Customer Challenge Group (CCG) Chairs meeting Jon Ashley, Chair - - PowerPoint PPT Presentation

Trust in water 1

Customer Challenge Group (CCG) Chairs meeting Jon Ashley, Chair

Ofwat, Centre City Tower, Birmingham 8 November 2017

Trust in water 2

Agenda Time Agenda item Presenter

10.30 Welcome and introductions Jon Ashley 10.35 CCG Aide Memoire Jon Ashley (Cathryn and David joining by VC) 11.20 DWI – long term planning guidance Sue Pennison 11.50 Break 12.00 Water 2020 – update Jon Ashley 13.00 Corporate Culture - Customer participation John Drummond 13.30 Lunch

Trust in water 3

Aide Memoire

Trust in water 4

Aide memoire

• At the CCG chairs meeting on 9 August we proposed to produce an aide memoire of the

main elements of the PR19 methodology consultation that relate to CCGs and customer engagement.

• We circulated the aide memoire to CCG chairs on 22 September.
• In this first session of the CCG chairs meeting we invite comments on the aide memoire
• We plan to finalise the aide memoire in January 2018 after we publish the methodology

statement in December 2017.

Trust in water 5

Sue Pennison, DWI

DWI Long term planning guidance – Sep 2017

Drinking Water Inspectorate Sue Pennison – Nov 2017

Objective's of guidance

• provide water companies and other stakeholders with guidance
• n long term planning for the quality of drinking water supplies
• no new policy initiatives or legal obligations
• focus on delivery of existing obligations, including recent and

imminent legislative changes, using current good practice within a long term planning context

• also provides advice on how DWI will assist companies in the

PR19 process

• .. take a source to tap approach

– i.e. use drinking water safety plans to protect public health and maintain consumer confidence

• .. always plan to meet statutory obligations

– drinking water quality is always accounted for in all cost benefit assessments

• f options and operation and maintenance work
• .. plan across generations of consumers

– sustainability and resilience of supply quality must be an integral part of all planning and delivery

• .. plan for containment and recovery from potential events

– maintain drinking water quality protection, confidence and supply acceptability

Principles of approach

It is expected that companies …

Broad considerations

• Risk assessment
• Catchment
• Treatment
• Distribution
• Consumer

Risk assessment

• from source to tap; drinking water safety plans

Risk assessment is the basis of our approach … We expect companies to:

• use drinking water safety plans to identify risks to water

quality from source to tap

• keep these plans under review, having regard to learning from

events or near misses etc;

• mitigate any identified risks in a timely, effective and efficient

manner to the benefit of consumers. We will continue to:

• consider legal instruments, where relevant, to ensure that

desired outcomes are achieved.

Risk assessment

• from source to tap; drinking water safety plans

Companies to provide assurance that risk assessments for drinking water quality include a long term view. – Submit a statement that sets out significant new future risk mitigation measures that a company considers it will need to provide for, by the end of May 2018

LTPG para 5.3.3

Catchment

We expect companies to …

• Catchment management: to routinely engage in proactive catchment

management for all supplies

• Resource and supply management: to supply wholesome water;

for new/altered supplies, consumers must not be exposed to a greater risk of exposure to unwholesome water

• Raw water deterioration, incl Pesticides: Raw water monitoring

at abstraction points of each treatment works and associated supply system; investigate the cause of any deterioration and take action to protect consumers, primarily catchment investigations and actions to control pollution at source

• Radioactivity: Investigate breaches of either gross alpha or gross beta to re-

evaluate the risk including the “indicative dose” to establish the extent of the risk

• Other emerging risks: nitrate, MIB, Geosmin, Chromium VI

Catchment

Companies to provide assurance that WRMPs plan to meet all statutory drinking water quality

• bligations
• Submit a statement from the Board that the

draft Water Resources Management Plan plans to meet all drinking water quality legislation

LTPG para 4.3.10

Water treatment

We expect companies to:

• use treatment processes to make water safe and clean, proactively

mitigating risks to public health, wholesomeness and acceptability;

• provide appropriate treatment facilities with operational flexibility over

short-, medium- and long-term timescales to support resilience and prevent supply of inadequately treated water;

• ensure that decisions made by supply controllers or network operators on

supply provision consider implications for supply quality;

• work collaboratively to further develop reliability and use of on-line

monitoring systems to improve responsiveness. NOTE: Companies are reminded that it is a criminal offence to supply water that is not treated adequately, as required by the Regulations.

