Water & Wastewater Treatment

12 | march 2015 | WWT | www.wwtonline.co.uk Industry leader Path to the top 2013 Cathryn Ross became Chief Execu- tive of Ofwat in October 2013. 2011-13 Executive Director of Markets and Economics at the Office of Rail Regulation (ORR) 2008-11 Director of Markets and Economics, Ofwat 2003-08 Director of Remedies and Business Analysis, Competition Commission 2002-03 Head of Competition Economics, Office of the Rail Regulator 2000-02 Economic Adviser, O el 1996-2000 Senior Consultant, Oxecon Ltd going to be reporting back to their cus- tomers on how they are doing against those performance commitments. So the pressure is on now to deliver. For the companies that do well, it will be much more obvious that they are doing well, but for the companies that aren't doing so well, they will also get that exposure." Totex challenge The other key departure for PR14 was the challenge to the water companies of framing their spending plans in terms of Totex (Total Expenditure), shunning the traditional distinction between Capex and Opex. Ross says that this should be seen as the regula- tor "taking the shackles off " the water companies, giving them the flexibility to come up with the most cost-efficient way of achieving customer outcomes. The shi‡ should encourage innovation as the companies "ask themselves dif- ferent questions," says Ross. However, she acknowledges that it will take many years for the Totex approach to become embedded, and that some of the water companies are further along this road than others. "We are on a real journey with To- tex, and what you saw with PR14 was essentially just the start of that jour- ney," she says. "When you looked at company business plans in PR14, some of the companies had really done their business plans on a Totex basis, start- ing with the outcomes and thinking back across all the different options - you could see that they challenged themselves. Other companies have struggled with that, and you could see that they'd started off on traditional lines of Opex and Capex and almost put a Totex overlay on at the end. "Of course, as we move on now, it's not about business plans, it's about real delivery, and I think delivery in a Totex environment is a step further than business planning in a Totex environment. It's harder." Ross says that traditional alli- ance agreements with the supply chain - based on risk-sharing between partners to jointly deliver a Capex scheme - will have to be rethought if solutions that are truly Totex and outcome- orientated are to take root. "It's not just a culture change for the companies, it's also a culture change for the whole supply chain," she explains. "I think the supply chain can actually help some of the water companies in terms of really under- standing risk and risk management really thoroughly to deliver that real genuine operation of Totex. Now that will take time. The next five years, I suspect, will be a real learning curve, and it will probably be ten or even fi‡een years before we start to see this really thoroughly embedded in a business-as-usual way. "My suspicion is that water com- panies will find some of the supply chain ahead of them, because I think in other industries this sort of ap- proach is not unusual. When I talk to people in the supply chain, some of the people I speak to see themselves very much as in the risk management business: they don't see themselves as contractors who will deliver you a Capex scheme, they see themselves as risk managers. They are quite keen I think to have conversations with the companies about what they can offer in terms of risk management." Strategic vision Last month saw the publication of Ofwat's new strategy, Trust and Con- fidence in Water and Wastewater Ser- vices. Ross describes it as a vision for the sector, and says she is confident that its central touchstone - winning the trust and confidence of customers – is one that resonates with those who work in the industry. The strategy envisages a less interventionist role for the regulator, as the water companies build on the customer engagement they have car- ried out so far to become more directly accountable and responsive to their customers. "We are asking them to really step up and take ownership of that, and to create a conversation that is much more between companies and their customers and stakeholders than it is between companies and the regulator," says Ross. "We are not retreating in any sense, but we are adopt- ing a slightly different role. If we do need to intervene, we will, but it is not going to be Ofwat's default position - we are going to do it as and when we need to. That means that our interventions in themselves become a signal." Ofwat itself will be given a reduced budget from the Treasury from the next financial year onwards, so does the regulator's new hands-off stance represent more than just a pragmatic response to having more straitened finances? "Our strategy is the right thing to do, regardless of the budget, because it's in line with our statutory duty and responds to what customers and socie- ty are looking for," Ross answers. "The way in which we do this obviously has to be conditioned by the funds we have available, and one of the things that you will see us doing over the next few years is working much more in partnership, placing much more responsibility on the sector to step up. Yes, there is an aspect of that which relates to our budget, but even without the budget constraint I genuinely think this is the right way to do things, because as the regulator we do not have all the answers." By James Brockett "What's going to be really interesting is the effect of transparency... the pressure is on to deliver." Cathryn Ross, Ofwat

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