Empowering customers Presentation to Ofwat 17 September 2018 - - PowerPoint PPT Presentation

Presentation to Ofwat 17 September 2018 South West Water Business Plan 2020-2025

Empowering customers

Empowering our customers – New Deal

• Most thorough customer and stakeholder engagement ever
• Moved from engagement to empowerment
• Customers have the opportunity to be in control
• Customers to share fairly in our success
• Ambitious radical plan – New Deal for customers

Prices

• Historically number one issue for South West Water
• 11% / 9% reduction in real prices from 2020
• Lower in 2025 than 2010 in cash terms (nominal prices)
• Our totex efgiciency continuing to drive real price reductions
• Our prices mean we will no longer be an outlier
• Eliminate water poverty by 2025
• Dual bill all remaining unmeasured customers, giving choice of bill and removing 10,000

customers from water poverty

• c. 1 million customers engaged

Over 27,000 customers directly providing feedback £300m totex outperformance driving down prices

Summary

• f our plan

Waterlevel

Empowering customers

their say their community their plan their stake

2019/20 £139 2024/25 £127 BW plan (real prices)

9% lower

2019/20 £477 SWW plan (real prices)

11% lower

2024/25 £418

3

Delivering our promises

• Delivering all our PR14 commitments, delivered Board pledges – track record to trust
• Includes delivering promised improvements to SIM and environmental performance
• Delivered Bournemouth Water integration synergies – better industry comparator
• Achieving tough PR14 Outcome Delivery Incentive (ODI) targets
• Ambitious PR19 plan – set tough service, cost and efgiciency targets again

Straightforward transparent financials

• Simple listed structure
• Natural PAYG / RCV run ofg rate
• Transparent dividend policy – endorsed by the WaterFuture Customer Panel
• Further ambitious totex efgiciency targets – stretching ODIs
• Innovative sustainable financing framework – environmental and social capital markets
• Transparent tax strategy following customer consultation

Innovation and markets

• National Innovation Centre for Water, Waste and Environmental Resilience –

partnership with Exeter University

• Roll out ground breaking Mayflower WTW to Bournemouth area
• Unique ‘internal market’ developed for water resources
• Isles of Scilly ‘Smart Islands’ exemplar
• Paid eco systems services market embedded since 2006
• Unique customer ownership plan – first of its kind in UK
• Customer behavioural change incentive programmes roll out

Summary of our plan continued

PR14 commitments and Board pledges on track to be delivered Driving frontier efgiciency 3% opex efgiciency 5% capex efgiciency

4

Fair rewards and sharing our success

• Principle of not retaining ‘unearned’ outperformance
• PR14 pioneered sharing new debt outperformance
• Extending to sharing embedded debt outperformance
• Outperformance financing – facilitates WaterShare+

Customer support and stakeholder engagement

• WaterShare has transformed relationships
• Continuous challenge and scrutiny by independent WaterShare panel
• Highest ever customer trust and highest customer support of our plan
• Customer engagement on £50 government contribution – led to solution
• Strong support with and without £50 government contribution

New deal for customers

• Customers hold us directly to account
• Customer AGM to hold WaterShare panel and company to account
• Tangible stake in business – past and future outperformance provides free customer shareholding option
• Set new benchmarks for service and efgiciency
• Completely eliminate water poverty by 2025
• Ambitious and radical plan
• c. £20m unique PR14 benefit expected

to be shared with customers in 2020 Similar quantum of benefit to be shared post 2020 from embedded debt sharing (new mechanism) 92% of Bournemouth Water customers accept plan 88% of South West Water customers accept plan 55 WaterShare panel meetings

5 Empowering customers South West Water Business Plan 2020-2025

Our Board pledges to 2025

Board areas

• f scrutiny

Sharing success with customers Bill level in 2024/25 Bill profile to 2024/25 Scale of afgordability support Addressing lessons learned from Storm Emma Ambition on pollutions performance Smart metering policy Direct procurement and markets

We will deliver efgiciency, keeping bills as low as possible and address water poverty

Target zero customers in water poverty by 2025 In real terms average customer bills are forecast to fall by 11% (South West Water) and 9% (Bournemouth Water) by 2025 South West Water customer bills are forecast to be lower in 2025 than they were 15 years earlier and lower than they are today Continue to focus on cost control and the use of innovation and markets to drive efgiciency.