Water distribution:

Discolouration

We expect companies to …

• Carry out risk assessments, and keep them under constant review, drawing
• n the accumulation of quality data; contact data; and asset specific data,

including maintenance and repair history

• Develop mitigation strategies that form the basis for a proactive

maintenance and operation regime

• Continue to innovate (e.g. use of real-time monitors) to improve

responsiveness to interruptions NOTE: it is not acceptable to routinely and passively accept impacts on the quality of supplies arising from burst mains

Consumer

We expect companies to:

Lead; to update and implement current strategies for lead; operating a

collective approach with stakeholders (e.g. local authorities, Director of Public Health) and support action aimed at vulnerable consumer groups;

• continue to innovate (e.g. investigation of lining techniques etc)
• continue to take mandatory consumer protection measures on

identification of non-compliance, including enforcement (s75, WIA 1991) NOTE: Companies in Wales need to have regard to Welsh Government SPS; Wales Water Strategy; Well-being of Future Generations (Wales) Act 2015; and Water Health Partnership for Wales on the development of lead policy

Other point of use considerations; continue to enforce the Water

Supply (Water Fittings) Regulations 1999; Mitigate failures in buildings using powers under s 74/75 of WIA 1991

Measurement and monitoring

Consumer Risk Index (CRI)

• Relative measurement of risk for each consumer

For each compliance failure:

• CRI (overall): Mandatory performance commitment
• CRI (WTW), CRI (SP), CRI (SR), CRI(zones): Long list performance

commitments

CRI (Overall) = CRI for compliance failures in water supply zones + CRI for compliance failures at water treatment works + CRI for compliance failures at service reservoirs ∑ (Seriousness x Assessment x Impact (population / WTW volume / SR capacity) Total population served / WTW volume/ SR capacity CRI =

Measurement and monitoring

Event Risk Index (ERI)

• Relative measurement of risk for each consumer
• Measure under development and consultation with industry
• ERI : Long list performance commitment

Σ(Seriousness · Assessment · Impact (population, time) ) population served by the company ERI =

PR19 Timeline

• Companies seeking technical support need to demonstrate

the need for each proposal; information requirements in Annex A accompanying LTPG

• DWI will formally confirm /decline support for proposals in

final decision letter; legal instrument are likely to be required

• Timeline for PR19 engagement
• DWI will engage with companies and CCGs as appropriate

throughout the process

PR19 final submission from Companies 31 Dec 2017 (some flexibility will be allowed ) DWI final decision letters to companies 30 May 2018 Legal instruments in place 31 Dec 2018

Questions?

Trust in water 21

Break

Trust in water 22

W2020 draft methodology Summary of responses For discussion

• In the following slides we summarise the responses to the July methodology consultation.
• We will take account of responses and confirm our policy in the December methodology

statement.

Trust in water 23

Affordability and vulnerability

Trust in water 24

Summary of responses – Affordability

Three aspects of affordability Respondents agreed

• overall affordability – providing value for money
• affordability in the long term
• affordability for those struggling, or at risk of struggling to pay

Five principles to assess business plans Respondents agreed

• good customer engagement;
• good customer support;
• effective approaches;
• efficient approaches; and
• financial assistance options that are accessible.

Common metrics to assess affordability in plans Mixed views

• Respondents generally supported the use of common metrics
• Respondents had mixed views of the common metrics we proposed in the July

methodology consultation

• Some respondents helpfully made alternative suggestions

Trust in water 25

Summary of responses – Vulnerability

Qualitative information and views of CCGs Respondents agreed

• Use qualitative information, and the views of CCGs, to assess how companies’ business

plans support customers in circumstances that make them vulnerable based on the challenges we set in our 2016 Vulnerability focus report.

Bespoke performance commitments Respondents agreed

• Most respondents agreed with our proposal to require companies to include bespoke

performance commitments for addressing vulnerability in their business plans after engagement with their customers.

