Water industry regulator Ofwat is progressing its approach to a number of key issues for the upcoming Price Review 2019 for the water companies’ AMP7 2020-2025 investment programmes.

At a Water 2020 stakeholder workshop held by Ofwat on 21 February 2017, Jon Ashley Associate Director, Water 2020, Outcomes and Customer Engagement told water company delegates that Ofwat had already decided the following key elements of the PR19 regulatory framework:

• Strengthened approach to customer engagement and outcomes
• CPI/CPIH indexation of price/revenue controls and the RCV
• Separate binding price controls for water resources and bioresources (and the broad outline of how the controls will operate)
• Information platforms for the water resource and bioresource markets
• Greater use of markets in the financing and provision of new assets by third parties (direct procurement for customers)

The upcoming PR19 methodology will set out further detail of Ofwat’s regulatory approach - in particular expectations of what it expects to see in company business plans, how it will assess those business plans and its approach to intervening if companies do not submit good business plans. This will also cover Ofwat’s approach to individual elements of the price control such as affordability, resilience and financeability.

The workshop had a particular focus on performance commitments, outcome delivery incentives, the future of the current Service Incentive Mechanism (SIM) and affordability for all and vulnerable customers.

SIM must change in order to be fit for the future

 Ofwat’s November 2016 consultation asked eight key questions about the future of the SIM measure:

• considering the scope and outcome of the measure?
• looking at service in different parts of the value chain?
• comparing service levels in water with other industries?
• asking more than those who have contacted or complained?
• using more channels to capture the voice of the customer?
• considering the impact of complaints data on incentives?
• considering how to support the vulnerability agenda?
• including other customers such as developer services customers?

According to the notes of the workshop, attendees were generally in broad agreement that the SIM must change in order to be fit for the future. There was also broad agreement that a satisfaction measure should be maintained, and that it should apply to the full service experience. However, there were differing views on the scope of the measure – with some delegates wanting to maintain a narrow customer service measure for ease of comparison and greater business controllability.

On wholesale to retail, there was also general agreement that the current 50:50 split works, despite some concerns over customers’ ability to differentiate between wholesale and retail.

There was also broad support for making comparisons beyond the water sector, together with wide agreement that channels should be widened to reflect newer communication channels.

However, while there was general agreement that vulnerability is important, attendees felt that this does not belong in any future measure. There was also caution beyond end users – with some against including developers; others suggesting creating a separate developer measure and only some recommending that developers should be added to the current measure.

Ofwat said that bringing all the elements together, there are three main areas of debate:

• How do we incentivise overall service excellence?
• How do we incorporate cross sector comparisons?
• How do we better capture the voice of the customer using multiple channels?

SIM proposals include multi-channel approach to incorporate rant and rave / social media sentiment

The workshop notes set out the extent of the scope of the current SIM and then looks at three potential options. Proposals for potential options on the table which are not currently part of the SIM include:

• Incentivises full customer experience
• Measures customer satisfaction which forms 90% of score
• Measures customer satisfaction which forms 70% of score
• Measures customer satisfaction on a scale of 1-7 using SMS and an online survey sent via email. Administered and funded by companies
• Measures satisfaction on a scale of 1-5 using SMS and an online survey sent via email. Administered and funded by Ofwat
• Measures satisfaction on a scale of 1-5 via a phone survey. Administered and funded by Ofwat
• Compares water with all other industries: sets minimum absolute target using UKCSI with relative ranking above that where only top performer receives financial reward each year/in-period. Target changes annually. Results published annually.
• No comparison with other sectors. Publish UKCSI scores alongside scores for new measure as a reputational incentive.
• A multi-channel approach which incorporates rant and rave / social media sentiment analysis results forming 10% of overall score. (Current SIM captures experience of mainly phone and some web-based inbound contacts)
• Includes satisfaction of only those who contacted supplier (inbound contacts) but also includes contacts by email, webchat, online, phone and where attributable, by social media
• Beyond end users – a satisfaction survey includes developer services customers
• Overall affordability – low and value for money bills for everyone during the next price control period
• Long-term affordability – low and value for money bills for everyone over the long term
• Affordability for those struggling to pay their bills – reductions to bills for qualifying customers

Affordability is one of four main themes of PR19

Commenting on affordability, Ofwat described it as a key focus for Governments, consumer groups and charities which is an important element of delivering trust and confidence. In its Water 2020 paper Ofwat identified the pressure on customer bills and affordability as one of the key challenges for companies.

