards “build-ing a microcosm of a future water business”. Anglian explains that while it is impossible to predict exactly what will be needed 25 years from now “we do know we need to protect our cus-tomers, environment and assets, whatever the future holds. So we have to learn to be more agile and responsive, challenge our traditional approaches, and make the most of collaboration, in-novation and engagement.”

INNOVATION|FEATURE

SHOP WINDOW FOR INNOVATIONAnglian Water is partnering with around 100 organisations in an innovation hotbed based in its Newmarket catchment.

❙ 80 litres per person per day which compares with the current national average of 150 litres. ❙ Zero leakage and bursts.

❙ 100% customer satisfaction. ❙ Energy neutrality. ❙ Zero pollution and �ooding. ❙ 100% compliant and chemi-cal free drinking water.

THE SHOP WINDOW’S ASPIRATIONAL GOALS


INTERVIEW|IAN JONES, GALLIFORD TRY

Ofwat has signalled the next price review will be tough on companies. Rewards for de-livery (rather than just busi-

ness planning) will be beefed up. And there is an explicit expectation of innovation. All of this points to the need for companies to draw on the resources and expertise of their supply chains as they attempt to deliver more for less in 2020-25. But how exactly should they best go about this?

As far as supply chain relationships in water are concerned, Ian Jones has pretty much seen it all. As managing director of Galliford Try’s water operations since 2010, he has been immersed in a huge va-riety of the industry’s delivery frameworks and alliances (see box p28). Jones’ personal experience in the sector stretches back to 1979 while Galliford Try’s stretches back over 25 years. It pioneered partnering in the UK water industry, becoming a member of the Scottish Water Solutions JV, the larg-est partnership in the water industry between 2003 and 2010.

The birth of collaborationJones brie�y sketches water supply chain trends over time. Be-fore 2000, contracting mechanisms were very traditional, with each project tendered individually and civil and mechanical/electrical contracts kept separate. His �rst taste of the conver-gence of those two disciplines and a move to “mini programmes” was at Yorkshire Water at the end of AMP2/start of AMP3.

Companies quickly caught on to the e�ciency bene�ts of bun-dling smaller value projects together to save on the administration costs of lots of competitive tenders. Jones describes an ensuing organic process whereby companies and contractors collaborated

on projects and over time grew programme management capabilities. �roughout AMP3 and AMP4 there were de�nite moves towards joined up collaborative alliances. He says it was at this point that companies began to package up work more coherently – for example, water/wastewater, or above/below ground. �e trend yielded further ef-�ciencies, closer relationships between con-tractors and their water company clients and the ability to forward plan more. Jones re-calls. “With the exception of oil and gas, the water sector was the �rst to really embrace collaborative working and the bene�ts that come with it.”

Aªordability squeezeIt was in AMP5 that things “started to swing back the other way”. Jones says: “I think the main driver for that was concern from the water companies that collaborative models were getting a bit �abby and ine�cient, and were they actually getting value for money? �e water companies were getting the levels of service and collaboration desired, and projects were being delivered on time, but there was a moment of challenge when they said ‘are we paying a premium for this and is that premium worth it’?”

He reports these concerns intensi�ed as AMP5 crossed into AMP6; companies came under intense a�ordability pressures, and had to grapple with the new approach taken by Ofwat at PR14 which featured a move to an outcomes focus and to total expenditure. “�ere are more stresses and strains around at the moment than I’ve seen in the past,” he observes. “�e uncertain-ties around outcomes, aligned with massive a�ordability chal-lenges, has led to the �rst two years of the new AMP, from the delivery perspective, being very slow.” He estimates that in the

TRY SOMETHING NEW Aªordability pressures are already

squeezing AMP6 outcomes. Looking ahead to AMP7, Galliford Try’s water MD Ian Jones urges water companies to embrace fresh thinking if the step change in outcomes Ofwat is looking for is to be delivered.


IAN JONES, GALLIFORD TRY|INTERVIEW

round the industry is “about a year behind where it should be in terms of capital delivery.”

Jones elaborates: “A�ordability is sti�ing decision-making. It’s stopped projects going ahead… there’s a scenario where a solu-tion is developed, whether that’s internally by the client, jointly with the contract partners or in an alliance, that proves to be un-a�ordable to the water companies.” What happens then varies. Jones explains that in the more collaborative alliances, the water company may cut something back elsewhere in the capital pro-gramme to fund the solution if it believes it is the right one, or cut back on scope. In less collaborative arrangements, “the focus has been very much on ‘your prices are too much’ and we’ve gone back into an adversarial position where clients are tempted to seek alternative procurement routes and ignore the frameworks in place.”

Jones believes business plan allowances at PR14 were simply too tight. “Certainly in comparison to previous AMP periods, the issue of a�ordability this time around is an order of magni-tude greater – and that is across the sector from my perspective.” And while it is “hugely frustrating” from a Galliford Try point of view, “to be balanced about it, I actually understand where the water companies are coming from in that they haven’t got the money, and they have got to deliver an output; and time is pass-ing by because we’ve already lost so much of it at the front end.” In the past, Jones says collaborative models have held up but

“they’re under more pressure now than they have ever been”. He adds: “It’s interesting, isn’t it, because collaboration works great when everything is hunky-dory but the true test is when things are not quite so smooth.”

No silver bulletDo water companies and contractors now have su�cient experi-ence to cra� the perfect model? �ere’s no such thing says Jones. “�ere is no silver bullet. �ere is no optimum model. If there was, as a sector we would already have got there. �ere are a whole number of variables: where risk lies, where the e�ciencies seem to be, what is the appetite for doing it, what is the type and the shape of the programme, where the pinch points are, where the outputs are.” He explains each company and contractor have to reach a balance they are happy with – perhaps where some kind of premium is paid for the value of the contractor’s wisdom and experience.

Jones: “In negotiations there are two contrasting paranoias: as a contractor I’m worried I’m going to lose my shirt; as a client you’re worried the contractor is going to receive excessive pro�t that hasn’t been earned. But what if I’ve earned it, if I’ve come up with a really good solution, if I’ve managed the risks?” He adds: “It all has to be within an envelope of what is reasonable. If the contractor is earning excessive pro�t, that doesn’t work, if he is losing money, that doesn’t work either. �ere’s an optimum posi-

Blackburn Meadows wastewater treatment works



tion which says: if the contractors are making a fair return and they’re earning it, that represents good value.”

Jones shares his own views on the best way ahead. “My own personal preference is for collaborative models but with checks and balances to stop them getting �abby. To keep you match �t, an appropriate amount of tension is good. But if that becomes all-encompassing, the focus moves entirely on to costs at the ex-pense of value.”

AMP7 outlookSo what of AMP7? �e message from Ofwat is that the screw will be tightened further. Yet the low hanging fruit from allianc-ing and frameworks has gone and Jones reports “I see a sector that is struggling to deliver the outcomes that are needed now. I just see stress everywhere in that respect.” He believes traditional approaches will not deliver the step change demanded and a real re-think is called for.

First, totex thinking needs to be embedded in the minds of contractors as well as that of companies. “It’s got to be at the front-end,” says Jones. “We need a model that drives behaviours that seek a fundamentally di�erent way of solving problems and the consideration of no-build operational options may be the best solution.”

Second, companies (and where relevant regulators) need to be more open minded about the existing approach to asset stan-dards. Jones notes the industry is understandably compliance driven and keen to meet asset standards that have been devel-oped over years. But a�ordability pressures suggest risk based decisions on a case by case basis will be necessary going forward, rather than blanket policy. “Increasingly, we have to challenge the status quo as we can’t a�ord to follow those standards any more. We need to be able to challenge and have a sensible conversation. �e answer won’t always be ‘yes’ because that’s not right either. But at the moment, the answers tend to be generally ‘no’.”

�ird, the sector will need to embrace innovation more widely

too. “We are constantly challenged, quite rightly, by companies saying we need more innovation.” But the reception for new ideas is typically very cautious. “So the climate for innovation is there, but the block is in the behaviour about accepting new ideas.”

And �nally, the heightened pressures expected in AMP7 will make an old problem even less palatable if it is not addressed more successfully than in the past: the boom/bust cycle that ac-companies the �ve yearly AMPs. “As a sector, we’ve talked about that for as long as I can remember,” Jones mulls. He praises e�orts to advance what became known as the “early start” programme to bridge the AMP5-6 divide, and says it was a “huge success” to get the regulator to agree. But he describes it as “massively disap-pointing” that the agreement on paper made little di�erence to what happened on the ground.

He attributes some of the ensuing hiatus to caution associated with the new PR14 totex and outcomes provisions. He hopes Of-wat will give the sector another chance by allowing early spend to bridge the AMP6-7 gap now those new arrangements are bet-ter understood.

Jones also urges companies intending to pursue collaborative arrangements in AMP7 to consider two things that would make a material di�erence to the likely outcome. Number one is pro-gramme visibility. Jones appreciates this is an old chestnut but emphasises its importance and re�nes its de�nition. “I would like a degree of visibility of what a programme looks like in suf-�cient detail to allow me to plan resources and to share with my supply chain with a degree of con�dence. Visibility is also critical so that we can get our business model right at the start, balanc-ing the use of the supply chain with self delivery. Our delivery models are �exible enough to be altered to deliver a programme more e�ciently.”

Number two is for earlier decision making about what can and cannot be a�orded. “We need those decisions a bit earlier because otherwise a lot of time and e�ort can be wasted in devel-oping una�ordable solutions.”

Jones concludes that years of working in partnership with water companies has enabled him to understand where they are coming from. He stresses that far from “throwing stones” his comments are aimed at securing the best outcome for all in likely di�cult circumstances. TWR

Galliford Try has an enormous presence in the UK water industry. It has worked on 40-50% of the total value of water assets delivered and 50-60% of the wastewater assets, both networks and treatment plants. Its key programmes and the array of delivery entities it is involved in are shown in the table.

It has over 25 years experience in the water industry and while it has a range of competencies, it specialises in creating integrated joint venture teams to deliver whole life cost solutions capable of covering the whole project lifecycle – from establishing the business case and scoping options for the design solution through to �nal commissioning and handover.

Galliford Try boasts among its core attributes: collaboration exper-tise, health and safety excellence, an appetite for innovation, leading environmental performance, extensive experience of customer and stakeholder engagement, e�ciency and best practice. It says it can take a joint venture from start up to delivery within three months.

GALLIFORD TRY IN WATER TRACK RECORD THROUGH THE AMPSWater company Delivery entity Value AMPsAnglian GTM £300m 3,4,5Yorkshire ETM £500m 3,4,5,6Scottish Morrison Construction,

Galliford Try and ESD£2,000m Q&S II, Q&S II

(a), Q&S III (b), Q&S IV

Southern Galliford Try and MGJV £500m 3,6Thames Galliford Try, GBM and

MGJV£900m 3,4,5

United Utilities GCA £950m 3,4,5Northumbrian GTM £32m AMP 5 ProjectWelsh Galliford Try £200m 3,4

A�ordability is sti�ing decision-making. It’s stopped projects going ahead…


|NEWS REVIEW

Last month, Waterwise published a Water e�ciency strategy for the UK – an action-packed and ac-tion-led document which calls for all sector stakeholders to work to-gether to raise the country’s water e�ciency ambition and to deliver measurable successes in de�ned timescales. Waterwise will work with the industry-led Water Ef-�ciency Strategy Steering Group chaired by Anglian Water’s Jean Spencer to oversee delivery.