We will provide

• utstanding

customer service

Target excellent service performance across all areas and sector leading C-MeX performance Meet stretching service performance commitments in the areas which matter most to customers Continue to provide a resilient service for now and the long term, regardless of any challenges faced Deliver major drinking water quality enhancement programme to deliver wide scale benefits for customers.

We will deliver environmental leadership

100% wastewater compliance Strive to eliminate harmful pollutions to the environment and reduce minor pollutions to record lows in the industry Upstream Thinking programme improving 80% of our catchments

6

Targeting industry leading leakage, delivering 15% reduction from 2020 Our largest environmental improvement plan for 15 years to deliver region wide benefits for the environment and economy.

We will empower

• ur customers

by giving them a stake and more

• f a say in our

business

Share the benefits of success with customers fairly and transparently, developing our transformational WaterShare+ framework Evolve our sharing mechanism for customers to continue to benefit from financing gains Receive oversight from the independent WaterShare+ panel Introduce a first of its kind customer share ownership option from 2020 Hold customer annual general meetings where customers can vote Hold quarterly public customer meetings chaired by independent WaterShare+ panel.

We will deliver

• ur promises,

supporting the regional economy and

• ur communities

Invest over £1bn in the region to enhance the communities and environment we serve Deliver key projects to protect rivers, bathing and shellfish waters for

• ur customers, tourists and businesses who depend on them

Invest in two new water treatment works in the Bournemouth region Extend our area of operation to include the Isles of Scilly Provide new employment opportunities through our regional investments Use our regional supply chain to support regional economic growth Invest in people, skills and personal development, including our apprenticeship programme.

7 7 Empowering customers South West Water Business Plan 2020-2025

Supplementary information

Prices 10 Address water poverty by 2025 11 Delivering our promises 12 Stretching service and efgiciency commitments 14 Innovation and markets 16 Straightforward and transparent financials 18 Customer support and stakeholder engagement 20 WaterShare+ 22

9

Customers have told us that keeping bills low is a key priority for them Focus on efgiciency has kept costs and customer bills as low as possible South West Water and Bournemouth Water customer bills lower in 2025 than today South West Water customer bills lower in 2025 than 15 years earlier Established as a ‘normal’ company, in the pack

2019/20 £527 South West Water plan without £50 GC

80%

customer

acceptance

2024/25 £468 2019/20 £139 2024/25 £127 Bournemouth Water plan (real without inflation)

92%

customer

acceptance 9% lower

2019/20 £477 South West Water plan (real without inflation)

88%

customer

acceptance 11% lower

2024/25 £418

Prices

2024/25 average bills

£489

South West Water (with £50 GC)

£539

South West Water (without £50 GC)

£145

Bournemouth Water

Customers currently receive a £50 government contribution (GC) towards their bill. We have tested customer acceptability at a higher bill level, and 80% still find the plan acceptable.

South West Water bill waterfall

£550 £539

Inflation

+£71

Legislative

• bligations

+£12

Isles of Scilly

+£4

Efgiciencies

• £98

£493

Average household bill Average household bill Average household bill

2024/25 bill (£)

393 382 378 345 327

449 423 418 417 409 10

86%

partnerships with Social Housing Providers

• f social households in our

region reached through partnerships

• lder customers and carers reached

through partnership working Regular pop-up advice surgeries held in customers helped

£43

per week

additional benefits realised for those eligible through WaterCare + Job Centres

21 21

1,000 1,000

16,000

• Social tariff
• Dedicated affordability team
• WaterCare+
• Restart
• Freshstart
• Social housing partnerships
• Data sharing and analytics
• Water affordability app

