Ofwat has contrasted competitive retail markets where there has been radical change, with innovation, and technology-led advances in customer service with the water sector, describing the possibilities offered by advances in technology as having “largely been left unfulfilled.”

In a wide-ranging speech, Chief Executive Cathryn Ross told delegates at Moodys 2016 UK Water Sector conference yesterday that while service levels had improved the range of services offered hadn’t – something which would only become more apparent as the result of changes the competitive retail business market would bring.

Brexit: even more important for investors to be able to put money into sector with sound fundamentals 

Commenting on Brexit, Ross said that with a new Prime Minister and many new faces occupying positions that touch the water sector,  “we have something that feels very much like a new government.” However, while the economic regulatory regime is untouched by Brexit with Ofwat’s  statutory duties and functions set out in UK legislation, Ross added:

“ if one of the things the Brexit referendum result is telling us is about the paramount importance of customer legitimacy, the evolution of the regulatory regime to inform, enable, and incentivise the sector to deliver much more for less, is even more important now than it was before."

“And if it is even more important after the Brexit referendum for investors to be able to put money into a sector where the fundamentals are sound, the regulatory environment is predictable and where all this is underpinned by customer legitimacy – it should be even more important for investors to work with us on that evolution.”

In the run-up to PR19, Ofwat’s direction of travel is clear and its strategy, including the regulatory model, remains the same and will remain the same through PR19, she added.

Ofwat to consult on ODIs later this year

She told delegates that Ofwat is planning a further consultation later in the year on outcomes with a focus on three areas:

• how we can get performance commitments that are truly stretching,
• how we can get ODIs that are more powerful and dynamic,
• and how we can ensure that resilience is built into the outcomes that companies deliver for customers.

More clarity and information on resilience needed in PR19

Commenting on resilience in PR19 and Ofwat’s new statutory duty, Ross said:

“It does seems to us as though one of the issues in engaging customers on improvements in resilience is a lack of clarity on the levels of resilience that exist today. And a lack of clarity on how these vary between companies and quite possibly within companies. If companies are going to factor increasing resilience into their plans, this information is essential.”

Ofwat would need to be satisfied that the company has been doing everything it should have, both in terms of price control settlements and the licence, to invest in resilience - not only but especially where a company’s plan seeks funding for increased resilience, “ We cannot ask customers to pay twice.” She added.

Review of household competition “ a wakeup call” on customer service

Ross went on to discuss customer service, saying that Ofwat’s review of the costs and benefits of retail competition for residential customers in England “was a bit of a wakeup call”.

“ If economic regulation of monopoly is supposed to mimic the effects of a competitive market, that review left me feeling as though we have a long way to go in terms of informing, enabling and incentivising genuinely excellent customer service in the sector,” she said.

Water sector innovation - possibilities offered by advances in technology largely unfulfilled

Ross acknowledged that the sector “has done a great job” over past couple of decades at improving operational levels of customer service, in terms of supply interruptions, sewer flooding, water quality and environmental improvements.

However, she went on to contrast the sort of innovation in services and customer experience that have happened and continue to happen in competitive markets, saying that both Ofwat and the water companies should be looking for more stretch and a more dynamic approach.

According to Ross, in competitive retail markets, there has been radical change, with innovation, and technology-led advances in service - in contrast, in the water sector the possibilities offered by advances in technology have largely been left unfulfilled.

“Undoubtedly, service levels have improved but the range of services offered hasn’t. And this is only going to become more apparent as we observe the change that competition in the business customer market will bring,“ she added.

Ofwat to raise the bar on quality of PR19 plans

Commenting on companies business plans for PR14, Ross said while she genuinely thought companies had achieved a lot, there was “rather more iteration and hand holding than we had initially expected…..But this isn’t something we plan to repeat in PR19.”

“In PR19, we will be simultaneously raising the bar on the quality of plans and reducing the extent to which, during the review, we help companies to get over that bar. We are moving from four separate price controls in PR14 to six in PR19.”

And while we expect this will enable us to take a more targeted approach to our regulation from 2025, it means we have a lot to do in PR19, and we have a lower budget to do it. So we will need to take a more focused approach in deploying our resources.”

 “It is also entirely in line with companies taking ownership of their plans, and companies and their investors bearing the risk associated with the quality of those plans.”

On the PR19 process itself, Ross said the evolutionary approach Ofwat had taken in PR14 “didn’t lend itself to a hard line during the process.”

PR19 - tougher totex efficiency challenge and tougher methodology

Ross went on to say that a step change in efficiency is the only way the sector is going to deliver great service, with genuine resilience, at a price that is not only affordable but seen to be fair.

Referring back to last year’s conference which had highlighted the expectation of a tougher totex efficiency challenge at PR19 than PR14, she told delegates this came in part from the expectation that Ofwat will get “significant challenge” on wholesale costs from retailers in the competitive market for business customers in England., adding:

“And it reflects my expectation that our methodology will be tougher – possibly with a benchmark that moves from upper quartile more towards frontier, possibly with a more forward looking, rather than historical, benchmark, possibly with a significantly shorter glide path to get to that benchmark.”

On the prospect of separate price controls for water resources, bioresources and water network plus and waste water network plus, Ross told delegates that this will enable Ofwat to take a more nuanced approach to assessing the loss of a comparator. “And as markets emerge and reveal information, especially in respect of water resources and bioresources, we will be less reliant on comparisons between incumbents,” she said.

2015-16 annual performance reports had revealed "siginificant underspend" on totex

Ross also referred to Ofwat’s first review of companies’ annual performance reports, for 2015-16 performance which had revealed “a significant level of underspend on totex, and particularly that element of totex which companies indicated would be capitalised (capex in old money).

While this could reflects efficiency developments, Ross warned that if  it reflects companies having been slow off the blocks in terms of their capital programmes, that would be “disappointing”, saying:

“And if it reflects a degree of compromise on investment – including investment in resilience – that should have happened in this period, then that is not acceptable. And as I said earlier companies cannot expect to press the ‘reset button’ on this in PR19 and cannot expect customers to pay twice.”