Utility Week

UTILITY Week 6th November 2015

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16 | 6TH - 12TH NOVEMBER 2015 | UTILITY WEEK 16 | 6TH - 12TH NOVEMBER 2015 | UTILITY WEEK Analysis H ow much money do water compa- nies make? How well are they per- forming? These questions are not as easy to answer as you may think. Indeed, with the private ownership and complicated group holding structures behind many water companies, information about both their finances and performance can be difficult to find – and once found, difficult to compare. All that is set to change, however, as Ofwat steps up its campaign for greater transparency in the sector. This drive from the regulator dates back to Jonson Cox's appointment as chairman nearly three years ago. In one of his earliest speeches, in March 2013, the ex-chief executive of Anglian Water called for greater transparency from water companies, as well as clearer board leader- ship and a renewed focus on affordability. With PR14 finally concluded and Ofwat chief executive Cathryn Ross implementing her vision for both regulator and companies over the next five years, transparency is top of the agenda. Earlier this month, the regulator set out a framework guiding companies about how they should share performance and financial information with their stakeholders. This, says the regulator, will be central to achiev- ing its overarching vision of "trust and con- fidence" in the sector. "More than this," says Ross, "if the sector has the right conversation on the basis of the information it publishes, this will help it to identify and manage risk, benefiting everyone over the long term." For companies, there is work to do. According to an Ofwat spokesman, there is still "room for improvement" on transpar- ency in the sector in areas such as board gov- ernance and financial reporting. The PR14 price control has a much greater emphasis on customer engagement, as well as encour- aging firms to focus on a total expendi- ture (totex) approach to cost assessment. However, the regulator warns that the new approach to transparency "must not become a box-ticking exercise". "Companies need to take responsibility for clear, open and effective conversations with customers and stakeholders," it says. "This will be crucial to further building trust and confidence." Additionally, water companies are expected to put in place their own govern- ance codes, with boards taking owner- ship and accountability for company performance. Minimum expectations are that companies report transparently, as well as operating and meeting their obligations and commitments. report. Ofwat says this is because the statu- tory accounts they currently publish are "not detailed enough" for the reader to be able to clearly assess their performance. Addition- ally, the reports must be accessible to all stakeholders so that they show how the sec- tor is delivering for its customers, environ- ment and wider society. Firms must also publish a summary of the results of the data assurance that proves the information provided is accurate. Where there is a lack of confidence in the informa- tion individual water companies provide about their performance, Ofwat will step in to protect customers by increasing assurance requirements. South West Water and Affinity Water, both fast-tracked through PR14, currently fall into the self-assurance category. All other compa- nies are in the targeted and prescribed assur- ance categories, meaning they must publish more detailed information for stakeholders. Additionally, Ofwat expects them to engage with their customers and other stakeholders to identify and address issues, and publish this each year. Financial monitoring Ofwat has now introduced a financial monitoring framework, under which it will publish financial information on the sec- tor annually. To make this accessible for stakeholders, the framework will include a high-level review of that information which identifies key trends and significant changes. "Alongside the company monitoring framework and annual performance reports, this represents a key component in building trust and confidence in the sector," the regu- lator says. At the moment, the financial monitoring framework applies only to regulated compa- nies, so Ofwat is considering also examining the financial arrangements for holding com- panies. Ofwat also consulted on requiring companies to stress-test their business plans and provide information on the outcomes, to help assess industry financial resilience and risks to customers posed by financial structures. The transparency of water PR14 may be concluded, but water companies must now enact the raft of measures set out by Ofwat to improve the transparency and governance of the sector. Lois Vallely reports. Finance & Investment The ball is firmly in the companies' court, says Ross: "We've put the onus on compa- nies stepping up and taking the lead to make available the right information, properly assured. That's vital if the sector is to have a clear and open conversation about whether it is delivering what customers and wider society want." So what's in store for water companies? Perhaps the biggest step is the "strategic dashboard" Ofwat wants companies to pro- vide, with accessible comparative informa- tion – both for their own benchmarking and for customers and other stakeholders. The dashboard will be a collaborative tool owned by both the sector and the regulator, with agreed, standardised datasets. The proposal was at first a controversial one for companies, but the industry has now accepted the challenge. Water UK has agreed to lead the work, and is in the process of set- ting up a steering group to agree with the regulator and other stakeholders what met- rics should be included and how the infor- mation should be presented. Publishing and stress-testing From 2015/16 onwards, water companies will be obliged to publish an annual performance "The onus is on companies stepping up and taking the lead to make available the right information"

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