Tackling Water Afgordability in Partnership

Address water poverty by 2025

7,000

customers helped through the Water Debt Gateway

Long track record of providing innovative solutions to address afgordability Reflective of regional characteristics

• f low incomes and high bills

Strong and extensive network

• f partnerships

Enhancing our industry leading support measures Dual billing – metering all remaining unmeasured properties,

• fgering choice of bill and removing

10,000 customers from water poverty Income maximisation checks and wider roll out of WaterCare App Removal of benefits cap from social tarifg allowing greater access Data sharing and mapping Behaviour changing financial assistance schemes

WaterCare advisor with app

12 12

11 11 Empowering customers South West Water Business Plan 2020-2025

WaterFuture Customer Panel Report Well evidenced Balanced Affordable Acceptable to customers In line with legislation and regulation

Delivering our promises

Customer Panel

Customer View

Bournemouth Water South West Water REaV sub group LREI sub group

Through extensive Board oversight we are on track to deliver all the stretching PR14 commitments

• n service and cost

All elements of RoRE outperformed Extra scrutiny (426 challenges during 55 meetings) by independent WaterShare panel and WaterFuture Customer Panel has held us to account from 2014 All Board pledges have been delivered Ambitious cost efgiciency targets have been met

• c. £300m totex efgiciencies

anticipated, keeping customer bills low Forefront of efgiciency

PR14 Board pledges delivered

Keep price rises well below inflation Deliver efgiciency through innovation to keep costs and customers’ bills as low as possible Share the benefits of success fairly between customers and investors Make significant improvements to frontline customer services Deliver service and environmental improvements Support sustainable regional growth

ODI Executive led Board Wastewater Performance review group Retail Performance review group Water Performance review group

RoRE

12

• 4%

Financing ODIs Totex Base return

75 87 82

79 86 82

82 86 84 84

85 87

Service incentive mechanism (SIM)

• Scale synergies
• Optimised customer

service package

Household

RETAIL

• PUROS 1 operation

& remote control

• Upstream catchment

management

• Innovative water

treatment solutions

• Leakage
• Metering
• Discolouration

& interruptions

• Resource sharing

and inter-connection

WATER

Resources

WATER

Distribution

WATER

Treatment

Integration with Bournemouth Water

Wholesale and retail synergies of £27m Sharing of best practice Return of small company premium Better industry comparator Pollution incidents – category 1 and 2 (number)

Stretching service level targets have been delivered Successful integration of Bournemouth Water Creation of better comparator for the industry (service and cost) Significant retail savings delivered Long track record of providing a reliable and resilient service even in extreme conditions

13 13 Empowering customers South West Water Business Plan 2020-2025

Target Actual/Forecast

Internal sewer flooding (absolute number) Pollution incidents – category 1 - 3

Stretching service and efgiciency commitments

2019/20 2024/25

Outcome Delivery Incentives (£m)

31 31 1 3 16 15 59 58 48 48 9 22 20 31 2 3 181 154

Pollution incidents – category 1 - 3 (number)

169 133 72 60 53 47 40 33

Robust customer research and engagement has informed proposals Targeting ambitious service and cost performance in the areas that matter most to customers Forefront of cost efgiciency and service – Industry leading customer service – 3% p.a. operating cost efgiciencies – 5% capital cost efgiciencies Most extensive customer valuation data sets triangulated to inform plans and ODIs Only company to comply with EA guidance on environmental ODIs Strong incentives driving improvements customers want and protecting them from poor performance Innovative customer behavioural change incentive programmes on water efgiciency and sewer blockages to reduce need for investment

14

Environment Plan to 2050 2019/20 2024/25 Per capita consumption

Water supply interruptions (minutes)

Environmental leadership and lowest levels of pollutions industry has ever seen Highest water quality, zero water restrictions and industry leading levels of leakage and 15% reduction from 2020 Increased protection from flooding and drought Community resilience improvement projects Direct procurement scheme for Southern Water

Innovation Centre

for water, waste & environmental resilience

15 15 Empowering customers South West Water Business Plan 2020-2025

Innovation and markets

Our interactive water resources video WaterCare advisor with app South West Water internal model Water resources System operator Water network plus Retail

