Expert analysis for a changing water industry
June 2021 issue
List of contents
This website includes excerpts from the latest edition of THE WATER REPORT.
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PUBLISHED BY
KEW PLACE
The minus touch
The business retail market has been loss making since it opened. On the back of a new study, retailers are
calling for an urgent REC review to safeguard customers from harm – including that of
systemic retailer failure.
Retailers would like to see the planned review of the Retail Exit Code (REC) urgently accelerated, on the back of an independent study which found the English non-household market has been loss making since it opened and is causing serious customer harms.
Commissioned by the UK Water Retailer Council (UKWRC), consultancy Economic Insight conducted a thorough analysis of the English market as it turned four years old, specifically to identify why from a customer perspective it is not working as well as it could, and to propose reforms to improve outcomes for customers.
The headline recommendations involve Ofwat taking immediate action to correct cost allowances and margins, or risk locking in the market’s underperformance for many customers – or worse, systemic retailer failure which would risk customers being stranded without a retailer.
The work was funded by nine suppliers – Business Stream, Castle Water, Clear Business Water, Everflow, First Business Water, Pennon Water Services, SES Business Water, Water Plus and Wave – and despite their differences in size and structure, they are all in broad agreement as to its recommendations.
The headline recommendations involve Ofwat taking immediate action to correct
cost allowances and margins.”
Social contract: a stocktake
Six months on from our 2020 Social Contract Summit, THE WATER REPORT and Indepen quizzed industry leaders on social purpose progress. The outlook's positive, but there’s more to do and views differ on who should lead the charge.
Water and energy companies have come a long way on social purpose since THE WATER REPORT and Indepen held our first Social Contract Summit at the end of 2018.
The idea that essential service providers should go beyond their obligations to deliver more for society and the environment was far from mainstream. In our 2019 and 2020 Social Contract Summits we tapped the enthusiasm shown by companies and Ofwat for the sector to demonstrate leadership on the social purpose agenda.
Since the first summit, the climate and nature emergencies have crystallised and raced up the public agenda, and there have been
a number of powerful social movements pursuing equality, diversity and inclusion. We have new and enticing term to describe this – “the just transition”.
We invited energy and water industry leaders to respond to a survey seeking their views on the progress in social purpose within their organisations and sectors. We included energy given the clear need for greater collaboration to bring about the just transition. The survey findings are available to our subscribers in the current issue.
Non subscribers who are interested in the findings should request a copy through our contact page.
Following its December launch, Ofwat has now set out its high-level thinking on PR24 and future price controls.
PR24: the show must go on
Ofwat’s newly published initial views on the framework for PR24 and future price reviews seems keen not to throw the baby out with the bathwater in terms of the mechanics, rather to introduce improvements and refinements. But it has teamed this with what is a significant shift to focus concertedly on the long term and on a broader definition of value.
Senior director of finance and governance and PR24 lead, Aileen Armstrong, emphasises the blend, and that the new paper discusses high-level ideas but is not a done deal. “We’re moving on from PR19 but we’re not throwing out the core elements that worked well and are delivering well. This is our third outcomes price control…we’re in the stage where we’re putting ideas out there, we want to hear views. Now’s the time for fresh ideas; we’re listening.”
The document sets out Ofwat’s thinking on an array of price control matters, including regulatory building blocks, prospects for process, and the role of markets and collaboration. But the message it hammers home concerns four strategic goals Ofwat plans to pursue.
According to the regulator, a successful PR24 will:
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increase focus on the long term;
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deliver greater environmental and social value;
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reflect a clearer understanding of customers and communities; and drive improvements through efficiency and innovation.
“We’ve really got to target the big challenges here,” says Armstrong
A greater leap
Five firms have secured Ofwat’s agreement to contribute to the Green Recovery beyond statutory schemes.
Water companies will make £2.8bn of investment over and above their PR19 allowances to support the green recovery under draft determinations issued by Ofwat for consultation until 9 June.
This is on top of investment programmes being accelerated within
The lion’s share of the green recovery funding – £1.9bn – will be sourced by bringing forward statutory environment schemes earmarked for AMP8. Twelve companies are involved in this: the nine English water and sewerage companies plus Affinity Water, Bristol Water and South Staffordshire Water.
