Utility Week

8 | 17TH - 23RD NOVEMBER 2017 | UTILITY WEEK Policy & Regulation Base incentives on customer feedback Ofwat should base financial rewards on a measure of customer satisfaction with value for money. Chief executive's view Tony Smith, Consumer Council for Water T hree years ago, we asked customers how they felt about proposals by the reg- ulator Ofwat to introduce a new system of financial rewards and penalties for water companies – called outcome delivery incen- tives (ODIs). We agreed with Ofwat – and still do – that incentivising com- panies in a way that better aligns the interests of investors with customers is necessary. But most customers responded very negatively to the idea of paying more for the proposed service-related ODIs. They told us they did not like the idea of pay- ing more money for their com- pany to provide the day-to-day services that they felt they were already paying for through their bills. It was a point we made for- cibly to the regulator, but ODIs were still introduced for all com- panies at the 2014 price review. Fast-forward to today and some of the concerns voiced to us by customers are starting to ring true. Two of the three com- panies that opted to collect their rewards or penalties on a yearly basis – Severn Trent Water and Anglian Water – are accruing substantial financial rewards. The largest of these is the £38 million Severn Trent is set to receive for its outperformance on sewer flooding, as well as other commitments. To the com- pany's credit, it has opted to defer £27 million of its reward to dilute what would have been a substantial rise in bills for its customers next April. At some point, however, customers will probably pick up the tab, includ- ing customers of the majority of companies whose rewards or penalties are set to be applied cumulatively at the end of the decade. Ofwat has set out in its meth- odology for the next price review, in 2019, proposals to remove the cap on the rewards compa- nies can achieve if they meet their ODI performance targets. Although Ofwat stressed that this will only be for exceptional performance, the major concern over customers' lack of accept- ance of these rewards remains. It is possible that much more stretching of ODIs might reduce the causes of dissatisfaction for some customers. However, it is not at all clear that Ofwat knows that it will actually drive improved satisfaction and off- set the negative impact of price increases for companies doing what many customers view as the day job. And that is before you factor in the impact of infla- tion being added to bills. We think there is a better solution that could address this problem and really align cus- tomers' and investors' interests. Ofwat could soen the incen- tive on service metric ODIs and transfer most, or even all, of these rewards to a measure of customer satisfaction with value for money or another similar metric. This would be regula- tion mimicking competition by directly and strongly incentivis- ing water companies to focus on doing the things that really satisfy their customers and seg- menting them, as they would in a competitive market. We know from our research that cus- tomer satisfaction with value for money also has a big influence on the amount of trust custom- ers have in their water company. Ofwat has rightly placed a strong emphasis on trying to boost cus- tomers' trust in the sector and we believe our proposals could help to achieve this. With the water industry under intense public and political scru- tiny, there is an urgent need to improve the perception of the sector among consumers. That should be a big enough reason to make this bold move as the 2019 price review gathers momentum.

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