Technology to deliver services Control technology and the use of remote sensing Customer engagement and service

Innovation

Catchment management Information sharing and data analysis Industry structure – markets

Supporting agricultural bill

• bjectives

80%

catchments covered

Innovative, efgiciency driven, customer focused culture firmly embedded into our business Markets embraced to deliver further tangible benefit to customers Bournemouth Water merger excellent example of use of capital markets to deliver significant service and cost improvements

• nly a merger can deliver

Paid eco system services market embedded since 2006 Unique first of its kind in the UK customer share ownership plan Internal markets approach for water resources developed Successful entry and operation in retail non-household market and transfer of learning to household business Innovative customer engagement and behavioural change programmes

16

Cost saving (net present value)

£412m £235m £101m

Innovation Centre

for water, waste & environmental resilience

Research programmes Enhanced Experimentation & Automation

Managing Supply

Managing Pollutants & Risks

Managing Demand

Improving Efgiciency & Productivity

Environmental Monitoring & Modelling Circular Economy & Ecosystem Modelling Research & innovation principles and approaches

Proposing direct procurement scheme for water transfer to Southern Water post 2025 Region wide deployment of behavioural change programmes on water efgiciency and sewer blockages – twin aim of engaging with customers, positively changing their behaviour, reducing their bills and helping long term resource planning Isles of Scilly smart islands project (subject to NAV application) Stretching and ambitious service improvements delivered innovatively e.g. LIDAR and WPD helicopter Innovation Centre for Water, Waste and Environmental Resilience will provide significant benefits to the whole sector

17 17 Empowering customers South West Water Business Plan 2020-2025

Straightforward and transparent financials

Outturn prices 2020/21 £m 2021/22 £m 2022/23 £m 2023 /24 £m 2024/25 £m PAYG (operating costs including retail and IRE) 258.0 263.2 262.2 262.7 263.1 Pension deficit repair costs1 10.1 10.5

• RCV run-ofg (including post 2020 additions)

176.9 179.7 182.9 186.2 188.9 Financing costs2 Return on RCV 97.6 100.4 103.6 106.7 109.4 Residential retail margin 4.3 4.4 4.3 4.4 4.4 Tax 18.2 19.0 20.5 20.3 19.7 Revenue legacy adjustments (9.5) (9.7)

• Total building block revenue

555.6 567.5 573.5 580.3 585.5 Grants & contributions recognised in revenue 9.5 9.7 9.7 10.1 10.1 Total appointee revenue 565.1 577.2 583.2 590.4 595.6 Capital expenditure 189.6 204.4 210.1 203.0 186.4 PAYG ratio 58.5% 57.2% 56.1% 57.0% 59.1% Regulated Capital Value 3,465.2 3,545.7 3,632.8 3,711.8 3,775.4 Notional interest charge2 89.9 92.4 93.8 94.9 95.6 EBITDA interest cover 3.67 3.72 3.68 3.66 3.64 Base dividends 55.0 56.7 58.4 60.2 62.1 Average household bill – South West Water3 486 490 489 490 489 Average household bill – Bournemouth Water 142 144 145 145 145

Key points to note are:

• PAYG and run-off rates reflective of

underlying cost profiles and asset lives

• Pension deficit repair costs aligned with
• ur agreed funding schedule
• Returns consistent with Ofwat’s base cost
• f capital assessment
• Taxation reflective of an effective rate of 15%
• Interest costs reflective of cost of capital and

rising in line with debt requirements

• Dividends rebased reflecting lower returns

to 2025.

