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The Topic: Flexibility FLEXIBILITY THE TOPIC 14 | 30TH JUNE - 6TH JULY 2017 | UTILITY WEEK W e at Ofwat promised we would provide clarity on our expectations for PR19 early. On 11 July we will be publishing our methodology con- sultation for PR19 – six months ahead now of where we were at this point for PR14. So looking forward I would like to reflect on each of the four themes of PR19 – affordability, resilience, innovation, and customer service. Resilience First I'll talk about resilience, which I imagine is fresh in everyone's minds with recent coverage of drought risk in parts of the country. First of all, this issue is not new to Ofwat. Even before we were given a statutory duty in 2014, we took a very broad view on resilience. It's not just keeping the taps running. We consider "resilience in the round". A resil- ient sector is one that is able to navigate its way through operational, financial and corporate challenges in a smooth and predictable way. An accusation we've been hearing is that Ofwat is "anti-infrastructure". This is not true. We are, however, pro-strong business planning, and we are looking for companies to use all the tools in their toolkit to achieve better resilience outcomes. If building new infrastructure is necessary to ensure the resilience and continuation of water and wastewater services, then that's fair enough. However, we know there is no such thing as zero risk. We need to think smarter about resilience – we can't just build our way into a more resilient sector. Our position is clear: resilience does not always have to mean spending heavy capex – but where it needs to, we would hope that companies are engaging with their customers and having honest and open conversations about the options and impacts. Customer service Customers are key to PR19 and we expect companies to raise the bar with active customer participation rather than passive engagement. That's because when customers are truly "tapped in", that's when you can unlock benefits for customers and companies and improve the current and future sustain- ability of water. Encouraging customers to recognise themselves as active users in the chain will help the sector to under- stand what customers want, and to act on their wishes, improve customer service and build trust and confi- Report sponsored by: Comment: John Russell, senior director of strategy and planning, Ofwat How PR19 ought to improve the lot of customers dence. Their actions, such as reducing water consump- tion, can help to increase resilience very directly. Working with customers to enable and encourage water efficiency will give companies headroom when it comes to current and future resilience of the sector. It might take a generation or more, but we need to start getting customers used to the idea that water is a valu- able and finite resource. This may need a much more intensive and long-term engagement with customers, rather than periodic, sporadic campaigns during periods of drought. During PR14, not only did we focus on customer engagement, we incentivised companies, with rewards and penalties, to focus on the delivery of outcomes that matter to customers both now and in the long-term. We are already seeing an improvement in perfor- mance of leading companies as a result of this approach which will result in a step change in efficiency. We will build on this for PR19. We want performance commitments to be more transparent, stretching and powerful so customers get more for their money and drive further improvements in service. Innovation Many people think the water sector is not particularly innovative – according to a recent survey, water com- panies spend around 0.5 per cent of their turnover on innovation, compared with upward of 5 per cent in the unregulated engineering and technology sectors. The good news though is that our approach to totex and outcomes during PR14 has removed barriers to innovation. For instance, we saw all companies put plans for sustainable drainage systems, or Suds, in place. Anglian Water plans to have 25 per cent of sewerage capac- ity schemes incorporating Suds and Welsh Water has announced 162 sustainable drainage plans, covering 12 per cent of the population. For PR19, we will incentivise companies to push fur- ther regarding innovation by recognising and rewarding exceptionally ambitious and innovative business plans that shi the frontier on service and cost efficiency. The sector needs to create more value for customers and through PR19 companies will be able to share in the value created. Affordability Affordability is the ability of a customer to pay for his or her water bill. There is no "bright line" between afford- able and unaffordable bills, it depends on household incomes, size of water bill and customer circumstances. The environment facing customers is challenging. Further upward pressure on prices looks inevitable as inflation continues to rise. At the same time, financing costs are at a record low. We think that PR19 may offer very real headroom either to improve the resilience of the service customers receive, or materially to cut their bills, or both. However, we've said before and I'll say again, there is no trade-off between affordability and resilience. If a company is efficient it can achieve both and that's what we'll be expecting in PR19. PR19 is part of a journey. It builds on the successes of PR14. Through company ownership, customer engage- ment and greater use of markets we think the sector can deliver for customers. This is an extract of a speech given by John Russell at Utility Week Live titled 'Preparing for PR19'.