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UTILITY Week 12th June 2015

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UTILITY WEEK | 12TH - 18TH JUNE 2015 | 19 Finance & Investment Analysis B ristol Water's discontent with the PR14 price review process is well known, with the water-only company reject- ing its final determination in February, claiming flawed modelling by Ofwat "dis- proportionately" hit the company's planned expenditure and proposed revenues. The Competition and Markets Authority (CMA) is currently investigating the final determina- tion and is due to publish its determination in September (see analysis, p20). But now Welsh Water and Northumbrian Water have voiced their criticisms of the PR14 process too, focusing on the late inclusion of key performance indicators for the whole industry, and the problems it has caused. Ofwat itself is in the middle of a review of the process, so is eager to listen to the (con- structive) criticism coming from the sector, to improve the process next time. The issue Welsh Water and Northumbrian Water have with the price review process stems from the "horizontal incentives" added at a relatively late stage. They claim this goes against the ethos that customers and water companies should own the business plans and set out their own priority areas. These incentives are designed to measure the key outcomes of interruptions to supply, water quality contacts, drinking water qual- ity compliance and leakage, as well as inter- nal sewer flooding and pollution incidents for water and sewerage companies. In a submission to the CMA's inquiry into Bristol Water's final determination, Welsh Water praises the regulator's "innovative approach" of allowing the companies to cre- ate their business plans, but warns this good work risks being undermined by having these areas of measurement. Welsh Water stated these may result in the company having to "divert resources to the achievement of targets that do not appear to be the highest priorities for our customers, and which were not part of our plans, and away from other priorities that were". In the submission, Welsh Water director of strategy and regulation Mike Davis said: "A unilateral change to these performance targets at a late stage in the process without time or process for proper consideration and little or no recognition of the cost or price consequences, or even our customers' pref- erences, means that the outcome was more crude and unsatisfactory than it had to be." The company said the price review sets out "a number of challenging measures", but added in a statement that "in the round, the business plan strikes the right balance that will enable us to bring significant benefits to our customers, their communities and the environment – both now and in the future." Northumbrian Water chief executive Heidi Mottram said Ofwat had to take action to ensure the companies' performances could be compared because each plan was structured and composed in a "slightly and subtly different way". She told Utility Week this was an "inevi- table consequence" of the approach to the price review taken by the regulator, and that something had to be done because "we were coming up with a situation where some com- panies could be earning a financial incentive for delivering a level of performance that other companies would be being penalised for." Mottram said the solution to this would be for the companies and their customer challenge groups (CCGs) to have data from the other companies, so a comparison could be drawn when the plans were created, with customer priorities still being the focus. Not having this data available meant some customer representatives were unable to work out if they were getting value for money, therefore Mottram said she "abso- lutely backs" the inclusion of the perfor- mance targets, even though they were added late on in the process. She also said that to avoid a repeat of this situation, the regulator must set out early in the PR19 process "some kind of mini- mum standards" to allow comparisons to be drawn between the water companies. The "lessons learned" review currently being conducted by Ofwat is examining this issue, and discussing whether standardised targets should be set unilaterally across the sector, or whether bespoke targets should be drawn up. The outcome of this "big debate" – still to be had – will feed into Ofwat's Water 2020 programme, which will in turn help shape the future water sector and PR19. Another element being carefully consid- ered by the regulator is how more informa- tion can be given to the CCGs – in whatever form they take as the PR19 process gets underway – to allow the comparisons between the companies to take place. This will "empower the customers" fur- ther to challenge the business plans that are put forward, and to ensure they are getting good value for money. The ghost of PR14 has once again raised its head – before it has finally been laid to rest – but its haunting of Ofwat and the sec- tor will help the regulator to set out a pro- gramme that ensures customers' needs are met and the performance of the companies can be benchmarked against each other. And one without any last-minute changes. Learn from the late changes As thoughts start to turn to water's next price review, the industry is calling on Ofwat to learn lessons from the PR14 process that left some companies unhappy, says Mathew Beech. £44 billion in investment – £2,000 for every household over the next five years 522 tailored performance commitments 50 beaches with improved bathing water quality 1 million more people receiving assistance with their bills 32% reduction in the time interruptions affect the supply of water 5% average reduction in water bills over the next five years THE PRICE CONTROLS FOR 2015-20

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