Utility Week

UTILITY WEEK | 30TH NOVEMBER - 6TH DECEMBER 2018 | 15 Policy & Regulation can deliver for their customers, be soundly financed and provide an acceptable share- holder return? Historically, regulated asset industries are naturally attuned to play- ing a long game, but it may now be time to turn that on its head. Business as usual and gradual evolutionary change will not be enough, and companies will need to address four key areas to bring about the necessary transformation. The first of these is to recognise and embrace the need for fundamental change to raise performance to the next level and beyond. Doing more of the same in the same way will not help with the "giant leap" that is needed. Companies will need a refreshed vision and a revitalised, value for money proposition for each customer if they are to remain relevant into the future. Second, there is a need to rapidly embrace digital and innovation. We can all see the havoc that digital is supposedly wreaking on the high street, though it is really consumers who are wreaking havoc, by changing their needs and taking their business elsewhere. Digital is just an enabler and water compa- nies need to understand how it can enable their business, what other innovations can create a step-change and how they can adopt an enduring innovation culture. The govern- ment has also launched a consultation on how regulation can enable cross-sector col- laboration and how to stimulate innovation in the sector, which will allow further debate on new approaches, in addition to the strengthening of the UK regulators' network. Third, companies should embrace agile working. Confronted with the need for change, the temptation is to reach for the transformation manual, but major pro- grammes are fraught with challenges and industries with a focus on the long term tend to create slow-moving transformations, ham- pered by legacy systems and processes. Agile transformation is a much better approach and our own research has shown that agility is critical to strong company performance. Last, and perhaps most importantly, com- panies will need to change the cultural and stakeholder conversation. That means put- ting the customer and society dead centre and understanding their world and needs, to develop the capabilities to respond dynami- cally to the changing external environment. Now is the time to protect our future pros- perity and create a new social contract that re-engages customers, government, regula- tors and the environment. Our regulated asset industries must lead this change if we are to make this giant leap. Mark Fitch and Liz Parminter, energy experts, PA Consulting MODELS OF REGULATION THE EVOLUTION OF ELECTRICITY AND WATER REGULATION OFWAT'S HIGH-LEVEL APPROACH TO PR14 THE RIIO FRAMEWORK Simple cost efficiency Ofwat challenged companies' proposals where necessary as part of its risk-based review of business plans Company boards were responsible for listening to their customers and for the proposals they submitted to Ofwat Companies had to develop and propose outcomes – and associated performance commitments – through customer engagement. They also had to propose a consistent supporting package of ODIs Customer Challenge Groups had to challenge – and report to Ofwat on – the quality of companies' customer engagement and how well they took account of customers' views and priorities RPI-X RIIO1 Electricity distribution Water Current company position and implemenation challenge Time Electricity transmission RIIO2 PR14 PR19 + Basic peformance measures/ point incentives + Broad-based incentives + Outcome incentives + Common commitments towards a social contract Ofwat adopted an outcomes-focused approach, with companies held to account for what they delver for their consumers, not the way they choose to deliver it RIIO primary outputs Satisfaction of consumers including a broad spectrum of network users, with network services Aspects of reliability and availability of network services that consumers are concerned with Compliance with HSE safety standards The process for new / enhanced connections to the network Impact of operations on the environment and contribution to low carbon targets Services to fuel poor and vulnerable consumers in line with government requirements RBR Outcomes CCGs Board assurance Customer satisfaction Reliability & availability Safety Conditions for connection Environmental impact Social obligations Performance commitments and ODIs 1 2 3 4 5 PR14

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