Utility Week

UTILITY WEEK | 8TH - 14TH FEBRUARY 2019 | 13 Policy & Regulation dragged its overall score down. Meanwhile a set of decidedly average scores put Northum- brian, which had been pegged for fast track, at least, among the slow trackers. Affinity Water will be particularly disap- pointed with its significant scrutiny assess- ment. It was one of only two companies to be fast-tracked through the previous price review process, PR14. To have fallen so far will have le- it reeling. The company declined to comment. For the companies in the "relegation zone" of significant scrutiny, big challenges lie in wait. Environment secretary Michael Gove has accused them of a lack of ambition, not least as they operate in the most water- stressed regions. "I fully expect the revised plans to be more ambitious in delivering for customers and the environment, and I con- tinue to offer Ofwat my full support in hold- ing companies to account," he says. "They've all got their particular circum- stances," says Water 2020's Black. "I think at least a couple of those companies acknowl- edge that they are in a period of transforma- tion and turnaround. The significant scrutiny status very much recognises that, and we are very keen to work with these companies to get them to a good place through the dra- and final determinations." Some in the industry have expressed concern that so many companies have been placed in the slow track, especially because the connotations of "slow" may send a bad signal at a time when questions hang over the legitimacy of the sector, and renationali- sation is a very real threat. Le-ist groups leapt at the chance to denounce the sector. We Own It, which cam- paigns to renationalise the water industry, has re-emphasised its call for "accountable, democratic public ownership" and criticised the levels of debt across the sector. And Labour MP Sue Hayman, the shadow envi- ronment secretary, says: "That only three out of 17 water companies' business plans got the green light from Ofwat shows just how privatisation is failing customers as well as failing to invest in infrastructure to cut water and carbon use." Ownership structure Interestingly, the three highest-rated compa- nies are all listed on the stock market. The share prices of all three shot up on the morn- ing of the initial assessment announcement. One industry player suggests that this, along with some of the language used in the document about financial models, is evidence that Ofwat favours this type of corporate structure. It is no secret that the Sector struggling with pace of change S o the waiting is over and Ofwat has given us its initial assessment of water companies' business plans. For seasoned sector-watchers, there were some surprises in where individual companies landed, but the overarching themes are even more interesting and suggest that Ofwat has some challenges of its own. It is noticeable that there are no companies in the top cat- egory of 'exceptional' – defined as those that are "high quality with significant ambition and innovation for customers and that push the boundaries of the industry and set an example for others". While the regulator has rightly lauded those companies that have made it into the fast- track category, I think it will be disappointed that none has reached the exceptional heights. In companies' defence, achieving exceptional was always a stretching ambi- tion. Although PR14 was more forward-looking, the scale of change needed to position water companies for the demands of PR19 is much greater. This pace of change is all the starker compared to the challenge that energy companies face moving from RIIO-1 to RIIO-2. I think the lack of companies in Ofwat's highest assessment category bears out this view. A second theme emerging from Ofwat's initial assessment of plans is the continuing need for water companies to grapple with innovation more success- fully. Ofwat acknowledges that all companies' plans reflect the importance of innovation and there are some examples of best practice, but it is clear that innovation as business as usual is some way off. The regulator talks of companies needing to show "how innovation is sup- ported and encouraged across the business", and water com- panies need to rapidly embrace digital and innovation. While it is important to recognise that digital is just an enabler, it will drive water companies' future success. All this will require an enduring innovation culture and, in particular, the effective use of data. My colleague Alex Mahon helps utility companies use data analytics to improve performance, and he has found little consistent conversion of analytical insight into action and demonstrable performance improvement. This failure stems from a lack of recognition from senior leaders that technology or analytics projects are just the start of improving performance. Analytical insights truly start making a difference only when end users, usually a company's field force, understand, incor- porate and utilise those insights in their day-to-day activities. It is this understanding that water companies will need if they are to get anywhere near the excep- tional category on innovation. So how should we sum up the initial assessment scorecard? Obviously, some companies will be pleased, some disap- pointed and others somewhere in between. Ofwat has pushed companies hard, but the pace of change appears to have been too much for some. Ofwat will only be able to give itself top marks when there are clear signs that water companies are making real progress in these areas. For more information on PA Consulting's work with water organisations, visit: http://bit.ly/PA-water. Market view Richard Khaldi Water expert, PA Consulting continued overleaf

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