Water industry regulator Ofwat has launched a new consultation on the format the Service Incentive Mechanism will take for 2015 onwards - deadline for responses is 31 January 2014.

In 2010, Ofwat introduced the service incentive mechanism (SIM) as the national minimum incentive for customer service. The consultation addresses changes Ofwat now needs to make to the detail of its application during 2015-20. The SIM was introduced in 2010 to provide companies in the water sector in England and Wales with a common outputs-based measure of customer service quality, against which the companies have been financially incentivised,  comprising:

• a quantitative component consisting of six customer handling metrics – number of calls abandoned or engaged, unwanted phone contacts, written complaints, and escalated complaints within the company and to the Consumer Council for Water (CCWater); and
• a qualitative component based on the results of customer satisfaction surveys with a recent resolved contact (by any media for any reason).

Each component is scored out of 50, and as part of setting price controls, companies are rewarded or penalised according to whether they are above or below the average score for the sector. The maximum reward for highly performing companies is capped at 0.5% of revenue of the appointed company’s integrated business; the maximum penalty is capped at 1% of revenue.

The SIM is widely regarded as having worked successfully to date to drive up the quality of customer service and is frequently used by analysts as a key performance measure. In its methodology statement for AMP6 the regulator confirmed that

a. the SIM would be used as a standard minimum national incentive to drive quality of customer service for 2015-20.

b. its likely scale and scope would be similar to the current SIM, but that it would apply only to the household retail price control in England and both retail controls in Wales (because of the Welsh Government’s policy decision not to introduce choice for non-household customers).

The consultation covers:

•  the design of the SIM for 2015-20; and
• the application of the incentives to the price controls set for 2020 onwards (based on the performance during 2015-20).

Ofwat wants to continue to incentivise the best companies to maintain their service levels and also wants other companies to improve the level of service that they offer to customers, particularly when those customers cannot choose their supplier. Ofwat said its new approach to setting price controls means that the current SIM will need to be modified and that the SIM now needs to evolve to:

• focus on the customers that have no choice (service incentives will no longer be relevant for non-household customers in England who will be able to choose their supplier);

• apply the incentive rewards and penalties to the retail price control only; and

• continue to measure and incentivise customer service for non-households in Wales (who, based on Welsh Government policy, will not be eligible to choose their supplier).

The consultation is based on the following assumptions.

• Customer service for all household customers will be measured separately from non-household customers whether in England or Wales, reflecting the changes to the price control methodology.

• Incentive rewards/penalties will compare all companies on the same basis – that is, the measurement of and incentive for household customer service will be the same in England and Wales.

• All customers will continue to be protected by the mandatory standards of service set out in the GSS Regulations.

• Customer service performance for non-household customers in Wales who do not have a choice of supplier (that is, those who use up to 50 million litres of water a year) will be augmented by a SIM incentive. This will be measured separately from household customers.

Ofwat is inviting views on:

• the proposition that the SIM should continue to be used to incentivise service improvements throughout the value chain, rather than being focused entirely on ‘retail’ activities;

• how these incentives (and financial risks and rewards) might be passed through from retail to wholesale businesses; and

• the proposition that we companies should be left to develop internal ‘contracting’ arrangements as they see fit, rather than be subject to any prescribed arrangements.

Ofwat said it expects to use the year 2014-15 to test the conclusions from the consultation. Between now and the deadline for responses by 31 January 2014, the regulator is planning to hold industry workshops in England and in Wales. Plans for these will be confirmed separately but they are likely to be early in the New Year.

Ofwat will use responses to the consultation to inform its decisions on the design of the service incentive mechanism (SIM), which will be published in March 2014.

Click here to access the consultation document.