Utility Week

8 | 8TH - 14TH DECEMBER 2017 | UTILITY WEEK Interview On the other hand, there are industry- driven changes, around the creation of mar- kets, for bio-resources, water resources, and major capital projects via direct procurement. This, coupled with the tough efficiency chal- lenges facing water companies in the next review, creates "a much tougher, more chal- lenging set of make or buy decisions, but with a far greater set of options over where to make those decisions". Ross looks ahead to a world where customers deal directly with utility aggregators and utilities management services, which contract with a water company, which in turn contracts with other water companies, and a range of third parties, for services such as bio-resources, water management and the operation of part of its network – not to mention the potential development of regional system operators for water resources. "What I think all this amounts to between now and 2024 is a fundamen- tally different contractual matrix in the sector." So the next price review, PR24, is likely to entail the creation of a radically different framework that allows for a much more complex value chain. Should PR19 have laid the groundwork for this? Ross shakes her head emphatically. "No – no, no, no," – it's clearly a ques- tion she's given some thought. "When we were doing the PR19 methodology, we did ask ourselves actually quite frequently whether we needed to build more into it to reflect the changes that could happen, and we consciously decided that we wouldn't do that precisely because we don't know what is coming. "The danger is as a regulator, you really can't know the future, so if you bake your assumptions about the future into your regulatory structures and your method- ology then you have the effect of ossifying the sector, or you dampen innovation, or you do damage." There's an interesting contrast here with the energy networks sector, which is currently considering whether to move back to a five-year regulatory cycle, having found that change is outpacing the current eight-year framework. "I'm very glad we didn't go for eight-year controls," says Ross with a smile. She is keen to challenge the idea that the introduc- tion of retail competition to the domestic water sector would be the game-changer, insisting that whether or not it happens – "I really don't know" – customer- and market-driven change in the sector will be dramatic. Of the business retail market, she lauds the effort involved in getting it open on time, and insists "for six months in, it's going really well". On to the more immediate business of the day: the PR19 methodology set to come out in the middle of this month. Will it contain any surprises? "Not much. You'd be sur- prised if I said there would be, this whole thing has been built up through a very transparent, iterative process." That process has allowed for an open debate on key areas such as Ofwat's approach to setting the cost of capi- tal, which a number of companies have challenged on the grounds that it doesn't take enough account of historic financial trends. Ross has made no secret of her views on these challenges – in her most recent speech, she said: "We received a number of responses along the lines that we couldn't possibly move away from an approach to the cost of capital heavily based on history and regula- tory precedent because… well… that would be… unprec- edented. I don't think I'm giving much away if I say that we weren't very impressed with those arguments." The regulator has been clear that the cost of capital will be a historic low in the next price review, reflecting the economic environment and ensuring value for customers. Does she have anything to add? "I think it's a great thing that we are putting out the indicative Wacc in December, and I say that because it feels like quite a brave place for a regulator to be." She adds the "giant caveat" that the final Wacc will be published in December 2019, and a lot can happen between now and then. But: "I think people should not be afraid to be brave, I really do." Another key element of PR19 is the ramping up of financial incentives and penalties for key areas of delivery, Outcome Delivery Incentives (ODIs). Aimed at replicating the pressures and rewards of a competi- tive market, ODIs have been embraced by many water companies. However, in its response to the dra meth- odology for PR19, one of Ofwat's key stakeholders, the Consumer Council for Water, suggested that such incen- tives, which come out of the customer's pocket, should be linked explicitly and solely to customer outcomes. "Customer satisfaction is still a relatively new meas- ure in the sector, it is a multi-variant measure, and I think our concern was that if we place too much weight on customer satisfaction and not enough weight on stuff that can more concretely be measured and observed and delivered by companies, we ran the risk of not necessar- ily creating perverse incentives but not quite getting the balance of incentives right." With the finishing touches being put to PR19, Ross can take a moment to reflect on what she has achieved in her four years at Ofwat – and she's keen to focus more on a human level than on regulatory red tape, speaking winningly of the "amazingness of human beings". "One of the things I am most proud of over the past four years has been the transformation within Ofwat – we have come an enormously long way in actually quite a short space of time." Certainly, there's an energy com- ing out of Ofwat today that has little to do with the musty old regulators of yesteryear – and it's a culture change that Ross believes water companies would do well to emulate: "It's very similar to what we've been asking the water companies to do, in terms of being open and con- fident and embracing change and thinking about new ideas and being agile not just in terms of working any- where, any place, but in terms of mindset." With so much done, and so much le to be done, why has Ross chosen to leave now, before the conclusion of the price review she has shaped? Her answer goes back to the transformational change she has outlined for PR24, and her belief that the chief executive of Ofwat, whoever that may be, needs to spend the next few years getting ready for it. For that reason, she says, her original plan to leave shortly aer the conclusion of PR19, would have been disruptive at a critical moment. And why the private sector aer a career in the civil service? "It's time to do something different, it's good for people to do something they're not sure if they can do. I've not done anything like this before." Ofwat has yet to announce her successor – conscious, perhaps, that she'll be a hard act to follow. As one water company chief executive tells Utility Week: "She's made a huge contribution to the sector – she's been a thought leader, and the way she's interacted with companies, occasionally driving us, occasionally cajoling us, but always from the perspective of ensuring that we meet the needs of customers now and in the future." As the water sector faces up to a future defined by uncertainty, one thing's for sure: Ross will be sorely missed. "[Companies are] now tackling some of the sub- stantive issues, and I think that's a good place to be"

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