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UTILITY Week 13th June 2014

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10 | 13th - 19th June 2014 | utILItY WeeK Interview a possible £6 million more available from enhanced menu rates. Loughlin welcomes all these benefits but adds: "The biggest thing is not just that we can get on with delivering the plan, but there is a reform agenda coming. 1 April 2017 is one milestone but there are other milestones. It will give us time to think, reflect and pre- pare for the reform agenda." A summary of the dra determination is set out in the box, but a few features are of particular interest. First, South West Water has done its utmost to balance the interests of different stakeholders. Loughlin explains it is this sentiment that lies behind the company's wholehearted embrace of symmetrical outcome delivery incentives (ODIs). While some water firms have only timidly adopted Ofwat's favoured policy of rewards and penalties for over/under performance (many opt- ing if anything for far more penalties than rewards), South West has built an extensive array of reputational, penalty-only and reward/penalty incentives into its plan. Loughlin says the concept of higher payment for higher service is unfamiliar in water but commonplace in many other industries, and that his company fully buys into the idea. "It was illogical in our minds to have only penalty mechanisms or not many of them. It was perfectly logical to have both positive and nega- tive incentives – rewards and penalties – in the areas customers value." What of the Consumer Council for Water's concern that paying extra, even if it is for superior service, is unpopular with customers, and could at worst be perceived as a trick to make base prices seem low while actual bills come in higher? Loughlin won't be drawn to comment on ODIs beyond his patch, but is crystal clear that South West Water customers are supportive of rewarding good performance and penalising failure (with the proviso that penalties should be higher than rewards). He says: "We did an awful lot of research and I'd be surprised if CCWater had done more research into our customer base than we have." The company's desire to balance the interests of dif- ferent stakeholders is also evident in its decision to set up an independently monitored performance-sharing framework, known as WaterShare. It will annually pub- lish a performance scorecard so any net benefits can be shared with customers in a transparent, timely manner. Loughlin says WaterShare is simply an evolution of its long-standing policy of sharing outperformance gains fairly between stakeholders. He cites as examples: a 2006 extra return to shareholders which was teamed with a price reduction for customers; last year's reinvest- ment of £60 million for the benefit of customers; and this year's foregoing of allowed price rises. "WaterShare is no more complicated than codify- ing what we perceive we've been doing for a good few years," Loughlin explains. Put simply, an independent panel will be involved, openly, annually, instead of the board doing it on an ad hoc basis. Understandably given the high historic prices, afford- ability features highly in the plan too. Loughlin explains the company wrestles with both genuine affordability problems and a sense of unfairness among the wider customer base – a small rural population burdened with paying for the upkeep of a third of England's bathing waters. The annual £50 bill reduction from the Treasury is welcome, while a 7 per cent price fall for household customers by 2020 will help too. For those in real hardship, the company plans to extend its assistance schemes to a further 10 per cent of customers (from 21,000 to 23,210). Loughlin says that "people like CAB [Citizens Advice Bureau] are kind enough to say we've got the most extensive support mechanisms for people struggling to pay their bills in the country". These schemes include a social tariff that could add up to £2 to ineligible household bills – the first to be introduced in the industry. Finally, there are lots and varied examples of innovation in the plan, many of which will be deliv- ered through local partnerships. Loughlin comments: "There's a perception that the industry isn't that innova- tive. I think that's slightly misplaced, but then I guess I would say that… people oen think of innovation as clever technology and clever kit and it oen is, but it's also about ways of doing things." In fact, South West Water has built both innova- tive technology and innovative processes into its plan. Key examples of the former include a water treatment works for Plymouth which will deploy "brand-new-to- this-country technology which will have much lower environmental impact and hopefully a much lower oper- ating cost performance – it could be a step change in how we treat water in this country". And the next phase of a programme to roll out remote asset monitoring and automation – a boon given the company's multitude of small, geographically disparate works. Among innovative ways of working are plans to extend or roll out projects including: Upstream Thinking – industry-leading catchment management; Down- stream Thinking – sustainable drainage; and the general consideration of more sustainable, cost-effective solu- tions rather than capital ones. So less a silver bullet, more a golden combination of: a genuine attempt to build a plan for customers rather than to achieve enhanced status; receptiveness to new ideas; and an ingrained predisposition to try to be fair and to keep a keen eye on affordability because of his- toric high prices and customer sensitivity. "People often think of innovation as clever technology and clever kit, but it's also about ways of doing things" South West Water draft determination Ofwat's dra determination for South West Water is largely unchanged from the updated plan the company submitted in March aer it accepted enhanced status. Consequently, Loughlin says that while a few details are up for discus- sion, "in the round, it's fine". • There will be a 7 per cent price cut in real terms over the five-year period, taking the average 2014/15 bill of £516 to £479 by 2019/20. These are lower prices that proposed in December when the original business plan was submitted, on the back of more efficient financing. No December service improvements have been cut. • The company will deliver eight umbrella outcomes, each with a number of measurable performance commitments relating to it. As well as the fea- tures discussed in the main article, highlights by 2020 include: a 36 per cent cut in contacts relating to the taste/smell/odour of water; 66 per cent fewer internal sewer floods; an ambitious SIM score upli from near the bottom to near the top of the table (70.5-85); 100 per cent bathing water compliance; and per capita consumption down 136-123 litres/day. • Totex: wholesale water £707 million; wholesale wastewater £881 million. • Allowed weighted average cost of capital: 3.7 per cent • Average-cost-to-serve adjustment for bad debt of £34 million, because of high bills and deprivation levels in South West. • Efficiencies: 2.5 per cent a year opex; 5.5 per cent capital efficiency over the period.

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