18

Appointee totex 2015-201 2020-251 Totex allowance 1,9242 1,978 Base efgiciency (before outperformance) Operating costs 2.5% 3.0% Capital expenditure 5.5% 5.0% 2015-20 2020-25 Real returns based on:3 RPI RPI CPIH Blended average

Wholesale vanilla cost of capital 3.7% 2.3% 3.3% 2.9% Residential retail margins 0.1% 0.1% 0.1% 0.1% Equity return 6.0% 4.0% 5.0% 4.6% Cost of debt 2.59% 1.33% 2.32% 1.9% Notional gearing 62.5% 60% 60% 60% Return on Regulated Equity (RoRE) 2.1 - 10.5% 1.5 - 8.8% Financeable

• Returns reduced – aligned with

Ofwat’s guidance

• Blended returns calculated from apportioning

the RCV between CPIH and RPI multipliers

• Financeable – financial covenants and key

ratios met

• Range for RoRE – opportunity of doubling

base RoRE.

• Evolution of RCV over period to 2025
• By 2025 60% of RCV inflated at CPIH.
• Continuing focus on delivering cost efficiency:
• Cost assessment focused on achieving

frontier efficiency

• Investment driven efficiencies
• Significant reduction in retail costs –

building on K6 delivery.

RPI

4.1% 2.5% 50.9% 42.5%

Regulatory Capital Value (RCV) allocation to revenue controls RCV allocation

Water Resources Network Plus Water Network Plus Wastewater Bioresources

19 19 Empowering customers South West Water Business Plan 2020-2025

Customer support and stakeholder engagement

Built on step change in engagement during PR14 Customer engagement into every day activities and Board directly involved in engaging with customers Best practice and innovative behavioural economics engagement techniques applied across entire customer base enhancing robustness

• f research data

Triangulated with customer data and played back to customers Co-creation workshops giving customers the chance not only to inform what we do but also how to deliver it Independent expert peer reviews Step change in conversations – making sure everyone has a voice

Our interactive water resources video

Record high customer acceptance of our plan Bournemouth Water

92%

customer

acceptance

W aterlevel

Record high customer acceptance of our plan South West Water

88%

customer

acceptance

Customer leakage co-creation workshops ICS Triangulation report Proposals and Choices 2020-2025

20

Independent WaterShare panel

• versight since establishment in

2013 has changed nature of customer relationship and discussion Extensive scrutiny of engagement with customers provided by independent WaterShare panel, WaterFuture Customer Panel and Customer View Group Panel engaged directly with NEDs independent of Executive 426 challenges during 55 meetings

Customer Panel

Customer View

Bournemouth Water

South West Water REaV sub group LREI sub group

“The package as a whole demonstrated great ambition from the company.”

Richard Lacey Chair, Customer View Group

“This is a super package that the company should be proud of. I would be very surprised if this affordability and vulnerability package was not industry leading.”

Steve Meakin Chair, Research and engagement sub-group

“I believe this is a good package.”

David Heath Chair, Consumer Council for Water Western Region

WaterFuture Customer Panel Report Well evidenced Balanced Affordable Acceptable to customers In line with legislation and regulation

21 21 Empowering customers South West Water Business Plan 2020-2025

Customers want to see benefits

• f success fairly shared

First of its kind customer share

• wnership scheme
• c. £20m unique benefits expected to

be shared with customers by 2020 with an option of shares Customers will have additional powers through attending a customer AGM and being able to vote Attendance at quarterly public WaterShare+ meetings Further sharing of gains and share

• wnership options post 2020

WaterShare principles applied to Bournemouth Water customers Evolved cost of debt sharing mechanism to 2025 expected to deliver similar quantum of unique benefits (c. £25m) 100% of ‘unearned gains’ returned to customers Community schemes were the least preferred customer option Eligibility criteria mirroring £50 government contribution

I think this would be a great

• idea. It’s showing that the

company is investing in its customers and not just lining

• thers pockets.

WaterShare+

• Total

• Benefits available

I think it gives people options - for those who like shares they can keep them, if they don’t they can cash them in. Good idea overall. Will make people feel they are part of the company. I usually don’t trust shares, but this would be an occasion where I would keep them, and therefore take an interest in the company.

• f customers ofgered shares

would keep them

87%

• f customers support customer

share ownership plans because they want to share in our success

79%

22

Notes

23 23 Empowering customers South West Water Business Plan 2020-2025