February 2020 issue

List of contents

This website includes excerpts from the latest edition of THE WATER REPORT

Full coverage is available only in the print and digital editions of the magazine.

PUBLISHED BY

KEW PLACE

Companies have less than two weeks left to accept or reject their final determinations, with few easy options.

Hard to swallow

At the end of January, Ofwat said two companies had formally accepted its final determinations – Severn Trent and United Utilities.

In its 28 January Q3 trading statement, fast tracked Severn Trent cited a totex allowance of £6.8bn “in line with our PR19 business plan,” a “stretching but achievable” suite of Outcome Delivery Incentives, and an expected Regulatory Capital Value real growth rate of 3.8% as among the reasons for its board’s decision. It also announced its dividend policy for AMP7 will be growth of at least CPIH. Ratings agency Moody’s noted this compares with RPI+4% currently.

Sources close to the board discussions are briefing to the effect of “multiple”
appeals.”

On the back of the news, the promptly downgraded to Baa1 from A3 the issuer rating of Severn Trent Water as well as the senior unsecured debt ratings of Severn Trent Water Utilities Finance.

 

It also downgraded to Baa2 from Baa1 the issuer and senior unsecured debt ratings of Severn Trent Plc, giving all ratings a stable outlook. Severn Trent has been part of a wide-ranging water company review Moody’s announced on 20 December after

the final determinations were published.

Spending cuts, short termism, and selective target pursuit – but also innovation – are all expected by

THE WATER REPORT Expert Forum, as companies cope with final determinations that many see as coming at the expense of future customers and resilience.

Judging by responses to the latest THE WATER REPORT Expert Forum survey, Ofwat has pitched its final determinations well.

There’s no overwhelming agreement that the package is either easily achievable and acceptable (too soft) or the opposite.

 

Views are pretty polarised on most aspects of the deal so it will be a tough call for many companies in choosing what to do next. However, there is considerable agreement that the review will have some negative longer term consequences. 

No sense of direction

Parts of the solution

Water Resources East has many parts all working to put together a single water resources plan for the East of England. 

A little over six months on from its incorporation as an independent company, Water Resources East (WRE) has already attracted 56 formal members including all the region’s water companies, many energy companies, the National Farmers' Union, green groups, local government, universities and many more.

What all of these organisations have come together to achieve is something that sounds delightfully simple but actually is fiendishly complex: WRE is one of five regional water resources planning groups and has the primary objective of developing a single, multi-sector regional water resources plan for Eastern England.

Managing director, Robin Price, said this would not be done in consultation with members, it must be genuinely co-delivered. And while he was “absolutely delighted by the number and diversity of organisations” now involved," he added: “the intention is to double this”. Technical director, Steve Moncaster, went further, saying the ambition is for the WRE's Strategic Advisory Group “to be as big as we can damn well make it”.


There is currently a truly broad range of interests involved. But there are also gaps – for instance, no water retailers are yet taking part, nor food manufacturers.

What all of these organisations have come together to achieve sounds delightfully simple but actually is fiendishly complex.”

will keep you on top of the threats and opportunities emerging from retail and upstream competition.

It's the eye on the competition.

The tough with the smooth

The Retailer Wholesaler Group promotes good practice to reduce market frictions – but its co-chairs say it now needs regulatory support to make sure everyone listens. 

The work of the Retailer Wholesaler Group (RWG) has been held up for praise by Ofwat on a number of occasions. Last summer, for instance, the regulator warned wholesalers it would monitor the take up of the good operational practice guides the RWG had produced and scrutinise “the reasons why any trading parties are of the view that they should not adopt this guidance”.

 

But a little over six months on, the RWG’s co-chairs would welcome a formal policy statement of support from Ofwat in their bid to embed practices across the sector that would benefit customers.The fundamental purpose of the RWG is to find industry-led solutions to issues that involve retailers and wholesalers, to benefit the end customer. And to encourage standardisation of good practice to simplify and improve the market. 

While many trading parties do adopt the advice set out in the guides, wholesaler chair and Bristol Water’s head of wholesale services, Simon Bennett, says there can be legitimate reasons for some not to welcome them immediately  – IT issues for instance, or convoluted sign-off procedures.

 

“It’s easy for me, we’re a small water company, I’m in a position to bring back the good practice

guide and say it’s what we’re going to do from now on. Some wholesalers have to take it back and it has to go through seven sign offs to be done. They’re not in a position to just say ‘we’re going to do this’, to take that leap of faith and that risk.” 

Bennett: "It’s easy for me. Some have to take it back and  go through seven sign offs "

Never going with the flow

Everflow Water is bucking market trends as a fast growing new entrant. Chief, Josh Gill, explains how he’s happy with retail margins and puts people before profit. 

For a remarkably profitable new entrant to the water retail sector Everflow Water is governed by an unusual tenet: “Profit and revenue are not my priorities," says chief executive Josh Gill. "If your purpose is profit, you either sacrifice your employees or your values.”

 

 Everflow is, by some measures, the most successful retailer in the business water market. So Gill's statement will be especially hard to digest for many of Everflow's competitors who have failed to turn a profit despite, no doubt, intense focus on it.

“Success has nothing to do with the perfect strategy,” he says. But it has everything to do with corporate culture. “We’ve worked so hard on our culture and it is my number one priority for 2020. I’m absolutely ruthless about who we take on.”

 

The top characteristic sought – sales record? target smashing? No. “Knowing how to have fun while doing the job.” (He sees his role as “chief fun officer,” he confides). He isn't joking.

Gill: "chief fun officer."

“I spend so little time thinking about revenue and profit, but I think a lot about how to improve the lives of our employees,” he says.

R-MeX in the mix

The Retailer Wholesaler Group R-MeX sub group is awaiting Ofwat’s decision on a code change it put forward to introduce a new measure of wholesaler performance for retailers.

Unlike the incentive measures to improve service to household customers and those for developers, Ofwat opted not to incorporate an incentive-based measure of retailer experience (R-MeX) into its PR19 framework. However, last summer it did tell wholesalers to get behind work to adopt a common measure of retailer satisfaction by

October 2019, and that it expected this to be implemented by April 2020.

 

Enter the The Retailer Wholesaler Group, which had been working on R-MeX since summer 2018 anyway but reinvigorated efforts to move things forward after Ofwat’s comment in support. Wholesaler chair, Simon Bennett, says it was a classic case of the industry stepping up and effectively saying to Ofwat “we’ll manage this for you, so you don’t have to worry about it”.

THE

WATER REPORT

HARD. WATER