�e strategy sets out to take previ-ous water e�ciency activity further in a number of ways. First, it seeks to coordinate the activities of all rel-evant stakeholders. Speaking at the launch of the report' Severn Trent’s water e�ciency manager Doug Clarke highlighted in particular the potential impact of a national com-munications strategy on water e�-ciency, covering long term messages rather than short term campaigns. “If we want to make e�cient behav-iour a social norm, we need to raise it in the national conscious.”

Second the strategy aims to pro-vide evidence to support stake-holder action, including water companies’ business planning and government activity. Waterwise chief executive Nicci Russell re-marked that she would like to see “greater political ownership of this across the UK” and the strategy would help by demonstrating the breadth of stakeholder support. Ofwat’s director of strategy and

Waterwise UK strategy seeks water e�ciency ambition and coordination

RECOMMENDATIONS FROM THE STRATEGYWater e�ciency area Recommendations include:Establishing the need for water ef-�ciency excellence

Include water e�ciency measures in energy e�ciency activities; baseline values and best practice to underpin resilience indicators & Water UK dashboard; develop indictors around PCC best practice.

Participation and communities

Develop a water saving culture; a national water e�ciency engagement programme for PR19; pool resources to establish a UK water information system to inform customers and other stakeholders.

Urban environment Water e�ciency inclusion in social housing standards; variable infrastructure charges for developers; in-crease water e�ciency of new homes; initiatives with local councils and planning bodies.

Products and labelling

Develop a mandatory labelling scheme with govern-ment; incentivise use of water e�cient devices through rebates; link public sector standards to water labelling; initiatives regarding rainwater harvesting and grey water reuse; regulate to prevent the sale and use of leaky loos.

Water companies and regulation

Ensure Ofwat re�ects water e�ciency ambition in PR19 work; allow full metering; smart meter trials; update evidence base.

Retail competition Clarify market codes in relation to water e�ciency; ensure fragmentation does not constrain water ef-�ciency; work with retailers on customer communica-tions and to build evidence.

Integrated water management and resilient infrastructure

Include water e�ciency in retro�t SUDS and Water Sensitive Urban Design projects; use big data and internet of things to better understand demand and behaviour; increase availability of open water data

planning Trevor Bishop called the strategy “very timely” given the PR19 schedule; he indicated it might be a useful reminder to the industry to be ambitious in light of the fact that companies’ PR14 plans had per capita consumption falling but that “we are starting to see slightly worrying talk from some water companies about moderating those ambitions”.

Finally and crucially, the strat-

30 INTERESTED IN PR19 DELIVERY PARTNERSHIPAiimi ESP Consulting PracticusAlex Wiseman Associates Europe Economics PricewaterhouseCoopers Alvarez and Marsal F1F9 Regulatory EconomicsArup Gardiner Theobald SLG EconomicsBaringa Partners HR Wallingford Strategic Management ConsultantCEPA Jacobs SwecoCmY Consultants MCG Professionals Turner & TownsendCPC Oxera Unicorn AnalyticsDeloitte PA Consulting Uti ConsultingEconomic Consulting Associates PCubed Waterwise

egy intends to prompt action rather than be a dusty reference document. It incorporates a huge number of recommendations with actions to accompany them, which it charges di�erent players with delivering. Some of the key recommendations are summarised in the table.

�e steering group will meet regularly and Waterwise will report against the actions from the strat-egy in 12 months.

Committed: Neil Parish has been reelected as chair of the EFRA Select Committee and Mary Creagh has been elected chair of the Environmental Audit Committee.

On the case: Ofwat has appointed Emma Kelso as senior director of custom-ers and casework. She joins after ten years at Ofgem. Ofwat has also appointed Lisa Com-mand as senior director of business improvement. She joins from a director-ship with Coventry City Council.

Rewarding: Anglian Water won Business in the Community's prestigious Responsible Business of the Year award.

Promoted: United Utili-ties has promoted Steve Fraser to chief operating o�cer from 1 August.

To A�nity: Thames Water's retail business CFO Stuart Ledger is to take up post as A�nity Water's CFO in December.

Partner power: UKPN's CEO Basil Scarsella has been appointed chair of the Energy & Utility Skills Partnership.

Water Matters: CC Water �agged up from its an-nual Water Matters cus-tomer survey that water has been overtaken in the value for money satisfac-tion stakes by energy and landlines.

Financial reports: The Wa-ter Report covers these online as they come out. Subscribe to our weekly e-newsletter for regular up-dates http://bit.ly/2vlwetx

NEWSIN BRIEF


NEWS REVIEW|

Abstraction reform still on the agenda, as WWF calls for urgent drought actionDespite primary legislation being halted in light of a hectic Brexit Parliamentary timetable, abstrac-tion reform “de�nitely hasn’t dropped o� the agenda,” accord-ing to DEFRA’s deputy director of water services Dr Sebastian Cato-vsky.

Speaking at Marketforce’s Water Market Reform conference at the end of last month, Catovsky said he was “keen to press on” and that his department was exploring the possibilities on how abstraction reform could be progressed out-side of primary legislation – in-cluding via secondary legislation and using Environment Agency powers. He said DEFRA was working with the EA to work up proposals.

Catovsky was responding to a question about the timetable for

abstraction reform a�er WWF called for it to be progressed as a matter of urgency as low rainfall threatens drought and long term environmental damage.

�e wildlife group painted a stark picture of a water environ-ment already struggling to cope with the demands put upon it by thirsty public water supply and agriculture: “More than 550 bod-ies of water in England and Wales are being over-abstracted, a�ect-ing iconic rivers like the Itchen and urban chalk streams like the Cray, which have seen their �ow decrease and turn to trickles.” Noting that April was one of the driest months on record, it said the environmental implications – including the very survival of the water vole and king�sher – “are likely to get worse over the next

few months and years unless ur-gent action is taken.”

Urgent reform of the abstrac-tion system was one recommen-dation in a report published by WWF last month. “If new legis-lation is not introduced soon the e�ects of poor management of water abstractions and dry weath-er are likely to have devastating consequences for our rivers,” the group said. Water for Wildlife rec-ommended: ❙ Transposing the Water Frame-work Directive in full as part of the Great Repeal Bill and estab-lishing mechanisms and sanctions to enforce its implementation and uphold its 2027 deadline a�er we leave the European Union.❙ A new ‘Restoring Sustainable Abstraction scheme’ to take ur-gent action at the 555 river water

bodies where the Environment Agency has proven that abstrac-tion is already damaging the ecol-ogy.❙ An immediate move to an ab-straction licensing regime that links abstraction to availability, encourages e�cient use and en-sures su�cient water for wildlife in every river to prevent future damaging abstraction and secure greater resilience.❙ A national strategy to cut water waste. WWF said: “With a third of water taken from the natural environment being [lost] through leaky pipes, losses in treatment and in the home, we need plan to ensure every home and business is water e�cient, to communicate the value of water with a fairer sys-tem of paying for water through universal smart water metering.”

Wildlife and Countryside Link has called on the government to adopt three key requirements when it publishes its long awaited 25 Year Environment Plan, if it is to make good on its commitment to be the �rst generation to leave the envi-ronment in a better state than it in-herited it. �ese requirements are:

Legally-binding environmental objectives with a delivery strate-gy, timeline and milestones. WCL called speci�cally for:❙ Nature: objectives should in-clude species conservation status, extent and condition of habitats and extent and condition of pro-tected sites on land and at sea.❙ Natural capital: objectives for natural assets which provide ser-vices to people, such as protecting vulnerable but valuable natural as-sets like carbon sequestering soils, woodland cover, fresh water and

green infrastructure.❙ International goals: objectives relating to the UK’s international obligations and impact on the en-vironment overseas, such as the Sustainable Development Goals.

Green investment—ensuring public and private money supports greener towns, countryside and seas. WCL urges the CAP be re-placed by a rural payments system that rewards environmental re-sults; that the government’s infra-structure investment programme should put natural infrastructure on the same footing as built in-frastructure, with a programme of investment and maintenance spending; and that business as well as the public sector be incentivised or regulated to support environ-mental objectives – for instance through reporting requirements, Payment for Ecosystem Services

schemes, pollution taxes or mar-ket-based �nancing instruments.

Accountability across govern-ment and the private sector —applying the polluters pays princi-ple and ensuring government and businesses are held to account for their environmental record. WCL would like to see:❙ Annual Parliamentary report-ing.❙ Judicial oversight. “Without the European Commission’s com-plaint process, we need an ac-cessible judicial mechanism to challenge public authorities for environmental infringements. �e Supreme Court does hear some environmental cases, but extra capacity is needed for ex-pert environmental judges and in-creasing access to environmental justice for ordinary citizens. Envi-ronmental expertise remains lim-

ited among judges and the judicial review process is highly restrictive in its scope, expensive and po-tentially subject to high levels of �nancial risk.”❙ Expert advice and oversight via a new, independent O�ce for Environmental Responsibility (or strengthen the powers and remit of the Natural Capital Committee) to o�er expert advice and make sure that the plan is delivered.❙ Credible agencies. “Environ-mental agencies have been weak-ened by cuts. DEFRA’s budget has been cut by over 50% in a decade. Outside the EU, the government will need to empower the agencies to act authoritatively, indepen-dently, and on the basis of scien-ti�c advice.”

WCL added the 25 Year Envi-ronment Plan should be jointly owned across government and be subject to public consultation.

Requirements for 25 Year Environment Plan

31THE WATER REPORT July/August 2017

|NEW REVIEWCOMPETITIONWATCHWATER

REPORTTHE

LARGE CUSTOMERS SWITCHING BUT MARKET LACKS 'WOW' FACTOR

The �rst glimpse of how the coun-try’s largest business custom-ers have experienced the initial months of the new retail market

was provided last month by the Major Energy Users’ Council.

�e MEUC – a membership body for in-dustrial and commercial utility consumers, with heavy representation from national multi-sites – surveyed its members at the end of June on their approaches to and early experiences in competitive water.

It found engagement levels with the new market very high at around 70%: 26% had switched or were in the process of doing so, 13% had renegotiated with an existing sup-plier; and a further 30% had engaged and were deciding on a way forward (see chart 1 p32). �e organisation has actively kept its members up to speed with the develop-ment of the market and what it o�ers, and this seems to have paid o�.

Of the remainder, 22% said they in-tended to engage. Reasons for waiting were varied. Some indicated they were waiting for the market to mature a bit (for example, for supplier numbers to reduce and data concerns to be addressed). Oth-ers cited the low savings available; lacklus-tre proactive contact from suppliers; and the di�culty for customers to make an informed choice at such an early stage of the market – there is a fear out of jumping out of the frying pan and into the �re. For others it was simply resourcing and other priorities that had held them back.

