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UTILITY WEEK | 15TH - 21ST SEPTEMBER 2017 | 13 Policy & Regulation It is worth noting that alongside these issues of contention, there are numerous areas of agreement, with all the consulta- tion responses made public so far keen to emphasise their support for the structure of PR19 and its broad aims. It is also worth not- ing that not all stakeholders have made their consultation responses public – although all will be published by Ofwat in December, along with its answers and final framework. How different will the framework look to the proposals put out to consultation? Time will tell, but Anglian Water regulation director Alex Plant says he expects Ofwat, "as a good regulator, to take on board and consider consultation responses and weigh them in the balance". The sector, and its customers and inves- tors, eagerly await Ofwat's final decisions at the end of the year. What they said: Key quotes from Pr19 consultation responses "Strongly incentivising com- panies to continually improve customer satisfaction and customer service performance (rather than ODIs for other service improvements that may be viewed negatively by many customers) would have the effect of focusing companies on their customers and lead to greater segmentation. This would mimic, to some extent, what would happen in a com- petitive market." THE CONSUMER COUNCIL FOR WATER "Ofwat appears exclusively to rely on PwC analysis and PwC's estimates of TMR, which in turn, are mainly based upon analysis using the dividend discount model, with additional evidence from market to asset ratios and investor surveys. The estimates appear to place no weight on historical outturn equity returns, achieved by investors over the long run, or take account of the limitations and uncertainties associated with these estimates. " KPMG, IN A REPORT COMMISSIONED BY NORTHUMBRIAN, ANGLIAN AND AFFINITY WATER "A sharp reduction in bills that is caused by an unduly harsh reduction in returns would ultimately act against custom- ers' interests by undermining investor confidence." NORTHUMBRIAN WATER "Ofwat has not provided evi- dence that it has assessed whether it is striking an appro- priate balance between costs, risk and tougher service per- formance incentives." ANGLIAN WATER Glidepaths Traditionally, when regulators impose tougher targets, they allow companies a period of time to work up to them, rather than face immediate penalties for not meeting them. Controversially, this time round, Ofwat proposes not doing so – a proposal that has caused mutter- ing in the sector, and one that some companies now take issue with in their consultation responses. Anglian argues: "Regulatory precedent would suggest that it would be appropriate for glidepaths to be provided in such circumstances, rather than cliff-edge shis." Direct procurement One of the biggest reforms proposed in the framework for PR19 is the introduction of direct procurement, which would see water com- panies putting the delivery, financing and possibly the operation of major capital projects out to tender. Most companies are supportive of direct procurement, with many seeing it as an opportunity to compete out-of- area on other companies' capital projects. However, Anglian believes it is unfair that companies cannot compete for their own major projects, and suggests an alternative model whereby a third party would be appointed to run the tender, allowing incumbents to compete. Anglian also suggests that Ofwat's proposed limit over which projects are sub- ject to direct procurement should be set on a capex rather than whole-life totex basis. Otherwise, it argues, long-life assets which have a relatively low capital value but reach the totex threshold over the course of their life will fall into direct procurement when it is not really appropriate for them to do so. C-MeX The service incentive mechanism (SIM), introduced in 2010, is widely acknowledged to have driven up service levels across the board, by incentivising companies to focus on customer satisfac- tion. However, with most companies delivering scores at or near the top of the range, it is reaching the end of its useful life, and the sector agrees it is time for an overhaul. Ofwat's proposed solution is C-MeX, a new measure that will survey the satisfaction both of customers who have not contacted the company and cus- tomers who have; and offer potentially higher rewards than the SIM, but only for upper-quartile performers. The companies offer broad support for C-MeX, with just some comments on the practical detail. CCWater, however, suggests more far-reaching change to the proposed framework, calling for the measure to be split into two parts. The first, C-MeX contacts, would measure customer contacts and complaints handling; the second, C-MeX satisfaction, would measure customer satisfac- tion with value for money and net promoter scores, a widely used measure of customer satisfaction. CCWater proposes that these two C-Mex measures are linked to two sep- arate ODIs, which comprise "most or all of the value of the full package of financial ODIs".