Common metrics to assess vulnerability in plans Mixed views

• Respondents generally supported the use of common metrics
• Respondents had mixed views of the common metrics we proposed at the July

Methodology consultation

• Alternative suggestions were proposed by some respondents

Trust in water 26

How well are companies addressing affordability and vulnerability

Other test areas Quantitative measures Qualitative measures

Common metrics form only part of our assessment in these two areas We propose to assess companies’ approaches and common metrics ‘in the round’

We will be promoting affordability / value for money in several ways at PR19

• Cost efficiency

including bad debt

• Cost of capital
• Service quality
• Financeability tests

We will be promoting:

• The key themes of

the Vulnerability focus report

• Unlocking the value

in customer data

• UKRN data sharing

report

Trust in water 27

Affordability common metrics Vulnerability common metrics

Percentage of customers finding the level of their bills affordable. Percentage of customers aware of support services offered Percentage of customers finding their bills acceptable. Number of customers on Special Assistance/ Priority Service Register Benefits (in £) of applying affordability measures. Percentage of total customers on Special Assistance/ Priority Service Register Costs (in £) of applying affordability measures. Year-on-year percentage increase on number of customers on Special Assistance/ Priority Service Register from 2011-2016 (2010 base year) Percentage of customers aware of financial assistance measures. Percentage of customers satisfied services are easy to access Percentage of customers who are on financial assistance schemes offered by the company and who are satisfied Percentage of customers on SAR/PSR contacted

• ver the past 2 years to ensure they are still

receiving the right support

Our current working common metrics for affordability and vulnerability

Trust in water 28

Outcomes (performance commitments, ODIs, C-MeX and D-MeX)

Trust in water 29

Clarification on performance commitments

We have discussed with you on a number of occasions the case for more stretching performance

• commitments. We want to clarify the following points.

1) A more stretching performance commitment does not cost customers more money

Our price review cost and outcomes tests work together. In essence:

• Our costs test looks at whether a company should have lower costs for a given level of delivery.
• Our outcomes test looks at whether a company could deliver more at no extra cost to customers.

If a company responds to our outcomes challenges by changing its performance commitment, for example, for sewer flooding from 400 to 300 incidents per year this does not, of itself, cost customers anything. We have a separate test on cost efficiency which challenges companies to have efficient levels of cost and we do not allow the company a higher cost allowance for a more stretching performance commitment. Indeed, doing so would undermine the benefit of more stretching performance commitments for customers. An example from PR14 was that Welsh Water proposed a performance commitment of 43 minutes in 2019- 20 for the average duration of supply interruptions for its customers. We reduced the performance commitment to 12 minutes during PR14 at no extra cost to customers. In 2016-17 Welsh Water actually achieved 12.2 minutes. We are looking to CCGs to challenge companies on the degree of stretch in companies’ performance

• commitments. Can the company deliver more at no extra costs to customers?

2) A more stretching performance commitment makes outperformance payments less likely

Customers only pay more for service performance through ODI outperformance payments (formerly known as “rewards”) where a company has outperformed its stretching performance commitment. The more stretching the performance commitment, the less likely the company is to achieve ODI outperformance payments and the more likely the company is to incur an underperformance penalty, which reduces customers bills.

Trust in water 30

July consultation - key messages on proposals for outcomes

We consider:

• There is significant scope to make performance commitments more stretching, so that

customers benefit from better service;

• There is significant scope to build on the ODI framework to incentivise companies to

deliver more of what customers want by better aligning the interests of company management and investors with those of customers.

• There should be greater incentive for companies to go beyond their service commitments

to customers, and larger penalties for those who do not achieve their commitments; and

• Better services can be achieved alongside keeping bills affordable for customers, given

the scope for efficiency improvements at PR19.

• We consider that the design of our new customer experience measures should encourage

companies to improve customer experiences.

Trust in water 31

Summary of responses – Outcomes

Respondents agreed

• There was strong support for the overall outcomes framework.
• There was general support for the balance between common and bespoke performance commitments

(PCs)

• There was general support for strengthening ODIs with some caveats
• There was general support for replacing SIM with the Customer Measure of Experience (C-MeX) and for

introducing the Developer Services Measure of Experience (D-MeX) .

Mixed views

• There were mixed views on our proposals for the definitions of leakage, drinking water quality, per capita

consumption, pollution incidents and asset health metrics.

• There were mixed views on the details of in-period ODIs, outperformance payments and the increased

use of financial ODIs.

• There were mixed views on the C-MeX survey methodology and cross-sector benchmarking.

Respondents disagreed

• There was more disagreement with the lack of glide-paths and our view that the average company with

average performance will incur ODI penalties.

• There was disagreement from a self-lay partner trade body on the focus of D-MeX being on satisfaction

rather than promoting competition.