Only 4% of respondents had engaged and decided not to act, which indicates re-tailer o�erings are by and large attractive to this segment. Many cited consolidated bills as a key bene�t.

Billing and data issuesNext the survey provided a list of possible issues and asked if members had experi-enced them (see chart 2 p32). Billing issues a�ected a whopping 52%, with respon-dents citing problems including absent bills (this was the most frequently men-tioned problem), inaccurate bills, wrong tari�s, unclear bills, payments not allocat-ed to accounts correctly and no resolution of raised issues. Comments included:

A survey from the MEUC has provided the �rst glimpse of I&C customer engagement with and early experiences in the new water market ❙ “Not allocating payments to accounts correctly, then chasing for payment and threatening disconnection and legal ac-tion for sites already paid.”❙ “No bills at all for 3 months!”❙ “Innacurate bills and lack of EDI data.”❙ “Messed up invoices thus hard to estab-lish what we are paying for.”❙ “System not set up to re�ect new con-tract. No bills since contract swap on 1st April yet.”

Beyond that, 30% of survey respon-dents said they had experienced prob-lems with their data in the central market system, including site details absent, site details incorrect and absent meter se-rial numbers. At a meeting hosted by the MEUC on 28 June to discuss the market, one member questioned whether com-panies should be required to take a more proactive approach to correcting data, rather than being free to choose when and how they approach the improvement process. Others members raised ongoing issues with eligibility criteria, particularly for mixed use developments.

Switching experience�e quarter of respondents who had switched or were in the process of switch-ing had a mixed experiences of the pro-cess: 42% said it was ok to very good, with 28% saying it was not good (see chart 3 p32). No one said it was awful. Some of the problems discussed above coloured

Some things to celebrate but market "a little

bit �at"


REPORT|CUSTOMER EXPERIENCE

some customers’ views – for instance, one cited “Issues with new industry data base and then delayed billing from new retail-ers due to teething billing systems issues”. Another put the spotlight on some retail-ers’ practices: “Very variable response from suppliers. Seems to be a lot of vari-ance in how o�ers are presented, and some suppliers worryingly making errors in their responses to tender. ”

Satisfaction levels with the new deals secured were skewed towards the positive but distinctly lacked ‘wow factor’ – 37% were satis�ed with their new deal and the same proportion neither satis�ed nor dis-satis�ed. No one was actively dissatis�ed, but nor was anyone very satis�ed (see chart 4). One respondent summarised: “It’s all a little bit �at”. Low cost savings featured prominently in comments – for instance:❙ “Wholesale rates have increased mark-edly. Managed to reduce negotiable ele-ment, but overall savings very modest.”❙ “In open tender I feel I got the best deal but not by much.”❙ “�e savings are small, but this was ex-pected.”

In summary, it seems the small savings available are not putting people o� – any savings are welcome – but there seems to be something of a ‘so what?’ factor in cus-tomers’ eyes. Policymakers will need to consider whether this is enough to con-sider the market a success.

Quality of customer service�e MEUC asked about the responsive-ness/service of wholesalers and retailers. �e results are shown in chart 5 but note that these are based on only a limited number of responses as many customers had not approached the water companies so could not comment ( half had not ap-proached an existing retailer; two-thirds

0 10 20 30 40 50 60

0 20 40 60 80 100

My organisation has switched already 17%

My organisation is in the process of switching 9%

My organisation has negotiated a better deal with its existing supplier(s) 13%

My organisation has engaged with the market and is deciding on a strategy 30%

My organisation has engaged with the market and has decided not to act 4%

My organisation has not engaged with the market but intends to 22%

Other, please state 9%

My organisation has not engaged with the market and does not intend to 0%

My organisation represents a number of customers who have pursued their own strategies 0%

Don’t know 0%

Problems with your data in the central market system

Estimated bills

Other billing issues

Retailers/wholesalers passing the buck on issues

Any di�culty communicating with your retailer?

Any di�culty communicating with your wholesaler

Questionable promises/o�ers

30%

22%

52%

9%

17%

13%

17%

Other - please state: 0% NOTE: remainder either said ‘no’ or ‘don’t know’

Yes 52%

No 22%

Don’t know 26%

26% 41% 33%

20% 60% 20%

33% 33% 33%

Existing retailer

Prospective retailer

Wholesaler

■ Satis�ed ■ Neither satis�ed nor dissatis�ed ■ Dissatis�ed

NOTE: Many respondents had not approached the water companies so could not answer this: half had not approached an existing retailer, two-thirds had not approached a prospective retailer, and three-quarters had not approached a wholesaler.

Very good 14%

Good/ok 28%

Not good 28%

Don’t know 28%

Awful 0%

(NOTE: ONLY A QUARTER OF THE TOTAL NUMBER OF RESPONDENTS COULD ANSWER THIS)

Q3 If your organisation has switched or is in the process of switching, how good has the experience been in the round?

Q2 Has your organisation experienced any of the following since the market opened?

Q5 If you have approached a water company about anything relating to your water/wastewater ser-vices since the market opened, how satis�ed have you been with how they have dealt with you?

(NOTE: ONLY A THIRD OF THE TOTAL NUMBER OF RESPONDENTS COULD ANSWER THIS)

Very satis�ed 0%

Satis�ed 37%

Neither satis�ed nor dissatis�ed 37%

Don’t know 26%

Too early to tell 0%

Dissatis�ed 0%

Q4 If your organisation has switched/is switching, or has renegotiated with an existing retailer, how satis�ed are you with your new deal?

Q6 It is early days, but do you think the market will improve your experience as a water customer?

CHART 3 IF YOUR ORGANISATION HAS SWITCHED OR IS IN THE PROCESS OF SWITCHING, HOW GOOD HAS THE EXPERIENCE BEEN IN THE ROUND?

0 10 20 30 40 50 60

0 20 40 60 80 100










Don’t know 0%


Estimated bills






30%

22%

52%

9%

17%

13%

17%


Yes 52%

No 22%

Don’t know 26%

26% 41% 33%

20% 60% 20%

33% 33% 33%

Existing retailer


Wholesaler



Very good 14%

Good/ok 28%

Not good 28%

Don’t know 28%

Awful 0%






Very satis�ed 0%

Satis�ed 37%


Don’t know 26%


Dissatis�ed 0%



CHART 4 IF YOUR ORGANISATION HAS SWITCHED/IS SWITCHING, OR HAS RENEGOTIATED WITH AN EXISTING RETAILER, HOW SATISFIED ARE YOU WITH YOUR NEW DEAL?

0 10 20 30 40 50 60

0 20 40 60 80 100










Don’t know 0%


Estimated bills






30%

22%

52%

9%

17%

13%

17%


Yes 52%

No 22%

Don’t know 26%

26% 41% 33%

20% 60% 20%

33% 33% 33%

Existing retailer


Wholesaler



Very good 14%

Good/ok 28%

Not good 28%

Don’t know 28%

Awful 0%






Very satis�ed 0%

Satis�ed 37%


Don’t know 26%


Dissatis�ed 0%



CHART 2 HAS YOUR ORGANISATION EXPERIENCED ANY OF THE FOLLOWING SINCE THE MARKET OPENED?

0 10 20 30 40 50 60

0 20 40 60 80 100










Don’t know 0%


Estimated bills






30%

22%

52%

9%

17%

13%

17%


Yes 52%

No 22%

Don’t know 26%

26% 41% 33%

20% 60% 20%

33% 33% 33%

Existing retailer


Wholesaler



Very good 14%

Good/ok 28%

Not good 28%

Don’t know 28%

Awful 0%






Very satis�ed 0%

Satis�ed 37%


Don’t know 26%


Dissatis�ed 0%



CHART 1 WHICH OF THE FOLLOWING BEST DESCRIBES YOUR ORGANISATION’S APPROACH IN THE OPEN WATER MARKET?


CUSTOMER EXPERIENCE|REPORT0 10 20 30 40 50 60

0 20 40 60 80 100










Don’t know 0%


Estimated bills






30%

22%

52%

9%

17%

13%

17%


Yes 52%

No 22%

Don’t know 26%

26% 41% 33%

20% 60% 20%

33% 33% 33%

Existing retailer


Wholesaler



Very good 14%

Good/ok 28%

Not good 28%

Don’t know 28%

Awful 0%






Very satis�ed 0%

Satis�ed 37%


Don’t know 26%


Dissatis�ed 0%



CHART 5 IF YOU HAVE APPROACHED A WATER COMPANY ABOUT ANYTHING RELATING TO YOUR WATER/WASTEWATER SERVICES SINCE THE MARKET OPENED, HOW SATISFIED HAVE YOU BEEN WITH HOW THEY HAVE DEALT WITH YOU?

tion in one instance!) or requirements, promising big savings if we join their ‘group’.”❙ “Yes, brokers using the opportunity to act in a questionable manner regarding water and their commission.”❙ “It would appear they are not all geared up for it.”❙ “Persistant and over optimistic.”

Future outlookFinally, large customers were asked about their outlook for the water mar-ket: would it improve their experience as a water customer? Over half (52%) said yes (see chart 6). Some comments were:❙ “I hope so; 12 months from now, and teething issues should be ironed out, but I think the retailers need more of a mar-

gin to be able to o�er better deals. Nobody has come to me o�ering any ‘innovation’ as yet!”❙ “De�nitely increased focus on this pro-curement category.”❙ “Retailers do appear interested in en-hancing their service o�ering.”❙ “�e market in Scotland vastly im-proved.”

Around a quarter of respondents said they didn’t yet know whether the market would improve their experience as a water customer, and 22% said it wouldn’t. One single site customer said they expected their costs would increase in the long run as a consequence of deregulation.

In terms of how the market could be im-proved for customers, MEUC members of-fered a range of suggestions, including: im-proving the data; better customer service from retailers; larger retail margins; simpli-�cation/standardisation including on pric-ing; allowing space for innovation; and just giving it time to settle. Some members also made some suggestions they felt could help smaller customers or less sophisticated purchasers, including: “Ofwat to arrange a not for pro�t TPI, who would assist SME customers with switching for a greatly re-duced pro�t share to cover costs only” and “I know how to look for things but those who aren’t so well informed about the water market will get confused about the wholesaler/retailer process. TWR

had not approached a prospective retailer; and three-quarters had not approached a wholesaler). Some themes that surfaced in the survey and discussion included:❙ Wholesaler/end customer relationships – “Our wholesaler would appear a little confused about talking directly with us”; “Issues re comms and information when water supply lost due to burst.”❙ Retailer workload/resourcing – “Some suppliers seem to have been swamped, re-sponse not as good as I would have liked from new supplier”; “�ey [retailers] need to dedicate competent account manag-ers to large companies with multi-sites to support ongoing issues. Whenever we call, we end up talking to call centre sta� that aren’t adequately trained and don’t have a good understanding of the changes that are going on in their own company let alone what’s happening in the industry at large!” ❙ �e wholesaler/retailer interface – “To-tal disconnect with each other and end users”; “Regarding any issues during the transfer period of historical issues, pass-ing the buck back to the retailer and vice versa isn’t con�dence inspiring.”

