Utility Week

8 | 1ST - 7TH MARCH 2019 | UTILITY WEEK Interview Referring to the 15 per cent leakage reduc- tion target Ofwat has challenged the sector to deliver – which her predecessor set – Fletcher says it's been "an interesting experiment" in using a different tool as a regulator. "It's been really encouraging to see all water companies say, 'well we know we have to meet at least a 15 per cent leakage reduc- tion over the next five years' – so I think there is some- thing we can build on and provide more clarity." And she suggests another thing for the regulator to think about is whether it is giving enough feedback and doing enough ongoing monitoring on the sector's perfor- mance. That includes sharing good practice. "As we're currently in the middle of a price review, we're building up a very detailed understanding of each and every company and having really fruitful conversations with them about the challenges that their business faces. "I think there is a question about whether we should make that more of an ongoing dialogue within each regu- latory period and use that feedback to continually drive improvement as well as the incentives that are sitting within the price review." Bringing the conversation back to Ofwat's "biggest room", we discuss the initial assessment of the PR19 business plans and whether the companies that have found themselves in the "significant scrutiny" and "slow track" categories have enough time to make the required changes and are they realistic and reasonable? Fletcher says: "We've had feedback about how help- ful all the analysis that we published has been to com- panies and I certainly know that among those four [in significant scrutiny – Thames Water, Southern Water, Affinity Water and Hafren Dyfrdwy] some of the compa- nies have pored over all of the plans and it's helped them to get a better understanding of the gaps and has given them the confidence that they will be able to submit a really good plan by April. "Fundamentally the process runs until December, so I very much hope and in fact I am expecting many of the 14 slow track and significant scrutiny companies to be coming forward with plans in April that we feel are now at the level that allows us to pretty much lock down the plans. "Although there are some companies that are going through a big transformation exercise and may still need a lot of dialogue and a lot of time with us a–er April before we can feel we have really got a regulatory settle- ment that we can secure," she adds. One such company that has been trying to transform and was particularly disappointed with Ofwat's initial assessment of its plan is Thames Water. Steve Robertson, the chief executive of the largest water and sewerage company, went as far to say as he felt like "a proud dad being told he had an ugly baby". In a recent piece for Utility Week, he expressed apprehension about how Thames Water can "significantly increase resilience" while spending less than it currently does. "One of our big concerns is that they [Thames] are inefficient," Fletcher explains. "And that's based on a lot of benchmarking with the other companies" – both on its base costs and its enhancement expenditure. "Thames's projects came out looking inefficient and that's where we need to have that dialogue with them." She stresses: "Benchmarking enhancement projects is much more of an art than a science so we will be expecting to have ongoing conversations, not just with Thames, about how we have reached our view of efficient enhancement spend. It's really important to be clear that we are saying these projects by and large need to go ahead but we are not convinced they have pitched in with an efficient cost for them." And at the other end of the scale, no company quite made the "exceptional" category – was Fletcher disappointed by that? "It was a very high bar," she says. "I think the sector has a lot of challenges on its plate and we've got some really big strategic challenges in terms of climate change and population growth. "We've also got legitimacy challenges that are being levelled against it. So, I think for any company to have hit that exceptional standard it would have had to pull something really eye-catching out of the bag and shown that it was addressing some of those big strategic challenges." For Ofwat it was important to set the bar high as it gives a signal that the sector "still has some way to go". Overall the regulator is pleased to see how far the plans have come on since PR14. "There has been a real step-change in terms of ambi- tion and plans being rooted in proper engagement with customers. The sector is also waking up to its responsi- bility to vulnerable customers and what it can do for the environment. Even in significant scrutiny we've got some good examples of good practice." With the sector's legitimacy being called into ques- tion of late, does it need to get better at shouting about achievements? "There is a question whether there is enough known about what it does and it's certainly worth thinking about how that message gets across, but I would really push back on the idea that the legitimacy challenge on the sector is just one of it being misunderstood. "Fundamentally, changes and improvements need to be made to address people's concerns." Ofwat is pushing an agenda on transparency, board leadership and governance, and it is saying every board needs to set a purpose that "reflects the interest of all its stakeholders not just its shareholders and investors". "Frankly, that has not always been the case." The regulator will continue to look at itself and how it can be more effective to "play the biggest role possible" so that the sector achieves the vision Ofwat has for it. The vision, while still being formulated, is likely to focus on greater collaboration and innovation. And if there is something in the way that Ofwat regulates the sector that is preventing companies from rolling out tech- nology or adopting innovative techniques, then Fletcher wants to hear about it. "I want to encourage the water companies to be clear with us where our regulations don't work in the interests of customers and the environment and be more forth- right in coming to us with proposed alternatives." If PR19 was Ross's tough price review, will the next be Fletcher's to bring in – is she in it for the long haul? "Whoa, where will I be in five years' time?" she laughs. "The water sector is really fascinating and a–er a year I can see more clearly than ever what needs to be done and I want to be here for as long as I think I can do a great job and help lead Ofwat to where it needs to go and to where the sector needs to go." A–er all, the regulator is not just for a price review. "We're building up a very detailed understanding of each and every company and having really fruitful conversations with them"

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