Utility Week

12 | 8TH - 14TH FEBRUARY 2019 | UTILITY WEEK Policy & Regulation Analysis P R19 is a big deal for water companies. Not only does the 2019 price review determine their core revenues for the 2020-25 period, it is also considered a major indicator as to how they are performing over- all. No surprise, then, that companies were waiting with bated breath as Ofwat pub- lished its initial assessment of their business plans on 31 January. Many, though, ended up disappointed. Just three of the water companies – Sev- ern Trent, United Utilities and South West Water – impressed Ofwat enough to be given "fast track" status, meaning their plans have been given the green light. The rest will need to spend the next few months revisiting their plans to make sure they are up to scratch by 1 April. And the few placed in the "signifi- cant scrutiny" category – Thames, Southern, Affinity and Hafren Dyfrdwy – will now have to go back to the drawing board and com- pletely rework their submissions. Even then, they will be subject to increased regulatory scrutiny for the remainder of the price review. What should companies take from the regulator's initial assessment? Well, Ofwat wasn't lying when it said PR19 was going to be the toughest price review to date. The general feeling in the industry is that their business plans were a marked improvement on the last price review, PR14. However, even those which came out on top didn't score highly across the board. This is emphasised by the fact that the coveted "exceptional" category remains empty. Ofwat's explanation for this is that none of the plans is deemed stretching enough. "We set a very high bar at PR19, and for com- panies to stand out from the rest they would have had to go well beyond what we would expect as a high-quality business plan, and we didn't quite see that even though the fast-track business plans look good in the round," David Black, senior director, Water 2020, at Ofwat, tells Utility Week. "Nonethe- less, we think it was a valuable approach to take and we certainly see signs of companies really stretching to get there, which is great." Former Ofwat boss Ian Byatt is pleased to see the regulator taking a hard line. He tells Utility Week: "I am delighted that Ofwat has told many companies to think again; custom- ers deserve better service and lower prices. Prices, profits and dividends have been too high, ever since the soœ price review of 2004, and need to be reduced." Slightly puzzling is the fact that the three companies which have been given fast-track status are praised by Ofwat for "setting a new standard for the sector" – similar language to that used in the final methodology, published in December last year, which said exceptional status would be awarded to those that "push the boundaries of the industry and set an example for others". An industry source sug- gests the three top-rankers may be on a par, making it impossible to elevate one above the others. One utilities analyst who spoke to Utility Week agrees, saying companies would have needed something "earth-shattering" to be put in the category. PA Consulting's water expert Richard Khaldi (see opposite page) suggests that the failure to award the highest status to any company is indicative of the fact the sector is still struggling to adjust to the rapid pace of change in the regulatory model. He says the scale of change required to position water companies for the demands of PR19 are "much greater" than PR14's were. "This pace The regulator gets ruthless Ofwat's initial assessment of companies' PR19 business plans has landed. Its verdict? None is 'exceptional' and the 'fast tracks' are heavily outnumbered by the 'slow tracks'. Lois Vallely reports of change is all the starker when compared to the challenge energy companies will face moving from RIIO-1 to RIIO-2," he adds. "I think the lack of companies in Ofwat's high- est assessment category bears out this view." The scores Digging into the detail of the nine criteria (see table, overleaf) the regulator used when grading the business plans sheds some light on the companies' ratings. For some, avoiding "significant scrutiny" will be considered a victory in itself. Bristol Water has had a trying time in the past and, despite recent changes at the top, was widely expected to be placed in the bottom category. Utility Week's own PR19 predictions report, published in December 2017 (see tables, overleaf), forecast the company would be given a significant scrutiny ranking. Even so, Bristol's scores leave much to be desired – a C in almost every area, and a D in "account- ing for past delivery" – possibly a hangover from past leadership. The decision looks harsh for some com- panies placed in slow track. Anglian Water scored highly across the board, bagging one of just three As (for engaging customers), but Ds in "securing cost efficiency" and, puz- zlingly, "securing confidence and assurance" COMPANY CATEGORISATIONS Source: Ofwat Fast track Severn Trent South West United Utilities Slow track Anglian SES Bristol South East Dwr Cymru South Staffs Northumbrian Yorkshire Portsmouth Wessex Significant scrutiny Affinity Hafren Dyfrdwy Southern Thames Plans ready to implement. Receive financial benefit, early decision and early certainty. Further work to do on plans. Substantially rework and resubmit plans. Increased regulatory scrutiny.

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