A number of MEUC members at the meeting pinpointed the speci�c problem of getting hold of their SPIDs. �ese should be printed on bills and easily accessible but some had not been able to get them despite approaching both their retailer and their wholesaler. Discussion of the issue proved divisive within the retailer community, with some retailers at the meeting report-ing SPID provision is pretty straightfor-ward in most cases, and others pointing the �nger at wholesalers as blockers. One retailer said both wholesalers and retail-ers must work together to work through the issues. He said informal routes may be quicker and hence in the customer interest than going through formal channels.

Members urged retailers to commu-nicate better with customers, so even if there are problems or delays they are kept in the loop rather than le� wondering what is going on.

�e MEUC also asked about mem-bers’ experience of broker/TPI activity in the market. Members reported a broad range of experiences – from useful sup-port from TPIs, through to questionable behaviour. A number remarked on lack of understanding of the market from some TPIs. Some comments included:❙ “Just the usual, a cold call with no un-derstanding of our business size (or loca-

0 10 20 30 40 50 60

0 20 40 60 80 100










Don’t know 0%


Estimated bills






30%

22%

52%

9%

17%

13%

17%


Yes 52%

No 22%

Don’t know 26%

26% 41% 33%

20% 60% 20%

33% 33% 33%

Existing retailer


Wholesaler



Very good 14%

Good/ok 28%

Not good 28%

Don’t know 28%

Awful 0%






Very satis�ed 0%

Satis�ed 37%


Don’t know 26%


Dissatis�ed 0%



CHART 6 IT IS EARLY DAYS, BUT DO YOU THINK THE MARKET WILL IMPROVE YOUR EXPERIENCE AS A WATER CUSTOMER?

System not set up to re�ect new contract. No bills since contract swap

on 1st April yet


REPORT|MARKET PERFORMANCE

Three months on from go-live, it remains too early of course to make any sweeping judgements about the performance of the non

household retail market. But it is instruc-tive nonetheless to survey emerging is-sues, beyond those (such as the quality of the data in the central market) that cropped up pretty quickly a�er April. Here we take a whistle stop tour of what’s being talked about in retail quarters.

Customer experience�e transition from shadow operation to the live market was seamless and custom-ers have been able to switch as intended. In the largest customer segment, there has been a good level of engagement and activity; our report on p31-33 shows 70% of MEUC members (industrial and com-mercial customers) have engaged and c40% made an active choice on their sup-plier (26% have switched; 13% renegotiat-ed a better deal with their existing suppli-er). Moreover, speaking at Marketforce’s Water Market Reform conference at the end of last month, Consumer Council for

FIRST QUARTER

RESULTSThree months in to the

market, how are things looking and what are the

emerging issues?

Water chief executive Tony Smith gave the market a cautious ‘so far so good’ re-port. It had, he said, been “pretty trouble free” to date: CC Water had received a low number of complaints and there were some switches going through.

�at’s not to say there couldn’t be im-provements from the customer perspective. Smith quoted an unpublished source which suggested the level of customer awareness of the market now stands at around 40% – so clearly there is still some work to do there. Moreover, he identi�ed two emerg-ing issues that need to be kept a close watch over: household/non household misclassi-�cations and issues arising at the interface between wholesalers and retailers. “�at’s an issue for us as an industry,” he observed, citing one extreme example of a wholesaler being so “hung up about level playing �eld issues” that it wouldn’t tell a customer who their retailer was.

CC Water planned from the end of June to collect complaint data from retailers with a view to publishing it as one tan-gible bit of evidence customers could use in their switching choices. Later the year it is planning some qualitative research. Be-yond the basics, the watchdog would like to see business customer ratings of value for money rising.

However, others take a less benign view of progress to date for customers. TPI Utilitywise recently published a �rebrand press release calling on environment sec-retary Michael Gove to “�x the water in-dustry” on the back of the fact that fewer than 1% of businesses have switched – a factor it attributes to “confusing pricing models and an inadequate switching pro-cess” as well as lack of good information for small businesses in particular.

A more speci�c issue raised by An-glian Water Business managing director Bob Wilson at the Marketforce event was that the microbusiness protections put in place by Ofwat’s Customer Protection Code of Practice were having the unin-tended consequence of deterring this cus-tomer segment from switching. Wilson reported some micro businesses, short of time and resources, were being put o� by the red tape and would prefer, for in-stance, being able to strike a deal quickly over the phone.

MOSL’s market performance director Steve Arthur gave the conference, held on 27 June, the three month switching �g-ures: around 35,000 SPIDs (supply point

IDs) had switched retailer – 28,000 SPIDs had completed a switch, and with around 7,000 more in train. It is di�cult to esti-mate exactly how many customers that equates to, but Utilitywise’s 1% �gure is probably not far o�.

MOSL has been sharing performance data with trading parties from day one, but from the end of this month some of this information will be made public. �e Water Report understands information will be released monthly from the end of July, with accompanying commentary re-leased quarterly.

Wholesalers’ and retailers’ issues�ere is evidence of the two troops begin-ning to organise themselves to represent and safeguard their respective interests. For some time, the Wholesale Interface Group has met for wholesalers to work together in a compliant way to address issues they commonly face. �ese issues may involve code changes or less formal working arrangements. A good example is working through the various issues that impinge on the wholesaler/end customer relationship. �ere seems to have been something of a so�ening of the origi-nal stance, which was that virtually all customer/wholesaler contact had to go through a retailer.

At the conference, Anglian Water’s wholesale services director Ian Rule raised the issue of contacting customers in an emergency situation: wholesalers have a statutory duty for water quality, not to mention that a quality failure would pose them signi�cant reputational risk. It is understandable therefore that wholesal-ers want to preserve ease of access to cus-tomers for this purpose. On a more day to day basis, most wholesalers are report-ing receiving ongoing operational contact from business customers. Bristol Water’s wholesale services manager Simon Ben-nett pointed out that customers are not going to change their habits overnight – in fact that Bristol has outsourced its billing to Bristol/Wessex joint venture BWBSL (now Pelican) for some 15 years, yet still receives operational contacts. Businesses, he said, are “still our customers operation-ally” so again it stands to reason that the company wants to serve them smoothly and to the best of its ability.

One early outcome of wholesaler col-laboration is the national accredited en-tity scheme, known as WIRSAE, due for

❙ Yorkshire Water has con�rmed what many have suspected for a while: that it is looking for a buyer for its non household retail operations. ❙ Castle Water has bought Cobalt Water and entered a deal with Scottish Power to enable it to provide multi-utility retail services. ❙ Marston’s has become the third brewer and pub chain to apply to Ofwat for a self supply water and waste-water licence. As with Greene King and Whitbread, Marston’s has engaged Waterscan to perform its retail functions. ❙ The latest WSSL application has come from First Busi-ness Water.

RETAIL MARKET NEWS UPDATE

THE WATER REPORT July/August 2017 3535THE WATER REPORT July/August 2017

MARKET PERFORMANCE|REPORT

launch this month. �is enables third par-ties to apply for accreditation to work on wholesalers’ meters and supply pipes on behalf of retailers.

�ere is now a lot of discussion about the formation of a retailer forum of some kind, to represent retailer common in-terests in a compliant way. For instance, there have been well supported (from both sides) calls for a league table of wholesaler performance to drive service improvements, though some have sug-gested this would need to have �nancial incentives attached to galvanise all whole-salers to respond. �ere is also a growing appetite from retailers who have now felt the sharp end of wholesale complex-ity for standardisation, on the grounds of customer bene�t, greater e�ciency and lower cost to serve. �ose calling for stan-dardised tari�s at this stage seem likely to be disappointed, not least because there are some good reasons for price variabil-ity. But more standardisation seems fea-sible in other areas.

Bilaterals and portalsPerhaps even more important that either of these areas individually though, are issues relating to how wholesalers and retailers interact with each other. �ese have the potential to impact customers (see p31-33) and the e�cient operation of compa-nies on both sides of the fence. Water Plus is showing signs of thought leadership on this issue: at the Marketforce event, chief executive Sue Amies-King said Water Plus planned to host an event a�er summer for

wholesalers and retailers to meet (again in a compliant way) to start to iron out some of the bilateral wrinkles together.

Top of the list might be bilateral com-munications, and in particular, the mat-ter of whether the market needs a single portal for wholesaler/retailer operational communications. To summarise the cur-rent situation, each wholesaler has been able to select its own systems to interface with retailers, providing these enable it to comply with the terms of the Wholesale Retail Code. �is has led to a wide variety of experiences for retailers – at best, fully transparent and interactive company por-tals; at worst, manual processes (featur-ing emails, calls and so on) which are re-source intensive and complex to manage.

Most informed participants understand wholesalers’ priorities were elsewhere (on CMOS, data loading and so on) when their bilateral arrangements were put in place, but the question now is whether something should be done about the re-sulting variety to ease retailers’ burden.

In the short term, individual wholesal-ers could improve their o�erings to o�er better service. �ere is some evidence of this going on, with the accompanying possibility (if companies buy the same systems) of greater standardisation by the back door. But the ultimate goal has got to be a single market-wide bilateral platform. We are nowhere near that yet, but there are encouraging signs. Far from digging in their heels and defending their existing investments, a number of whole-salers at the conference indicated they had an open mind on evolving the portal situation for the good of the market.

Living codes �ree months in and some code changes are starting to come through. �ere have been a few points of clari�cation, such as a successful modi�cation raised by Nor-thumbrian Water to enable wholesalers to disconnect self supply licensees for non payment. However the most signi�cant activity so far has been Ofwat pressing wholesalers to act in the spirit of code principles regarding alternative eligible credit support, following a case raised by �e Water Retail Company.

Lord Redesdale, chief executive of �e Water Retail Company, �rst raised a code change proposal on 26 June on the grounds that the current key terms and templates in the Business Terms of the Wholesale Retail

Code do not match how insurance-backed surety bonds work in practice. He sought to amend the key terms of schedule 3 of the Business Terms a�er some wholesalers found �e Water Retail Company’s surety bond, backed by insurance, unsatisfactory, despite insurance products being approved by the market. Lord Redesdale argued res-olution was needed as a matter of urgency as within a few weeks his company would formally be in dispute with the relevant wholesalers, which would lead to it losing a contract with a large multi-site customer.

Ofwat stepped in with a new change proposal on 4 July suggesting the existing schedule 3 wording is not clear and pro-posing amendments requiring parties to act reasonably towards each other, with-out reasonable delay and to negotiate in good faith with one another. �e change was approved by the Code Panel and im-plemented on 14 July. �e amendment is likely to result in the wholesalers in Lord Redesdale’s case reconsidering their ini-tial positions, the company keeping its large customer and, potentially, an early failure being avoided.

MarginsAnd �nally, with the PR19 methodology out, thoughts inevitably turn to prospects for future margins. Ofwat hasn’t yet said anything publicly on this; its jury is out on whether to set price controls for competitive retail going forward. But the sector seems to be anticipating margin movement. Ollie Arthurs, a key account manager at Castle Water, told the Marketforce conference his company anticipated margin expansion over time. In a panel discussion at the event,

a number of incumbent wholesalers and re-tailers highlighted options/reasons for mar-gin expansion, including: ❙ Re-examining and reallocating how ac-tivities are classi�ed into wholesale and retail buckets.❙ De-duplicating double-counted costs (those currently allocated to both whole-sale and retail)❙ Making allowances for retail costs that have superseded expectations – for ex-ample, MOSL’s costs. ❙ Driving costs out of MOSL. TWR

�e ultimate goal has got to be a single market-wide

bilateral platform.

