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10 | 28th November - 4th December 2014 | UtILItY WeeK Interview of relationship between the regulator and the companies that we've been looking for." She is also ready to learn from any mis- takes: there will be a formal "lessons learned" exercise once the review is over. Any idea yet what could have been done differently? "One thing that springs to mind, and something I've heard from a lot of people, is that it has been a lot of change in a short space of time and it would have been nicer to have more clarity about the policy framework and the methodology in particular. I hear that, that would have been good for us too." It looks as though the fast-track model is here to stay: she thinks it has been a success, and it's important philosophically. "As a regulator, I don't think we should be intervening where we don't have to intervene. I know that sounds really trite and self-evident, but I don't think pre-2009, that was the model. Then we had a model that was blanket intervention, where we were telling the com- panies what to do, we were looking at whether they did it or not and we were stepping in. It was quite one size fits all, for good reason, we were trying to get the sector up to minimum standards, but I think the world has moved on. "I think it's generally a better thing to be very clear what's expected of companies. But then if they do what they need to do and they do it well and, crucially, pro- vide us with assurance that they have, then we don't need to intervene. That's better for everybody because that gets us to companies genuinely owning the relation- ship with their customers, genuinely driving their busi- ness from that relationship and, frankly, us not wasting our time and effort where it isn't needed." With all the time and attention that's been spent on PR14, it's easy to forget that it's just the prelude to AMP6. "That will be a completely different ball game, and it's going to be a real challenge – particularly delivering out- comes and totex. If you put those two things together, and bear in mind those are the two things where I think people will really be able to make money and deliver outperformance, you have to run your business in a com- pletely different way." Ross sees some companies preparing already for this brave new world – she namechecks Severn Trent for overhauling its management team and structures. "You can see already some of them beginning to grapple with what delivery in line with PR14 actually means, but it's a tough ask, and if you think about, for example, the relationship with the supply chain, that's really interest- ing. If you go back to PR09 and the last control period, a lot of the companies had alliancing agreements back through the supply chain, but alliancing agreements to deliver outputs on a capex project is a completely differ- ent ball game to delivery of outcomes on a totex basis – the risk sharing is much more complex." That differentiation is precisely what the risk and reward structures set up in PR14 aim to recognise. Despite media protestations over water company profits, and growing political scrutiny, Ross is happy to defend out- performance in the sector under the new arrangements "because we've actually aligned the incentives for compa- nies and company management with those of customers". Moreover, PR14 is tough on the bottom line, with pro- posals to reduce the Wacc from 5.1 per cent in PR09 to 3.85 per cent already on the table, and the possibility this could be driven down even further. How likely is it the final Wacc will come out below 3.85 per cent? "Go and hire an economics consultant!" she bats back. "If you look at the way that the markets are moving and if you plug those observations into the sort of models that we use, there is an argument for a lower cost of capital. What we will do in making our final determinations is weigh everything in the round and make a judgement." The tough risk and reward guidance will put pressure on senior management. With Richard Bienfait's surprise departure from Affinity already announced, will we be waving goodbye to any more chief executives? "I'll be quite interested to see how particularly the investor community responds to a lot of the informa- tion we put out in PR14. We have done transparency like never before in this review, there are thousands of pages out there and a lot of what those pages are telling you is about the quality of company management." There are likely to be changes in market structure as well as leadership, with Ofwat having opened the door to mergers. Ross insists she "doesn't have a model in her pocket" and laughingly declines to name a minimum number of companies the sector's comparative regula- tion model requires, but says: "I'd be surprised if there were not changes in market structure… At the moment we have 17 water retailers – that's a hell of a lot." There are changes afoot at Ofwat, too, as it gets to grips with a government-mandated cut in its budget from £31.5 million this year, at the height of the price review, to £21.5 million next year. "It's not like for like [because of the review], but it's still a hey budget cut." To deliver to this tighter budget, Ross has run a "busi- ness transformation project", which will see the head- count come down by about 45 – all through voluntary redundancies – and the workforce reorganised into "resource pools" from which project teams are drawn on a project-by-project basis. The regulator's strategy for the years ahead will be published early next year; its content has been heavily trailed. It's all about trust and confidence – which Ross admits has been inspired by the experience of energy firms, which have lost public trust. "You've got to go back to first principles on this stuff – ask what do water compa- nies do, what does the sector do, and it takes you about a nanosecond before you realise it provides one of the most vital public services to everybody in the country." This will be at the heart of the regulator's approach as it oversees the introduction of competition to the non-domestic market in 2017 and, further ahead, to the upstream market. Ross acknowledges there's "a lot to do" on competition, particularly on the cultural side: "It's not so much the nuts and bolts that worries me, it's just how different a mindset a competitive market requires on the part of companies who have just been so insulated from this for so long." As if that wasn't enough for companies to grapple with, Ross says upstream reform is firmly on her agenda for PR19, talking enthusiastically about the "size of the prize" of introducing competition and driving efficiencies in the wholesale part of the value chain. Coming on the back of PR14 and retail competition, that will be a bitter pill for water firms to swallow. Does Ross feel the regulator has won back their "trust and confidence" following the Sec- tion 13 debacle? "It's a difficult one for me because I can't do the before and aer comparison, but I think we're in a good place, given the scale of changes we made in PR14. The sector has responded really well, the conversations have been incredibly constructive. Not everyone likes everything we do, but regulation is no popularity contest." You can't get clearer than that. "I'd be surprised if there were not changes in market structure… At the moment we have 17 water retailers – that's a hell of a lot."