Trust in water 32

W2020 draft methodology Summary of response For information

Trust in water 33

July consultation - key messages on proposals for risk and reward

• Cost of capital set on a forward look - market evidence indicates a lower cost of debt and a lower

cost of equity for PR19.

• Index the cost of new debt. Embedded debt set by reference to the efficient cost – there will be

winners and losers

• Companies to provide a Board statement, explaining how they have identified risks associated with

delivering the plan and how it has assured itself that the risk mitigation and management plans in place are appropriate

• High bar for acceptance of any risk pass through mechanisms.
• Increase the proportion of revenue at risk from service performance through ODIs
• Sharpen the cost sharing incentives to:
• reward companies who deliver larger efficiency gains for customers
• inefficient companies will bear a greater proportion of the cost of underperformance
• Index price controls to CPIH, so that water bills better reflect the overall rate of inflation faced by

customers

• Mechanism to pass through material changes in tax to customers

Trust in water 34

Summary of responses – Risk and Return

Respondents supported

• transition to CPIH
• include a tax reconciliation mechanism
• the scenarios proposed for PR19 risk analysis, the guidance and the use of the Financial model for risk

assessment

• respondents welcomed early publication of the financial model and rulebook
• there was general agreement to our proposals for the cost of debt indexation mechanism

Respondents disagreed

• PwC’s approach to the cost of equity. Respondents considered we were placing too much reliance on

assumptions driven from dividend growth models and market to asset value assessments. Companies supported their views with reports commissioned from KPMG and Ernst and Young

• The overall alignment of risk and return. Company and investor respondents raised particular concerns

that returns for an average performing company are asymmetrically skewed to the downside

Trust in water 35

• Each company will need to submit a plan that is financeable and provide Board assurance

that it is financeable on both the notional and actual financial structure.

• Companies will need to provide evidence of customer support where they alter bill profiles to

address such financeability constraints.

• Choice of capital structure and financing remains a matter for companies and their
• shareholders. Companies should not expect customers to bear the costs of resolving

financeability constraints arising from a company’s choice of financial structure or inefficient financing strategy.

July consultation - key messages on proposals for financeability

Trust in water 36

Summary of responses – Financeability

Respondents supported

• There was general support for our approach to testing financeability using the notional capital structure,

however a number of companies raised the point that changes in the balance of incentives at PR19 would put pressure on company financeability due to increased revenue volatility.

Mixed views

• There were mixed views on the financial metrics that we have included in our modelling with a number of

companies suggesting that metrics should be those used by the credit rating agencies.

Trust in water 37

July consultation - key messages on proposals for cost assessment

• Strong expectation of step up in efficiency for PR19, sharing efficiency benefits of totex and
• utcomes framework with customers.
• Challenging cost baselines, which will incorporate catch-up efficiency as well as forward looking

dynamic efficiency and evidence from other sectors.

• A new cost sharing incentive to reward efficient business plans and penalise inefficient business
• plans. No menus.
• Benchmark analysis using econometric modelling and a mix of top-down and granular models
• For enhancement expenditure, use of historical as well as forecast cost information to identify

efficiency benchmark. A different approach to funding of unconfirmed environmental requirements

• Warranted cost adjustment claims trigger symmetrical cost adjustments to cost baselines
• On retail controls, an econometric approach to benchmark companies’ costs and set efficient

baselines, plus take account of cross sector comparators. No indexation to inflation index. No glide path.

Trust in water 38

Summary of responses – Cost Assessment

Respondents supported

• There was support for our overall approach for assessing costs using benchmarking analysis and a mix
• f aggregate and granular models; for retaining a process for cost adjustments, and for moving from an

average benchmark to an efficient and independent benchmark, developed through econometric analysis, in residential retail.

• There was some support for our proposed approach for funding unconfirmed Water Industry National

Environment Programme (WINEP) requirements.

• There was also support with our proposal to retain the transition programme at PR19.

Mixed views

• There were mixed views on our approach for cost sharing; all companies supported the removal of menu

regulation and the use of a simplified cost sharing incentive but some respondents suggested that our proposal creates a perverse incentive for companies to bid “too” low, with unintended consequences.

• There were also mixed views on our proposed approach to downward cost adjustments; all companies

agreed that downward adjustments could be appropriate, but raised issues related to their ability to raise informed cost claims and challenge downward adjustments.