First shoots: bilateral issues emerging

36 July/August 2017 THE WATER REPORT

INTERVIEW|RICHARD STANBROOK, PENNON WATER SERVICES

Perhaps because it operates under a number of di�er-ent trading brands, Pennon Water Services (PWS) is easily overlooked as one of the sizeable water retail-ers. Yet the Bournemouth-based company does have

scale; it supplies around 180,000 customers from Cornwall to Scotland and, courtesy of the joint venture between Pennon Group and South Sta�ordshire in November 2016, it has some handy footholds in the east and the Midlands too.

What’s more, PWS, supported by the ambitions of its FTSE250 parent Pennon Group, has an unmistakeable appetite for growth. According to PWS director Richard Stanbrook, the group is committed to investing in the retailer. It started by setting PWS up as a standalone business and converting a Bournemouth Wa-ter operational building into its base. “�at was a clear statement that we are part of the growth plan for Pennon,” says Stanbrook. “And that makes a huge di�erence to how we think and operate.” He believes the resulting situation – physical and legal separation from the wholesale HQ and the “reputation and backing” of the group company – makes a powerful combination and is a good platform from which to grow.

Merger and JV�is desire for scale is evident in the company’s activities to date. Pennon’s acquisition of Bournemouth Water, and Bour-nemouth’s subsequent merger with South West Water, enabled the non household retail activities of both companies to be un-

buckled from their wholesalers and joined together. �e deal provided the opportunity for Bournemouth Water’s industry leading customer service performance (it was frequently at the top of the SIM) to be put to use in the new market, supplemented by the experience and expertise of managers from South West Water’s non-household retail team.

Hot on the heels of that merger came the 80:20 joint venture in November 2016 with South Sta�ordshire Group, for its non household retail activities to be incorporated with South West’s and Bournemouth’s. �is went live in April, but the tie-up op-erationally will go live in the autumn when South Sta�s Group’s customer service specialist Echo Managed Services – which has taken South Sta�s and Cambridge Water customers into the market and served them to date – hands its care over to the Bournemouth-based team.

Stanbrook explains the driver for these deals was “primar-ily scale” though a few other factors were in play too. He says South West/Bournemouth and South Sta�s/Cambridge share “a strong service ethic” and similar customer bases covering such sectors as agriculture, tourism and leisure, manufacturing and academia.

Building a businessPWS is now busy cra�ing its own identity and culture. Its team of about 90 sta� derive approximately 30% from the forerunner water company operations and 70% from new recruits. Stan-brook says the plan is to “tap into Bournemouth Water’s top cus-tomer service performance, which recognised you collect money with a relationship, not a blunt one-dimensional approach.” But not to try to recreate it like for like as the competitive market makes di�erent demands – thinking commercially for one thing (cross and up selling) and getting cash in e�ectively for another.

According to Stanbrook, this water/non water sta� blend pro-vides the best of both worlds: technical water expertise, experi-enced key account management, and the “ability to hold whole-salers to account, in the vocabulary they are familiar with” on the water side, teamed with broader commercial expertise from the new recruits. �e new head of commercial brings over 20 years’ experience in commercially-focused customer service businesses and among those manning the phones are a former

PENNON AND ON

Pennon Water Services already serves four incumbent customer bases but

director Richard Stanbrook says further growth is top of its agenda.

We are part of the growth plan for Pennon [Group]. And that makes a huge di�erence to how we think and operate.


RICHARD STANBROOK, PENNON WATER SERVICES|INTERVIEW

pub landlady, a market trader and carpet salesman, recruited on attitude and their ability to empathise with customers.

Stanbrook himself is �rmly of the water stable and comes armed with a wealth of expertise from his varied and extensive career at Bournemouth. Among the disciplines he has experi-ence of are leakage, quality, safety, IT, retail, corporate services and HR. Perhaps of most direct relevance to his current role, which he took up in spring 2016, was his time as director of re-tail for Bournemouth Water. In this guise he oversaw and im-plemented the company’s transformation from struggling with retail (it was close to outsourcing its operations at one stage) to one which was top of the SIM and with strong debt performance.

Bigger is betterFar from satisfying its appetite for growth, PWS’ consolidation activity to date has given it a taste for more. Stanbrook is open about wanting to wrap in other companies’ customer bases, where appropriate. Be it buying customer books or looking at other partnership type arrangements, he says “We wouldn’t not look at other opportunities – we are constantly scanning.”

Organic growth is obviously on the menu too. �e �rst port of call for PWS has been converting its water only customers in the Bournemouth, South Sta�s and Cambridge areas onto dual tari�s and at this it has been successful across the board.

It is for its in-area customers that PWS has retained local trad-ing names: South West Water Business, Bournemouth Water Business, South Sta�s Water Business and Cambridge Water Business. �is is to avoid customer confusion initially; Stan-brook explains that “keeping it as straightforward as possible seems the best course for now”. However he observes: “Before too long we will be rationalising our portfolio of brands.”

In any event out of area customers have been, and will con-tinue to be, approached and looked a�er by the Source for Busi-ness brand.

Stanbrook says that while the company has taken part in the big tenders in the market and has won a few, including the na-tional motorway services chain Moto, it is also paying close at-tention to the needs of smaller businesses. Its proposition here is based on o�ering simplicity, good billing and high quality ser-vice; on deterring unnecessary contact and on e�ective handling of contacts that are made. �e team has already been able to im-prove its call handling performance, reducing volumes from a peak of around 500 a day to around 350 a day now.

Special attention is being paid to the speci�c sectors where the company already has extensive experience, and to customers likely to have private networks who could make use of group ser-vices. PWS has an extensive value added services capability in-cluding services around leakage, water e�ciency, trade e�uent, legionella and tankered waste among other things. It also o�ers a host of infrastructure services to the public and private sectors – from design through to installation, testing, repair and long term maintenance contracts. PWS will look to cross sell these value added services to its non household customers as appropriate.

A related initiative, which is underway now following the fo-cus on dual tari� conversions, is to try to cross sell water and wastewater services to the customers of group companies – in-cluding, of course, Pennon’s national waste and recycling arm Viridor. “�at’s all about the relationships in the group,” Stan-brook comments.

Past and futureIt is early days, but so far PWS has put in a solid performance, growing its customer base by 1% (with a net growth of 1,500 business accounts). It is understood to be one of only a handful of incumbents to have actually grown since the market opened.

So what’s it been like getting there? Stanbrook isn’t riled by some of the commonly cited issues. He says switching customers has been “relatively smooth, we can’t grumble” and he expects this to get slicker over time. Data quality in CMOS has been challenging for tender purposes but “we see that as a standard operational challenge”. But he is refreshingly honest about the di�culties PWS has encountered along the way. “If you’d come here in December, you would have found a very di�erent story,” he con�des. Learning to transact through CMOS during shadow was a steep learning curve, as were the rigours of the level play-ing �eld. “We’d just unbuckled a vertically integrated business and the wholesalers were, rightly, keen not to show any prefer-ence,” he recalls.

�e boss’ air suggests he thinks the company has successfully overcome its initial challenges, but he declines to tempt fate: “�ere are still aspects of the market under development. �ere’s still stu� we need to put right. And we don’t yet know what’s round the corner.” He o�ers in example that customer appetites for particular o�erings and initiatives are only in the foothills of testing.

Looking ahead a bit more broadly, Stanbrook identi�es “fo-cusing on getting more scale” as his priority challenge, through all means possible – winning more tenders, re�ning the SME proposition, building relationships, cross selling and potential-ly acquisition. “We want to develop as a market leader – agile, innovative and service based.” He appreciates this may involve diversifying into multi-utility services, something he is “actively reviewing.”

Finally, he says that while his company can “work with the margin, and be successful”, ultimately he thinks margin expan-sion would be bene�cial. “Personally speaking, the market may need a little bit more margin – particularly when you hit things you didn’t expect, it quickly eats into your resources.” TWR

Richard Stanbrook

38 July/August 2017 THE WATER REPORT

REPORT|WATER EFFICIENCY

Whether competitive retail will help or hinder e�orts to encourage businesses to be water e�cient is one

of the many as yet unanswered questions the new market has posed. One argu-ment runs that in the absence of size-able margins, new retailers will look to sell value added services (many of which involve reducing consumption to reduce cost) to turn a decent pro�t.

On the other hand, severing the cus-tomer relationship with the regional wa-ter company could be detrimental to the success of its water e�ciency messaging. �is side of the argument also questions the wisdom of relying on market forces to deliver consumption savings, particularly in areas where the looming de�cits are substantial and while the proportion of all eligible customers switching remains tiny.

For Southern Water, the risk of losing business customer engagement on wa-ter usage is unpalatable. Its area is water stressed and at the moment, following months of dry weather, the company is one of a number grappling with the real risk of drought next year. It has consequently decided to take the initiative and seek to work in partnership with retailers on the challenges it is facing as a wholesaler, with water e�ciency front of mind. In Septem-ber it is hosting an event, open to all re-tailers and with contributions from other key stakeholders including the Consumer Council for Water and MOSL, to share details of these challenges and to explore mutually bene�cial ways of tackling them.

Southern’s water e�ciency manager Ben Earl explains: “As a company, we have water e�ciency targets, FOG [fats, oils and grease] issues, a potential drought situation next year. �ere may be services and support that we can o�er to retailers that would ben-

SOUTHERN SEEKS WATER EFFICIENCY

PARTNERSSouthern Water is pioneering a partnership

approach with retailers to keep water saving messages firmly in business customers’ minds.

e�t them, bene�t customers and bene�t us.” He hurriedly adds that compliance with the market’s level playing �eld rules won’t be compro-mised as Southern will make any service it o�ers available to all retailers. “We are look-ing for a compliant route to maintaining our relation-ship with end customers in partnership with retailers. In our situation, we just can’t sit back and say to retailers ‘do what you want’.”

Earl says he appreciates some retailers are out there actively promoting value add-ed water e�ciency services, but notes this is not an obligation and that such services are commonly targeted towards larger cus-tomers. “�e market code does not have anything about water e�ciency in it,” he points out, adding his particular concern are SME businesses. “Who’s doing that sort of stu� for small businesses? I just don’t think there’s the margin there for them [re-tailers] to invest in that.”

Other innovationsFor Earl and his team at Southern, the re-tailer event is the latest strand of its innova-tive work to drive down consumption. He runs through a few other interesting trials:❙ Community incentives – in the Cheri-ton district metering area. per capita consumption is 50 litres per person per day above the average and standard price signals are ine�ective. So instead the com-pany is o�ering payments to local char-ity and community groups on a sliding scale according to how much water the c650 households in the area save. �e top award, for a 25% reduction, is £50,000. Earl says the objective is to test the prin-ciple of community incentives with a view

to rolling them out across Hampshire if they work. ❙ Variable infrastructure charges – South-ern is trialling a 50% discount on infra-structure charges for a development in Eastleigh if the developer can go below the 110 litres per person per day Southern can enforce to 100l/p/d. ❙ Social housing – A scheme is under-way with Brighton and Hove Council to provide combined water e�ciency and a�ordability checks to around 1000 social housing tenants. �e University of Sus-sex is tracking both the consumption and �nancial savings made to inform future

joint local authority/wa-ter company initiatives.

