Utility Week

8 | 26TH OCTOBER - 1ST NOVEMBER 2018 | UTILITY WEEK Interview companies is to have a very big penalty and incentive around the customers' views of that company in every respect. "This would cause the companies to segment their customers more, to try and satisfy customers on a more indi- vidual basis than they are at the moment in all sorts of very important ways for customers." One area where Smith suggests this method could work well is complaints. In September, the consumer watchdog released a report revealing that households made more than 2.1 million calls to resolve problems last year. It found that nine out of 21 water companies in England and Wales reported an increase in calls from customers to resolve problems – known as "unwanted contacts". Four companies also reported an increase in written complaints, although the number for the indus- try as whole fell by nearly 17 per cent. Although the number of complaints has undoubtedly improved a great deal, Smith points out they still aren't always handled in the way they should be. "There's been a 70 per cent reduction in complaints since the highs the sector saw before CCWater came along and put pressure on the companies. But there are still problems." This lack of proper incentivisation has been part of the cause of the legitimacy issues that have plagued the sec- tor of late, Smith argues. "The regulatory system doesn't very directly incentivise companies to improve the things that really matter in that regard. They incentivise compa- nies to improve their services, which has an effect, but not directly driving the companies to really think about their customers, and to get the interests of shareholders and customers much more aligned. We think if you had a very big incentive on the companies, then boards would be interested and they would start to do things that other companies in other sectors do automatically." Will Ofwat's new customer service measure, C-MeX, help? It's a step in the right direction, says Smith. "It starts to do what we said it should, which is include the perceptions of customers who haven't contacted the company." However, he has questions about the measure. Is the overall incentive big enough to make a difference rela- tive to other incentives, for example the outcome delivery incentives? And will C-MeX – which could have the effect of reducing the focus of complaints – prompt the poor performers to improve dramatically, and will it encour- age the mediocre to do better? "There is still a problem with some companies on complaints, despite the service incentive mechanism, and despite CCWater's pressure. We want those compa- nies to be rattled out of that position." Another way of getting companies to act more like they are in a competitive market would be to introduce competition. Does Smith see the household market being opened any time soon? The business market must first prove its mettle, especially for smaller businesses which have, so far, not benefitted greatly from competition. Following an announcement in 2015 from the Treasury that it wanted to introduce competition into the domestic market by 2020, Ofwat conducted an analysis of the benefits this would bring to customers. At the same time, CCWater did its own research which found there was a lot of appetite for consumers to have a choice of their water retailer, but this level of interest quickly dropped away once they realised what was on offer. "What's on offer in the retail bit of the business is maybe £10 off the bill. At the very most, if you took all the value out of the retail business and did it at zero marginal cost, it could be £40. Many cus- tomers don't find that very interesting." Smith also recommends that gov- ernment and regulators keep an eye on whether the energy market works for domestic custom- ers "better than it has done in the past". "If you can't make a market work that's got maybe £200 on offer to customers, it's going to be very difficult to make a market work that's only got £10-£40," he says. Whenever talk of renationalisation looms, the indus- try's favourite figure to quote is the £150 billion that has been invested by companies in England and Wales since privatisation in 1989. Smith says the figure is beside the point. He believes companies should be focusing on improving customers' perceptions of them and showing them what's improving – as locally as possible. "The legitimacy issue is nothing new," Smith suggests. "We've been flagging it up since 2007/08." He argues that although customers are very satis- fied with the service they get overall, they're far less satisfied with value for money and fairness. "When you explore the reasons for that it is to do with when prices have gone up suddenly and unexpectedly and a lack of understanding about what companies are doing to jus- tify that." He also cautions the industry against making "super-normal" returns. Since 2015, Ofwat has been criticised by CCWater, the National Audit Office and the Parliamentary Pub- lic Accounts Committee for its "over-generosity" to the industry. While Ofwat had a lower cost of capital assumption when prices were last set in 2014, water com- panies' financial performance since 2015 shows they are "still raising finance at a cost lower than their regulator assumed". CCWater did, however, welcome signals from Ofwat that it would set a record low cost of capital at PR19 (2.4 per cent in RPI terms). "The industry has been making returns in excess of what you'd expect in a low- risk industry for a long period of time – that is not sus- tainable," says Smith. "You've got to address all of these things, you can't just be picking out the good bits. You've got to address the underlying issues. The combination of proving to customers that you're investing on their behalf and not making super-normal returns for a low-risk industry is absolutely fundamental." For the future, Smith would like to see a sector that truly does good things for customers, whatever the model. "What I love is urgency towards making sure cus- tomers are happy with service, value for money and fair- ness. This will undoubtedly improve perception. "The assets can be owned by government or they can be owned by the private sector, but the crucial thing is customers believe that what they're getting is good and not a rip-off – that's got to be the most urgent issue the industry faces. And the thing about utility customers is that it's not an overnight success. Those companies that are improving on those metrics are doing it because they're doing it every day for years and years." Smith says sternly that customer service shouldn't be a "box-ticking exercise". "It's about analysing what your customers are doing and thinking. That to me is the vision. You want customers going: 'yeah the water indus- try is pretty good'. Then I think we've got a success on our hands." "Proving to customers that you're investing on their behalf and not making super-normal returns for a low-risk industry is absolutely fundamental."

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