The regulator cited the example of the findings last week by the Joseph Rowntree Foundation in relation to economy-wide concerns that ‘Nearly a third of the population of Britain is living on an "inadequate" income’ and ‘millions of families "just about managing" are on the tipping point of falling into poverty’. Ofwat also referred to new data last week published last week by the Office for National Statistics (ONS) showing that the bottom income decile of households spent on average 3.3% of their income on water in 2015-16.

Water industry needs to continue to improve awareness of social tariffs

Since PR14 UK and Welsh Government policy has developed, the regulator said it had produced new analysis of affordability and vulnerability and that customer uptake of social tariffs has increased considerably. By March 2016 262,670 customers were receiving financial help through WaterSure and social tariffs (of which 130,000 through social tariffs).

All 17 companies offer social tariffs following customer engagement, although two still have to implement them in parts of their areas in 2017. The schemes currently in place have the potential to deliver assistance to around 350,000 to 400,000 households.

However, Ofwat pointed out that eligibility, the discounts offered and funding for the social tariffs vary between companies, saying:

“The industry needs to continue to improve awareness of social tariffs with customers who would benefit from them.”

 Ofwat went on to set out three main aspects to affordability which are relevant at PR19:

1. Overall affordability – low and value for money bills for everyone during the next price control period
2. Long-term affordability – low and value for money bills for everyone over the long term
3. Affordability for those struggling to pay their bills – reductions to bills for qualifying customers

The regulator said it is currently developing ways of testing these three aspects of affordability at PR19, building on the PR14 approach to affordability, companies’ existing performance commitments and policy developments since PR14. Key questions Ofwat is looking to answer include:

• Should we use a metric to assess the overall affordability of business plans e.g. percentage acceptability? Is there other information we should use?
• What information and metrics are needed to assess whether a company has addressed long-term affordability?
• What metrics or other information could we use to assess companies’ efforts to address affordability for customers who are struggling to pay their bills?

Ofwat said it would continue to engage and refine its policy on affordability and finalise its policy proposals on affordability for the PR19 methodology consultation which will take place in July 2017.

Mixed views on Ofwat’s proposals for ODIs and performance commitments

 The workshop also heard how Ofwat had further developed its thinking on outcomes in the form of Outcomes Delivery Incentives (ODIs) and performance commitments (PCs) following on from the November 2016 outcomes consultation.

The consultation had asked a number of questions including whether more use should be made comparative performance information to make the commitments more stretching and invited comment on the common performance commitments Ofwat was suggesting for PR19.

Attendees at the workshop heard that the consultation had revealed there was strong support for making better use of comparative information and that there was general support for a group of common PCs, although no-one had supported all 10 proposed by Ofwat without any reservations.

There were mixed views on bespoke PCs, in particular the level of detailed guidance required and the level of coverage of specific areas that could / should be mandated. There were also mixed views on the use of more powerful ODIs.

Asset health: widespread support for using water mains bursts and sewer collapses as common PCs

Attendees also heard about Ofwat’s thinking on asset health: the regulator had proposed two asset health measures as common PCs the outcomes consultation, suggesting that water mains bursts and sewer collapses were both appropriate for comparative assessment

It also proposed six draft asset health outcomes expectations for PR19 and looked at when ODI rewards might be appropriate for asset health performance commitments.

Responses to the consultation showed widespread support for using water mains bursts and sewer collapses as common PCs, the introduction of  some partial standardisation to asset health and on Ofwat’s asset health expectations for PR19. However, opinion appeared to be more divided on Ofwat’s asset health reporting requirements for PR19, while only 50% of respondents supported the use of ODI rewards as appropriate for asset health PCs.

Ofwat now intends to consult on the way its PR19 methodology for setting price controls for 2020-25 in June or July 2017 and set final price limits in December 2019.