Earl says that alongside learning from these trials individually, Southern is seeking to “join the dots” between all its water ef-�ciency activities to “see what we can achieve in the round”. �e ambition is to mainstream suc-

cessful initiatives as part of PR19 business planning. “�e south east has massive de�-cits coming,” he comments. “We can’t just meddle and do fringe stu�.”

Regional and national activityBeyond the con�nes of his own com-pany’s activity, Earl observes water e�-ciency is on the rise both regionally and nationally. �e Water Resources South East group (see article, p29) has just ap-proved a paid position for at least two years to promote water e�ciency across the region in a coordinated way. “�e idea is to keep the discussions going outside of drought,” Earl explains.

At a national level, resilience is clearly on the rise on political, regulatory and compa-ny agendas, though Earl questions: “How high up the resilience agenda is water ef-�ciency?” Earl notes that there are lots of aspects under the resilience umbrella that will compete for directors’ attention.

Finally, Earl has been working for many years to support the development of a wa-ter labelling scheme for taps and showers. However, implementation on the ground has proceeded at a grindingly slow pace. �e original scheme was underpinned by the Ecodesign Directive, which won’t ap-ply once we are out of Europe. If it was so-minded, the government could mandate a labelling scheme. TWR

Ben Earl


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July/August 2017 31

NEWS REVIEW|

Abstraction reform still on the agenda,

as WWF calls for urgent drought action

Despite primary legislation being

halted in light of a hectic Brexit

Parliamentary timetable, abstrac-

tion reform “de�nitely hasn’t

dropped o� the agenda,” accord-

ing to DEFRA’s deputy director of

water services Dr Sebastian Cato-

vsky. Speaking at Marketforce’s Water

Market Reform conference at the

end of last month, Catovsky said

he was “keen to press on” and that

his department was exploring the

possibilities on how abstraction

reform could be progressed out-

side of primary legislation – in-

cluding via secondary legislation

and using Environment Agency

powers. He said DEFRA was

working with the EA to work up

proposals. Catovsky was responding to a

question about the timetable for

abstraction reform a�er WWF

called for it to be progressed as a

matter of urgency as low rainfall

threatens drought and long term

environmental damage.

�e wildlife group painted a

stark picture of a water environ-

ment already struggling to cope

with the demands put upon it by

thirsty public water supply and

agriculture: “More than 550 bod-

ies of water in England and Wales

are being over-abstracted, a�ect-

ing iconic rivers like the Itchen

and urban chalk streams like the

Cray, which have seen their �ow

decrease and turn to trickles.”

Noting that April was one of the

driest months on record, it said

the environmental implications –

including the very survival of the

water vole and king�sher – “are

likely to get worse over the next

few months and years unless ur-

gent action is taken.”

Urgent reform of the abstrac-

tion system was one recommen-

dation in a report published by

WWF last month. “If new legis-

lation is not introduced soon the

e�ects of poor management of

water abstractions and dry weath-

er are likely to have devastating

consequences for our rivers,” the

group said. Water for Wildlife rec-

ommended:

❙ Transposing the Water Frame-

work Directive in full as part of

the Great Repeal Bill and estab-

lishing mechanisms and sanctions

to enforce its implementation and

uphold its 2027 deadline a�er we

leave the European Union.

❙ A new ‘Restoring Sustainable

Abstraction scheme’ to take ur-

gent action at the 555 river water

bodies where the Environment

Agency has proven that abstrac-

tion is already damaging the ecol-

ogy.❙ An immediate move to an ab-

straction licensing regime that

links abstraction to availability,

encourages e�cient use and en-

sures su�cient water for wildlife

in every river to prevent future

damaging abstraction and secure

greater resilience.

❙ A national strategy to cut water

waste. WWF said: “With a third

of water taken from the natural

environment being [lost] through

leaky pipes, losses in treatment

and in the home, we need plan to

ensure every home and business

is water e�cient, to communicate

the value of water with a fairer sys-

tem of paying for water through

universal smart water metering.”

Wildlife and Countryside Link has

called on the government to adopt

three key requirements when it

publishes its long awaited 25 Year

Environment Plan, if it is to make

good on its commitment to be the

�rst generation to leave the envi-

ronment in a better state than it in-

herited it. �ese requirements are:

Legally-binding environmental

objectives with a delivery strate-

gy, timeline and milestones. WCL

called speci�cally for:

❙ Nature: objectives should in-

clude species conservation status,

extent and condition of habitats

and extent and condition of pro-

tected sites on land and at sea.

❙ Natural capital: objectives for

natural assets which provide ser-

vices to people, such as protecting

vulnerable but valuable natural as-

sets like carbon sequestering soils,

woodland cover, fresh water and

green infrastructure.

❙ International goals: objectives

relating to the UK’s international

obligations and impact on the en-

vironment overseas, such as the

Sustainable Development Goals.

Green investment—ensuring

public and private money supports

greener towns, countryside and

seas. WCL urges the CAP be re-

placed by a rural payments system

that rewards environmental re-

sults; that the government’s infra-

structure investment programme

should put natural infrastructure

on the same footing as built in-

frastructure, with a programme

of investment and maintenance

spending; and that business as well

as the public sector be incentivised

or regulated to support environ-

mental objectives – for instance

through reporting requirements,

Payment for Ecosystem Services

schemes, pollution taxes or mar-

ket-based �nancing instruments.

Accountability across govern-

ment and the private sector —

applying the polluters pays princi-

ple and ensuring government and

businesses are held to account for

their environmental record. WCL

would like to see:

❙ Annual Parliamentary report-

ing.❙ Judicial oversight. “Without the

European Commission’s com-

plaint process, we need an ac-

cessible judicial mechanism to

challenge public authorities for

environmental infringements.

�e Supreme Court does hear

some environmental cases, but

extra capacity is needed for ex-

pert environmental judges and in-

creasing access to environmental

justice for ordinary citizens. Envi-

ronmental expertise remains lim-

ited among judges and the judicial

review process is highly restrictive

in its scope, expensive and po-

tentially subject to high levels of

�nancial risk.”

❙ Expert advice and oversight

via a new, independent O�ce for

Environmental Responsibility (or

strengthen the powers and remit

of the Natural Capital Committee)

to o�er expert advice and make

sure that the plan is delivered.

❙ Credible agencies. “Environ-

mental agencies have been weak-

ened by cuts. DEFRA’s budget has

been cut by over 50% in a decade.

Outside the EU, the government

will need to empower the agencies

to act authoritatively, indepen-

dently, and on the basis of scien-

ti�c advice.”WCL added the 25 Year Envi-

ronment Plan should be jointly

owned across government and be

subject to public consultation.


|NEW REVIEW

COMPETITION

WATCHWATER REPORT

THE


The �rst glimpse of how the coun-

try’s largest business custom-

ers have experienced the initial

months of the new retail market

was provided last month by the Major

Energy Users’ Council.

�e MEUC – a membership body for in-

dustrial and commercial utility consumers,

with heavy representation from national

multi-sites – surveyed its members at the

end of June on their approaches to and

early experiences in competitive water.

It found engagement levels with the new

market very high at around 70%: 26% had

switched or were in the process of doing so,

13% had renegotiated with an existing sup-

plier; and a further 30% had engaged and

were deciding on a way forward (see chart

1 p32). �e organisation has actively kept

its members up to speed with the develop-

ment of the market and what it o�ers, and

this seems to have paid o�.

Of the remainder, 22% said they in-

tended to engage. Reasons for waiting

were varied. Some indicated they were

waiting for the market to mature a bit (for

example, for supplier numbers to reduce

and data concerns to be addressed). Oth-

ers cited the low savings available; lacklus-

tre proactive contact from suppliers; and

the di�culty for customers to make an

informed choice at such an early stage of

the market – there is a fear out of jumping

out of the frying pan and into the �re. For

others it was simply resourcing and other

priorities that had held them back.

Only 4% of respondents had engaged

and decided not to act, which indicates re-

tailer o�erings are by and large attractive

to this segment. Many cited consolidated

bills as a key bene�t.

Billing and data issues

Next the survey provided a list of possible

issues and asked if members had experi-

enced them (see chart 2 p32). Billing issues

a�ected a whopping 52%, with respon-

dents citing problems including absent

bills (this was the most frequently men-

tioned problem), inaccurate bills, wrong

tari�s, unclear bills, payments not allocat-

ed to accounts correctly and no resolution

of raised issues. Comments included:

A survey from the MEUC has provided the �rst

glimpse of I&C customer engagement with and

early experiences in the new water market

❙ “Not allocating payments to accounts

correctly, then chasing for payment and

threatening disconnection and legal ac-

tion for sites already paid.”

❙ “No bills at all for 3 months!”

❙ “Innacurate bills and lack of EDI data.”

❙ “Messed up invoices thus hard to estab-

lish what we are paying for.”

❙ “System not set up to re�ect new con-

tract. No bills since contract swap on 1st

April yet.”Beyond that, 30% of survey respon-

dents said they had experienced prob-

lems with their data in the central market

system, including site details absent, site

details incorrect and absent meter se-

rial numbers. At a meeting hosted by the

MEUC on 28 June to discuss the market,

one member questioned whether com-

panies should be required to take a more

proactive approach to correcting data,

rather than being free to choose when

and how they approach the improvement

process. Others members raised ongoing

issues with eligibility criteria, particularly

for mixed use developments.

Switching experience

�e quarter of respondents who had

switched or were in the process of switch-

ing had a mixed experiences of the pro-

cess: 42% said it was ok to very good, with

28% saying it was not good (see chart 3

p32). No one said it was awful. Some of

the problems discussed above coloured


bit �at"



























WWF last month. “If new legis



water abstractions and dry weath



group said.

ommended:

❙ Transposing the Water Frame


the Great Repeal Bill and estab








encourages e�cient use and en

July/August 2017

THE WATER REPORT

26

THE WATER REPORT

July/August 2017 27

IAN JONES, GALLIFORD TRY|INTERVIEW


O fwat has signalled the next price review will be tough on companies. Rewards for de-livery (rather than just busi-ness planning) will be beefed up. And there is an explicit expectation of innovation. All of this points to the need for companies to draw on the resources and expertise of their supply chains as they attempt to deliver more for less in 2020-25. But how exactly should they best go about this? As far as supply chain relationships in water are concerned, Ian Jones has pretty much seen it all. As managing director of Galliford Try’s water operations since 2010, he has been immersed in a huge va-riety of the industry’s delivery frameworks and alliances (see box p28). Jones’ personal experience in the sector stretches back to 1979 while Galliford Try’s stretches back over 25 years. It pioneered partnering in the UK water industry, becoming a member of the Scottish Water Solutions JV, the larg-est partnership in the water industry between 2003 and 2010.The birth of collaborationJones brie�y sketches water supply chain trends over time. Be-

fore 2000, contracting mechanisms were very traditional, with each project tendered individually and civil and mechanical/electrical contracts kept separate. His �rst taste of the conver-gence of those two disciplines and a move to “mini programmes” was at Yorkshire Water at the end of AMP2/start of AMP3.Companies quickly caught on to the e�ciency bene�ts of bun-dling smaller value projects together to save on the administration costs of lots of competitive tenders. Jones describes an ensuing organic process whereby companies and contractors collaborated

on projects and over time grew programme management capabilities. �roughout AMP3 and AMP4 there were de�nite moves towards joined up collaborative alliances. He says it was at this point that companies began to package up work more coherently – for example, water/wastewater, or above/below ground. �e trend yielded further ef-�ciencies, closer relationships between con-tractors and their water company clients and the ability to forward plan more. Jones re-calls. “With the exception of oil and gas, the water sector was the �rst to really embrace collaborative working and the bene�ts that come with it.”

