5 things we learned from Ofwat’s initial verdict on company plans

Mike Keil
Mike Keil, Head of Policy and Research at CCWater

It’s often said that good things come to those who wait. Try telling that to the four water companies that were sent back to the drawing board when Ofwat delivered its initial verdict on the industry’s business plans for 2020-25 at the end of last month.

The Good, the Bad and the Ugly

Affinity Water, Thames Water, Southern Water and Hafren Dyfrdwy now face the unenviable task of fixing the huge holes the regulator has punched in the proposals they hoped would set them on smooth course to the price-setting finish line in December.

That’s in stark contrast to Severn Trent Water, United Utilities and South West Water who have the wind in their sails after being were awarded fast-track status.

Those were the big winners and losers but what else did the Initial Assessment of Plans (IAP) tell us about Ofwat’s current thinking?

5 things we learned

  • Ofwat have four different categories reflecting their view of the quality of each plan but ‘exceptional’ status proved beyond everyone’s reach. We’re not surprised given that we did not see any proposals that could be considered the finished article. Every company – even those that were fast tracked – has room to stretch itself further.
  • The regulator did spring a surprise by introducing a new common Performance Commitment (PC) to measure water companies’ support for vulnerable customers. This is something we had called for more than 18 months ago. But it doesn’t go far enough. For example, there should be a common PC for helping customers who cannot afford their bills and we will keep making the case for this to be included.
  • Ofwat was disappointed that companies had not voluntarily proposed ways of protecting their customers from unexpected bill hikes caused by Outcome Delivery Incentives (ODI) rewards. These are the rewards companies can pocket for achieving certain targets, for example, reducing leakage or internal sewer flooding. There’s a really simple solution to this: put the cap back on ODI rewards and don’t allow it to be removed once price limits have been set.
  • Many companies have over-cooked the pricing of their costs and proposed investment programmes – some by more than 30 per cent, according to Ofwat’s assumptions. It’s not the role of a consumer body like ours to unpick the complex finances that underpin water companies’ plans. However, we’ll be watching closely to make sure companies do not short-change customers on important areas like maintenance, or investing for the future, in order to look more efficient.
  • One other surprise was the whopping £360 million that is being made available for a number of companies to look at the feasibility of multi-company water transfers and new shared water resources. These investigations are part of wider efforts to ensure the industry can continue to meet the increasing demands we place on our supplies. Although taking a strategic approach is very sensible, and one we welcome, we need to protect customers from paying for schemes that they will never benefit from. That’s why we’ll be seeking further clarity on how this will work.

Striving to do better

Although the IAP is an important milestone in the lengthy price review process, there is still plenty of scope for companies and Ofwat to build on the positives we’ve seen so far and deliver better outcomes for consumers.

This will be our focus right up until the Final Determinations at the end of the year.

Categories: Blog, News, Price Review