Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/184245
Interview league table on the SIM [service incentive mechanism] is not a good place to be in terms of the legitimacy agenda. That's why we've made such strong commitments in our business plan around the level of improvement, which we're starting to deliver now rather than waiting for AMP6." The other priorities Wright lists are: bathing water quality improvement; reducing the number of properties subject to flooding; and achieving a bold per capita consumption target, set on the back of a 90 per cent metered customer base by 2015. To put its money where its mouth is, Southern is voluntarily introducing "outcome delivery incentives" for outcomes customers have identified as especially important. In a nutshell, the company will pay a penalty if it fails to meet a set target – say, the number of properties suffering flooding. If it meets the target there will be neither penalty nor reward. If it exceeds the target it will get a reward. I ask if the company will be incentivised, then, to prioritise delivering the targets where there are potential rewards, possibly to the detriment of other outcomes? Wright replies honestly: "Yes, but only because those are the areas customers have told us are important… So it's not a question of us focusing on the things that will get us a reward. It's almost the reverse, which is that we will be focusing on things they want to see improvement in and we will pay a penalty if we don't." He adds "the downside will be bigger than the reward – in aggregate". The focus on customer priorities in the draft plan and on dealing with customers equitably is crucial to the entire price review process this time around. According to Wright: "I can't stress highly enough this reorientation away from a regulatory process and ticking the boxes for the regulator, 180 degrees towards what our customers are telling us. It's actually been an incredibly profound change for the industry." He is full of praise for Southern's Customer Challenge Group, chaired by Anna Bradley, whom he describes as "a top-drawer customer advocate; tremendous". He elaborates: "Hand on heart, we would not be in the position we are in [with the business plan] without the help of the challenge group. It wouldn't be as good." The plan is certainly clear, accessible and unambiguous. What of other aspects of the process of PR14? Eyebrows have been raised at the sheer amount of reform the regulator has packed in, not to mention key Ofwat personnel changes at such a critical time; outsourcing some of the process; and a £10 million levy on companies to make ends meet. Wright is firmly in the camp that welcomes the lack of prescription from the regulator on business planning. "I think that's been tremendously liberating and I think you will see a lot of variability as a result of that, but surely that's a strength? The diversity of approach, that's where innovation comes from; that's where ideas come from. So I think it's been an entirely positive thing." He adds: "Would we like to understand exactly how the menu works and how the cost comparisons and all that is going to work? Well, yes we would, but we'll get that in the fullness of time." More broadly, he says: "Ultimately I'm pretty confident that [Ofwat will] get it right, because they have to. And if they need more time and more resource to do that, I'm not going to be critical of that because it's in our interest that that's what they do. "I think the transition between Regina Finn [outgoing Ofwat chief executive) and Cathryn Ross [incoming chief], while not ideally timed, is good in one sense because it's Cathryn, and Cathryn's been there before and was there at the beginning of this sea change in the way in which Ofwat has sought to regulate the industry, so she's philosophically aligned with Regina's direction… We've embraced the new approach, we're supportive of it, we expect that to continue." On the crucial issue of cost of capital, Wright acknowledges that the macroeconomics – particularly the cost of debt – have changed since PR09, so he considers it "reasonable" to expect a lower weighted average cost of capital (Wacc). However, he cautions even if the cost of debt is lower, Ofwat needs to judge whether it will remain low over the next five years. Ratings agency Moody's has warned that Southern would be one of the water companies most exposed by a lower Wacc or demanding efficiencies at PR14 because of its high embedded cost of index-linked debt. Wright acknowledges that it used to be the most highly leveraged company in the sector, but now it is only number three on the list. Southern Water is owned by Greensands Investments, a consortium of pension and infrastructure funds. As a privately-owned company, you might expect Southern to be in the front line of recent criticism about opaque ownership structures, reporting and governance, but Wright is unconcerned. He says his company has responded to requests for more financial disclosure willingly, and has four independent non-executive directors plus an independent chair at the operating company board level, when only three are required. He is robust, too, on the issue of corporation tax, saying he understands concerns but as the industry is capital-intensive and debt-loaded, little will change unless the tax rules are altered – and there's no quick fix there. "UK plc will continue to need to invest in infrastructure. It will need to continue to attract debt and equity and it will need a certain form of incentive – through the return or whatever – to allow that money to be provided. So it's a difficult one to say. I think a lot of the angst and uncertainty around this issue would be mitigated by greater transparency. That's what we're being encouraged to do and we are doing and we think that's right." Key features of Southern's draft business plan Customer Key commitments by 2020 Total cost priority area 2015-20 Customer service 90% first time query resolution; among best in SIM league; Charter £316m with compensation Water supply Leaks cut by 1.9m l/d; no supply restrictions unless 2 dry winters £758m Wastewater removal Cut properties flooded with sewage by 25%; reduce smell complaints by 5% £741m Care for environment No serious pollution incidents; 1% abstraction cut; beaches with excellent £1.2bn bathing water quality up 15% Better information Bill queries down by 50%; pcc down 149-135 l/d £9m Affordable bills £180m efficiency savings; increase take-up of hardship support £16m 10 | 4th - 10th October 2013 | UTILITY WEEK Proportion of pre-inflation 2020 bill of £449 £32/ 7% £146/ 32% £139/ 31% £130/ 29% £1/ sub 1% £1/ sub 1%