A�ordability squeezeIt was in AMP5 that things “started to swing back the other way”. Jones says: “I think the main driver for that was concern from the water companies that collaborative models were getting a bit �abby and ine�cient, and were they actually getting value for money? �e water companies were getting the levels of service and collaboration desired, and projects were being delivered on time, but there was a moment of challenge when they said ‘are we paying a premium for this and is that premium worth it’?”

He reports these concerns intensi�ed as AMP5 crossed into AMP6; companies came under intense a�ordability pressures, and had to grapple with the new approach taken by Ofwat at PR14 which featured a move to an outcomes focus and to total expenditure. “�ere are more stresses and strains around at the moment than I’ve seen in the past,” he observes. “�e uncertain-ties around outcomes, aligned with massive a�ordability chal-lenges, has led to the �rst two years of the new AMP, from the delivery perspective, being very slow.” He estimates that in the

TRY SOMETHING NEW A�ordability pressures are already squeezing AMP6 outcomes. Looking ahead to AMP7, Galliford Try’s water MD Ian Jones urges water companies to embrace fresh thinking if the step change in outcomes Ofwat is looking for is to be delivered.

round the industry is “about a year behind where it should be in terms of capital delivery.” Jones elaborates: “A�ordability is sti�ing decision-making. It’s stopped projects going ahead… there’s a scenario where a solu-tion is developed, whether that’s internally by the client, jointly with the contract partners or in an alliance, that proves to be un-a�ordable to the water companies.” What happens then varies. Jones explains that in the more collaborative alliances, the water company may cut something back elsewhere in the capital pro-gramme to fund the solution if it believes it is the right one, or cut back on scope. In less collaborative arrangements, “the focus has been very much on ‘your prices are too much’ and we’ve gone back into an adversarial position where clients are tempted to seek alternative procurement routes and ignore the frameworks in place.”

Jones believes business plan allowances at PR14 were simply too tight. “Certainly in comparison to previous AMP periods, the issue of a�ordability this time around is an order of magni-tude greater – and that is across the sector from my perspective.” And while it is “hugely frustrating” from a Galliford Try point of view, “to be balanced about it, I actually understand where the water companies are coming from in that they haven’t got the money, and they have got to deliver an output; and time is pass-ing by because we’ve already lost so much of it at the front end.” In the past, Jones says collaborative models have held up but

“they’re under more pressure now than they have ever been”. He adds: “It’s interesting, isn’t it, because collaboration works great when everything is hunky-dory but the true test is when things are not quite so smooth.”

No silver bulletDo water companies and contractors now have su�cient experi-ence to cra� the perfect model? �ere’s no such thing says Jones. “�ere is no silver bullet. �ere is no optimum model. If there was, as a sector we would already have got there. �ere are a whole number of variables: where risk lies, where the e�ciencies seem to be, what is the appetite for doing it, what is the type and the shape of the programme, where the pinch points are, where the outputs are.” He explains each company and contractor have to reach a balance they are happy with – perhaps where some kind of premium is paid for the value of the contractor’s wisdom and experience.

Jones: “In negotiations there are two contrasting paranoias: as a contractor I’m worried I’m going to lose my shirt; as a client you’re worried the contractor is going to receive excessive pro�t that hasn’t been earned. But what if I’ve earned it, if I’ve come up with a really good solution, if I’ve managed the risks?” He adds: “It all has to be within an envelope of what is reasonable. If the contractor is earning excessive pro�t, that doesn’t work, if he is losing money, that doesn’t work either. �ere’s an optimum posi-

Blackburn Meadows wastewater treatment works













obligations and impact on the en



Green investment





Catovsky was responding to a













International goals: objectives


obligations and impact on the en



Green investment



on projects and over time grew programme management capabilities. �roughout AMP3 and AMP4 there were de�nite moves towards joined up collaborative alliances. He says it was at this point that companies began to package up work more coherently – for example, water/wastewater, or above/below ground. �e trend yielded further ef-below ground. �e trend yielded further ef-below ground. �e trend yielded further ef�ciencies, closer relationships between con-tractors and their water company clients and the ability to forward plan more. Jones re-calls. “With the exception of oil and gas, the water sector was the �rst to really embrace collaborative working and the bene�ts that

It was in AMP5 that things “started to swing back the other way”. Jones says: “I think the main driver for that was concern from the water companies that collaborative models were getting a bit �abby and ine�cient, and were they actually getting value for money? �e water companies were getting the levels of service and collaboration desired, and projects were being delivered on time, but there was a moment of challenge when they said ‘are

SOMETHINGNEW A�ordability pressures are already ooking ahead Ian Jones urges water companies to embrace fresh thinking if the step change in outcomes fwat is looking for is to be delivered.

July/August 2017

THE WATER REPORT

30

THE WATER REPORT

July/August 2017 31

NEWS REVIEW|

Abstraction reform still on the agenda,


Despite primary legislation being

halted in light of a hectic Brexit

Parliamentary timetable, abstrac-

tion reform “de�nitely hasn’t

dropped o� the agenda,” accord-

ing to DEFRA’s deputy director of

water services Dr Sebastian Cato-

vsky. Speaking at Marketforce’s Water

Market Reform conference at the

end of last month, Catovsky said

he was “keen to press on” and that

his department was exploring the

possibilities on how abstraction

reform could be progressed out-

side of primary legislation – in-

cluding via secondary legislation

and using Environment Agency



proposals. Catovsky was responding to a






























WWF last month. “If new legis-



water abstractions and dry weath-



group said. Water for Wildlife rec-

ommended:

❙ Transposing the Water Frame-


the Great Repeal Bill and estab-


to enforce its implementation and

uphold its 2027 deadline a�er we

leave the European Union.

❙ A new ‘Restoring Sustainable

Abstraction scheme’ to take ur-

gent action at the 555 river water







encourages e�cient use and en-

sures su�cient water for wildlife

in every river to prevent future

damaging abstraction and secure

greater resilience.

❙ A national strategy to cut water

waste. WWF said: “With a third

of water taken from the natural

environment being [lost] through

leaky pipes, losses in treatment

and in the home, we need plan to

ensure every home and business

is water e�cient, to communicate

the value of water with a fairer sys-

tem of paying for water through

universal smart water metering.”











objectives with a delivery strate-



❙ Nature: objectives should in-


extent and condition of habitats

and extent and condition of pro-

tected sites on land and at sea.

❙ Natural capital: objectives for

natural assets which provide ser-

vices to people, such as protecting

vulnerable but valuable natural as-

sets like carbon sequestering soils,

woodland cover, fresh water and




obligations and impact on the en-



Green investment—ensuring



seas. WCL urges the CAP be re-


that rewards environmental re-

sults; that the government’s infra-



on the same footing as built in-

frastructure, with a programme

of investment and maintenance

spending; and that business as well

as the public sector be incentivised

or regulated to support environ-

mental objectives – for instance

through reporting requirements,

Payment for Ecosystem Services

schemes, pollution taxes or mar-

ket-based �nancing instruments.

Accountability across govern-

ment and the private sector —

applying the polluters pays princi-

ple and ensuring government and

businesses are held to account for

their environmental record. WCL

would like to see:

❙ Annual Parliamentary report-

ing.❙ Judicial oversight. “Without the

European Commission’s com-

plaint process, we need an ac-

cessible judicial mechanism to

challenge public authorities for

environmental infringements.

�e Supreme Court does hear

some environmental cases, but

extra capacity is needed for ex-

pert environmental judges and in-

creasing access to environmental

justice for ordinary citizens. Envi-

ronmental expertise remains lim-

ited among judges and the judicial

review process is highly restrictive

in its scope, expensive and po-

tentially subject to high levels of

�nancial risk.”

❙ Expert advice and oversight

via a new, independent O�ce for

Environmental Responsibility (or

strengthen the powers and remit

of the Natural Capital Committee)

to o�er expert advice and make

sure that the plan is delivered.

❙ Credible agencies. “Environ-

mental agencies have been weak-

ened by cuts. DEFRA’s budget has

been cut by over 50% in a decade.

Outside the EU, the government

will need to empower the agencies

to act authoritatively, indepen-

dently, and on the basis of scien-

ti�c advice.”WCL added the 25 Year Envi-

ronment Plan should be jointly

owned across government and be

subject to public consultation.


|NEW REVIEW

COMPETITION

WATCHWATER REPORT

THE







Energy Users’ Council.

�e MEUC – a membership body for in-

dustrial and commercial utility consumers,

with heavy representation from national

multi-sites – surveyed its members at the

end of June on their approaches to and

early experiences in competitive water.

It found engagement levels with the new

market very high at around 70%: 26% had

switched or were in the process of doing so,

13% had renegotiated with an existing sup-

plier; and a further 30% had engaged and

were deciding on a way forward (see chart

1 p32). �e organisation has actively kept

its members up to speed with the develop-

ment of the market and what it o�ers, and

this seems to have paid o�.

Of the remainder, 22% said they in-

tended to engage. Reasons for waiting

were varied. Some indicated they were

waiting for the market to mature a bit (for

example, for supplier numbers to reduce

and data concerns to be addressed). Oth-

ers cited the low savings available; lacklus-

tre proactive contact from suppliers; and

the di�culty for customers to make an

informed choice at such an early stage of

the market – there is a fear out of jumping

out of the frying pan and into the �re. For

others it was simply resourcing and other

priorities that had held them back.

Only 4% of respondents had engaged

and decided not to act, which indicates re-

tailer o�erings are by and large attractive

to this segment. Many cited consolidated

bills as a key bene�t.

Billing and data issues

Next the survey provided a list of possible

issues and asked if members had experi-

enced them (see chart 2 p32). Billing issues

a�ected a whopping 52%, with respon-

dents citing problems including absent

bills (this was the most frequently men-

tioned problem), inaccurate bills, wrong

tari�s, unclear bills, payments not allocat-

ed to accounts correctly and no resolution

of raised issues. Comments included:

A survey from the MEUC has provided the �rst

glimpse of I&C customer engagement with and


❙ “Not allocating payments to accounts

correctly, then chasing for payment and

threatening disconnection and legal ac-

tion for sites already paid.”

