Ofwat has published further guidance on how the water companies will have to consult their customers on their business plan proposals for 2015-20 – however, the water industry regulator says that “some issues will only become clear as the price-setting process progresses.”

Most companies have already begun to engage with their customers and are also appointing the chairs and inviting consumers to join their Customer Challenge Groups (CCG). Several have held their first meetings.

Ofwat held the first meeting of its own sector-wide customer advisory panel in February 2012 and expects to publish its future approach to setting price limits in May 2012. The regulator will then consult in the autumn on its proposed methodology and timetable for setting price limits for 2015-20 – the upcoming AMP6 investment programme for the UK water companies.

According to the regulator, both the water companies and their customers are now asking questions about how the process will work in practice. Ofwat said it is publishing the latest update on how it expects the customer engagement process to work in order to "ensure all participants understand it and their various roles and responsibilities as it moves into the practical stage of customer engagement."

The regulator sets out the key responsibilities for the water companies’ CCGs charged with examining the business plans as:

• testing that the company has adequately understood and addressed its customers’ priorities and needs; 
• challenging whether the plan will deliver the right outcomes and levels of service at a price customers are willing to pay;
• assuring Ofwat on how well the company has engaged with its customers and highlighting any concerns; and
• reviewing how well the company delivers its plan and challenging its response to any service failure.

However, the regulator emphasised that the CCGs do not agree the company’s business plan or prices on behalf of customers – a task which falls to Ofwat.

Ofwat’s own responsibilities also include the provision of information to the CCGs on its regulatory assumptions, the price review methodology and sector-wide information.

Ofwat is not providing specific guidance to the water companies on how they will be required to engage directly with their customers to understand their views, which cannot just be via customer representatives. This has instead been left to each company to find an approach that works best for it and its customers.

Firms must enable CCGs to challenge phasing, scope, scale and method of delivery of investment programmes

The firms will however be expected to use a wide range of information from customers and where necessary carry out any robust new customer research needed to understand its customers’ priorities for services  and views on bills.

Ofwat said it would be looking for evidence that each company’s business plan reflects its customers’ views when making decisions on price limits. The companies will be expected to test proposed outcomes through customer engagement and to share conclusions with customer challenge groups. They will also have to enable the groups to challenge the proposed phasing, scope, scale and method of delivery of investment programmes.

However, although Ofwat says it “will hold each company to account for understanding and responding to its customers’ views in its business plans” at this stage it has not set out the steps it would take in the event of a water company’s customer engagement process being deemed unsatisfactory. Comment on possible sanctions currently appears to be confined to saying that :

“The CCG may wish to propose measures of success and consequences for the company in the event that it fails to deliver its outcomes.”

From Ofwat’s side, the regulator simply says that customer acceptability will be a key factor in its decisions and that evidence of effective customer engagement on, and support for, a company’s business plan will inform its scrutiny of the plan. Ofwat’s expectation is that plans will require less scrutiny where:

• the company demonstrates that its customers support its plan;

• the company can comply with its obligations and meet cost assumptions; and

• Ofwat is confident of its track record of effective planning and delivery.

More guidance may be forthcoming when Ofwat publishes its framework for setting price limits in May when it will provide further advice to the Groups on setting outcomes.

In terms of the information the water companies will be expected to provide to the CCGs, the Ofwat guidance is of a general nature, with each company needing to provide “in an accessible form the information that its CCG needs to work effectively.”  Ofwat suggests that this could include likely costs of a course of action, options on performance standards, possible risks to delivery, and customers’ stated preferences and willingness to pay.

While the guidance says that the CCGs are encouraged to ask the companies for any specific information they need, it does nor spell out what the options are if this is not forthcoming – Ofwat confines itself to simply saying:

“If a CCG needs information that the company cannot provide, it can contact us.”

"Some issues will only become clear as the price-setting process progresses.”

The regulator is now planning to hold a workshop for companies on 16 May 2012 to continue to develop the process. However, with Ofwat’s upcoming consultation on its price setting methodology and timetable in autumn 2012, the detailed stakeholder engagement process the water companies will need to carry out could well come under increasing time pressures.

However, presumably the regulator will have some ability to allow leeway in this regard – the guidance also states:

“This new approach to customer engagement is an exciting development, but it has not been tried in any utility sector before.

So it will be challenging for everybody involved and we will need to work closely with all our stakeholders, including the newly-formed CCGs, to make it work and learn lessons as it develops.

We are at the early stages of its development and so not all information is yet available. Some issues will only become clear as the price-setting process progresses.”