Respondents disagreed

• There was some disagreement with our approach not to index the retail controls, although most

companies supported an alternative approach of providing an allowance for inflation as part of totex, if appropriate

Trust in water 39

July consultation - key messages on proposals for form of controls

Our proposed approach will protect customers, through better targeted regulation; and create value through wholesale markets where appropriate:

• we will continue to set wholesale price controls using a building block approach – which

is our traditional approach to regulation

• ur aim is to promote a greater role for markets in water resources and bioresources

services, creating opportunities for companies to look beyond traditional company boundaries and their own in-house solutions to meet the long-term needs of customers.

• we proposed retail price controls for customers who can switch supplier (e.g. where we

introduced business retail competition) as well as for those that cannot switch (e.g. residential customers). NB: we cannot regulate exited retailers in the business market in England this way, instead they companies are regulated through our Retail Exit Code.

• we consulted on a three-year duration for all our retail price controls, rather than a five-

year duration. This would give us an earlier opportunity to take account of information and lessons from the English competitive businessmarket.

Trust in water 40

Summary of responses – Wholesale controls

Respondents supported

• There was strong support for our proposals on water trading incentives and the revenue forecasting

incentive mechanism

• There was broad support for the specifics of the water resources control, for example the use of water

resources yield as the measure for capacity

• There was general support for the specifics of the bioresources control, for example using an average

revenue control There were mixed views on developer services; access pricing; and the calibration of the incentive mechanisms in bioresources. Some of these requiring further clarification.

Mixed views Respondents disagreed

• There was some disagreement to market wide demand utilisation risk sharing in water resources and

the benefits of bilateral markets, and our reporting requirements to support this market at PR19

Trust in water 41

Summary of responses – Direct Procurement

Respondents supported

• There was general support for our proposals on introducing direct procurement for customers (with the

notable exception of some stakeholders in Wales who oppose direct procurement as an approach).

• Stakeholders were fairly supportive of the draft procurement and contract principles which we set out.

Respondents disagreed

• A number of stakeholders disagreed with our view that appointees should be excluded from bidding in

their own tender processes

• Some stakeholders challenged the our decision that the £100m whole life totex threshold for DPC

schemes on the basis it was too low and that we should consider either changing it to capex or raising it

Trust in water 42

Summary of responses – Retail form of control

Respondents supported

• use of a weighted average revenue control for residential retail (which continues our approach from

PR14).

• business retail controls for Welsh companies not subject to competition
• business retail controls (i.e. default tariffs) for English water companies that have not exited the market

Mixed views

• three-year duration of retail price controls
• price controls for water service customers of Welsh companies using more than 50 mega-litres a year

based on the view that there is not evidence that competition in the market it working yet.

Trust in water 43

July consultation - key messages on proposals for Initial Assessment of Plans (IAP)

We want companies to produce high quality, ambitious and innovative business plans, pushing forward the performance of the industry as a whole and stretching the boundaries for delivery and efficiency.

• Our initial assessment of business plans will allow us to test the quality of the plan, the level of

ambition and innovation, and the extent to which it requires intervention from us to protect customers.

• The initial assessment builds on and goes beyond the risk based review approach used in PR14.
• In PR19, we want companies to really stretch themselves and deliver a step change.
• We will use this assessment to give all companies strong incentives to produce high quality business

plans that are right first time, and to demonstrate that their plans will benefit customers, the environment and wider society.

Addressing affordability and vulnerability Securing long- term resilience Securing cost efficiencies Engaging customers Delivering

• utcomes for

customers Aligning risk and return Targeted controls, markets and innovation Accounting for past delivery Securing confidence and assurance

9 test areas

We proposed an IAP methodology framework including:

• Nine test areas for the assessment
• Three key characteristics we are looking for: high

quality, ambition and innovation

• Four categories: significant scrutiny, slow-track,

fast-track, exceptional

• A mix of financial, procedural and reputational

incentives

Trust in water 44

Summary of responses – IAP

Respondents supported

• there was broad support for our overall approach to the Initial Assessment of Business plans, including
• n: the 9 test areas; the characteristics we are looking for (high quality, innovation and ambition); and the

4 categories (significant scrutiny; slow-track; fast-track; exceptional)

Mixed views

• on the overall balance of incentives, with some suggesting financial incentives generally considered too

weak; and by some as disproportionate to financial penalties. On the other hand also a suggestion that there should be no financial incentive associated with the IAP.

• on our proposal not to include ‘Do no harm’ as a procedural incentive

Trust in water 45

Customer participation John Drummond, Corporate Culture