❙ “No bills at all for 3 months!”

❙ “Innacurate bills and lack of EDI data.”

❙ “Messed up invoices thus hard to estab-

lish what we are paying for.”

❙ “System not set up to re�ect new con-


April yet.”Beyond that, 30% of survey respon-















Switching experience









bit �at"

plus an electronic copy for unlimited distribution within



objectives with a delivery strate



Nature: objectives should in



with a delivery strate-


Nature: objectives should in-




seas. WCL urges the CAP be re


that rewards environmental re

sults; that the government’s infra



WATCHLARGE CUSTOMERSWITCHING BUT

KET LACKS LACKS LAFACTOFACTOFA R






UC has provided the �rst

customer engagement with and


“Innacurate bills and lack of EDI data.”

“Messed up invoices thus hard to estab-

“System not set up to re�ect new con-


Beyond that, 30% of survey respon-










July/August 2017

THE WATER REPORT

4

THE WATER REPORT

July/August 2017 5



I t is coming up to a year since Steve Robertson became chief executive of �ames Water. To the casual observer, the job may seem like a poisoned chalice; a number of incidents have put �ames in the spotlight for all the wrong reasons

since Robertson started in September 2016. But he says the re-ality is much more balanced. “�ere are a lot of strengths in this business and we’ve got some really good historical perfor-mance but we need to remember that in our region we have a lot of growth, we have got the implications of climate change, and we’ve got some legacy performance issues, especially in the service area, that need addressing.” On the strengths side, he praises the company’s sta�, many of whom have given years of dedicated service. He says the struc-ture of the organisation is �t for purpose and he likes what he sees the company doing on customer engagement – from the 60,000 water saving home visits completed, to schools work and how plans are shaping up for PR19. “I think we are quite close to being state of the art in that,” he observes. Robertson highlights two areas in particular as falling short. First, the customer experience. While many indicators including complaints, SIM score and debt recovery are showing improve-ments, “if you look at how �ames Water has played in the cus-tomer services league tables …you can’t be happy if you are the CEO of the business with where we sit.” And second, infrastruc-ture. Network failings have attracted much of the recent bad press. Eight major trunk main bursts in London have brought the dual horrors of �ooding and supply outages. Meanwhile the

company missed its 2016/17 annual leakage target for the �rst time in ten years. Robertson knows he has his work cut out ad-dressing these issues and needs to make sure “we fully exploit all the options and opportunities of having the totex regime”.Rising to the challengeWhile they are a priority, responding to the regulatory ‘requests’

recently made of �ames by Ofwat chairman Jonson Cox do not feature as a headline challenge, for the simple reason that the company has no di�culty meeting them. �e company notes that even the seemingly intrusive direction to review the compo-sition of the �ames board to ensure its independence and trust-worthiness is already required following recent Ofwat reforms of corporate governance. So on the face of it, Cox’s ‘de-mands’ seem relatively modest – though �ames points out that nevertheless they will re-quire considerable work to make sure that customers expectations are met in full. Under Robertson, �ames has already voluntarily moved to improve customer communications (see below), and to make its �nancial arrangements and investor returns clearer – for instance it has recently published Our taxes explained and Our �nances explained, two book-lets setting these aspects out in plain English.

Meanwhile, tying management rewards to performance for cus-tomers as well as investors is al-ready in place and very much in keeping with the general direc-tion of regulatory travel for PR19

EVERY CHALLENGE IS AN OPPORTUNITYSteve Robertson is facing Thames Water’s adversities head on and is determined to learn as much as he can from them to inform future strategy and delivery.

(see p12-13). And �ames’ Customer Challenge Group has al-ready requested joining up operational and �nancial reporting. Robertson responds: “I’m going to do it and actually I’m think-ing about what more can we do in that space. �at would be a minimal level from me. I want to think more imaginatively about how we engage with customers about our performance.”

Even the board composition request doesn’t jar. Robertson: “I think the point of Jonson’s comments is to say ‘look, you’ve got new investors coming in; you’ve got a chairman at the end of his tenure with the new chairman to be appointed; pay attention to the people who are coming in’. And from my point of view that’s �ne.” He points out that a number of new appointments have been made in the past few months anyway including indepen-dent non executive director Nick Land as well as new investor representatives a�er Borealis Infrastructure and Wren House ac-quired Macquarie’s 26.3% stake in the business on 31 May 2017. He o�ers that the new recruits are “smart and have a long term view of the business” which is not out of kil-ter with Cox’s priorities. “And as time goes on, the board will evolve as well and over the next couple of years, there’ll be some members of the board who will reach the natural end of their tenure.” He adds that of course it will be “up to Jonson to take a view” on whether the new chairman and recomposed board de-liver his objectives, “but I think we are in the process of doing exactly that”.

More generally, Robert-son is sanguine about Ofwat’s – somewhat unusual – pub-

lic pleas. Cox’s comments were framed around the publication of �ames’ �nancial results and operating performance summary (see box, p7). While the leakage target miss was company spe-ci�c, �ames is far from alone in the industry on some of the other aspects in the line of �re – investor returns, gearing, man-agement rewards and balancing customer/�nancial interests. Yet Robertson does not object to being singled out: “We are who we are, we operate where we operate, we are the largest integrated water company, so I’m afraid you have to accept that when things happen, it’s going to be high pro�le. And if you think about the accumulation of the events that have happened – the big bursts before Christmas; we had a incident on Christmas Day at Hamp-ton; we have had lots stu� around the performance around leak-age etc etc – and when you mix all that together then by de�ni-tion you can expect public scrutiny.”Nor is Robertson perturbed by this public scrutiny. “One of the things about running an infrastructure business is don’t do it, especially a business like �ames Water, if you’re going to get wobbly and angsty about the public scrutiny. I don’t start adopt-ing the ‘Oh it’s not fair…’ line. I have zero angst about the public nature. I only care about the substance and the outcomes.”Ambition

So what substance and outcomes might we expect to see? Rob-ertson is ambitious. “�ese moments represent an opportunity and a litmus test for us. When some bad stu� happens, you either use it as an opportunity to engage and as point of motivation to reset agendas etc or you pull the blinds down, shut o� your phone, hide under the desk and hope it goes away.” Clearly opt-ing for the former, he continues: “�e question is, what are we actually going to do di�erently, and how quick and how radical will we be? We can all agree about the direction; the question is how much do we embrace, how fast do we embrace and how far do we go? As you probably get the impression from me… I think we need to challenge ourselves…and the things that I was talking about earlier as areas of weakness that we need to ad-dress, are exactly those things that Jonson pointed out.”Some changes have already been made, notably in the senior management team. Along with Robertson himself, the company has a new CFO and a new customer services director, as well as some key internal promotions. Robertson notes he is delighted that some of these top roles have gone to women. He is also keen to progress work that started be-fore he joined. A good example is implementing the new billing platform. “�at’s started and of course these are notoriously tricky programmes and we need to make sure that we land that; it’s a big focus,” he explains. Similarly he reports �ames has successfully implemented a new digital platform and needs to work now on “how we actually utilise it in terms of the website and for customer interaction; we need to make sure that we fully exploit that.” It is a similar story on the delivery side of the business. Robertson’s predecessor Martin Baggs put three innovative and collectively incentivised delivery alliances in place: the eight2O alliance, the infrastructure alliance and the transformation and technology al-

July/August 2017 31














THE WATER REPORTTHE WATER REPORT

t is coming up to a year since Steve Robertson became chief executive of �ames Water. To the casual observer, the job may seem like a poisoned chalice; a number of incidents have put �ames in the spotlight for all the wrong reasons

since Robertson started in September 2016. But he says the re-ality is much more balanced. “�ere are a lot of strengths in this business and we’ve got some really good historical perfor-mance but we need to remember that in our region we have a lot of growth, we have got the implications of climate change, and we’ve got some legacy performance issues, especially in the service area, that need addressing.” On the strengths side, he praises the company’s sta�, many of whom have given years of dedicated service. He says the struc-ture of the organisation is �t for purpose and he likes what he sees the company doing on customer engagement – from the 60,000 water saving home visits completed, to schools work and how plans are shaping up for PR19. “I think we are quite close to being state of the art in that,” he observes. Robertson highlights two areas in particular as falling short. First, the customer experience. While many indicators including complaints, SIM score and debt recovery are showing improve-ments, “if you look at how �ames Water has played in the cus-tomer services league tables …you can’t be happy if you are the CEO of the business with where we sit.” And second, infrastruc-ture. Network failings have attracted much of the recent bad press. Eight major trunk main bursts in London have brought the dual horrors of �ooding and supply outages. Meanwhile the

company missed its 2016/17 annual leakage target for the �rst

company missed its 2016/17 annual leakage target for the �rst time in ten years. Robertson knows he has his work cut out ad--dressing these issues and needs to make sure “we fully exploit all

dressing these issues and needs to make sure “we fully exploit all the options and opportunities of having the totex regime”.Rising to the challengeWhile they are a priority, responding to the regulatory ‘requests’

recently made of �ames by Ofwat chairman Jonson Cox do not feature as a headline challenge, for the simple reason that the company has no di�culty meeting them. �e company notes that even the seemingly intrusive direction to review the compo-sition of the �ames board to ensure its independence and trust-worthiness is already required following recent Ofwat reforms

worthiness is already required following recent Ofwat reforms of corporate governance. So on the face of it, Cox’s ‘de

of corporate governance. So on the face of it, Cox’s ‘de--mands’ seem relatively modest – though �ames

mands’ seem relatively modest – though �ames points out that nevertheless they will repoints out that nevertheless they will re--quire considerable work to make sure quire considerable work to make sure that customers expectations are met that customers expectations are met in full. Under Robertson, �ames in full. Under Robertson, �ames has already voluntarily moved to has already voluntarily moved to improve customer communications improve customer communications (see below), and to make its �nancial (see below), and to make its �nancial arrangements and investor returns arrangements and investor returns clearer – for instance it has recently clearer – for instance it has recently published Our taxes explained and and

Our taxes explained and Our taxes explainedOur �nances explained, two book--lets setting these aspects out in plain

lets setting these aspects out in plain English. Meanwhile, tying management Meanwhile, tying management rewards to performance for cus--tomers as well as investors is al--ready in place and very much in

ready in place and very much in keeping with the general direc--tion of regulatory travel for PR19 tion of regulatory travel for PR19

Steve Robertson is facing hames Water’s adversities head on and is determined to learn as much as he can from them to inform future strategy and delivery.

JULY/AUGUST 2017

w

Ofwat's PR19 team on price control design, business plans, customer outcomes, cost e�ciency and �nanceability.

INSIDE WICS' SRC21 DECISIONS|ROSS ON FUTURE REGULATION|CEO STEVE ROBERTSON ON HIS FIRST YEAR AT THAMES WATER

COMPETITIONWATCH❙ Large customers are engaged and switching...but the market lacks wow factor. ❙ Emerging issues three months on from go-live.Pennon Water Services' boss Richard Stanbrook on simplicity and service. ❙ Southern seeks retail partners on water efficiency.

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