The remaining £862m is genuinely new investment that has secured draft approval from Ofwat. Five companies made formal proposals in January following a July 2020 joint invitation from Defra, Ofwat, the Environment Agency, the Drinking Water Inspectorate and CCW to the sector to support the green recovery.
AMP7 where possible to boost jobs, prosperity and the health of the
environment.
Waters' meet
British Water and the Water Industry Forum are seeking their members’ support to merge, arguing they’ll be stronger and more influential together.
The boards of British Water and the Water Industry Forum have proposed to their members that they join forces, with a view to spearheading collaboration, creating a stronger collective voice and driving value.
If members agree and the proposed merger goes ahead, it will create an organisation with a diverse range of water sector interests to face current and future challenges and pursue opportunities. The plan is to position the combined entity as “a collaborative, unifying organisation and destination of choice for water sector organisations seeking to build strategic relationships with the sector as a whole”.
British Water chair, Chris Loughlin, says that as well as being a positive step for the two organisations concerned, the prospect of a merger with Water Industry Forum was also “exciting for the sector”
Loughlin: "a louder, clearer, more effective voice."
Fletcher: "from strength to strength."
adding: “A benefit and advantage of bringing British Water and the Water Industry Forum together would be a louder, clearer, more effective voice for the sector”.
Loughlin's counterpart at the Water Industry Forum, Mark Fletcher, says it is the needs of the whole sector rather than organisational need that is really driving the move to combine. Individually, each organisation is respected and financially stable, he says, but together, they can go “from strength to strength."
Rule of six
Six quid. CCW’s Affordability Review has concluded that's all everyone will have to find to end water poverty. That means a single, national social tariff.
For around £6 on the average bill (after transition costs), we could end water poverty. This recommendation – for a single national social tariff – was one of ten produced by CCW when it published the findings of the Affordability Review Defra and the Welsh Government asked it to undertake last October.
The recommendations are broad and wide ranging, taking in everything from debt to data sharing, and communications to making processes more customer friendly. They encompass measures from those that can be taken immediately, such as improving access to existing help, to those that will take some time to action, including overhauling social tariff policy.
Clancy: a “simpler, better, fairer system”
CCW chief executive, Emma Clancy, said collectively, they amount to a “simpler, better, fairer system” that should ensure customers have “one less thing to worry about”.
The review’s ultimate objective is to end water poverty, which it defined as customers spending 5% or more of their household income after housing costs on water bills. CCW’s director of policy, research and campaigns Mike Keil said if implemented, the measures would “represent a step change in the
breadth and quality of help available”.
keep on top of the threats and opportunities in retail and upstream.
It's the eye on the competition.
Covid-related excess bad debt is set to be recovered in part from customers through retail price cap uplifts.
At its end of year Chief executive officer's Forum last month, MOSL showcased the activities it is undertaking to improve the services it provides across the water market.
MOSL chief executive, Sarah McMath, recapped what MOSL had delivered in the last year against its business plan. She gave also an overview of MOSL’s use of its position as custodian of market data to “unlock insight”. This included getting a more granular understanding of consumption to support water efficiency efforts.
She reported that the data insight work was posing fundamental questions about the market and highlighted the fact that 15% of low-consuming customers had a higher cost to serve than the allowed retailer margin based on taking a single meter read. Added to that
Lift the
MO and more
she shared the finding that retailers can’t make a profit on a further 40% of customers wile another 30% become loss making the minute a customer makes contact. We should, she argued, be asking questions like: should we take some customers out of the market, and should there be an open-data standard for non-household consumption?
In an update on MOSL’s Bilaterals Improvement, programme, John GilbertIn said he was "heartened” by the depth and breadth of work done so far. He reported that the start date for the first bilateral process to be adopted by all trading parties had been delayed to early September from the start of August. He said that the decision reflects its “strong desire to not jeopardise the excellent progress made by sacrificing quality for expediency”.
MOSL is consulting on creating a strategic market code panel as well as a code change committee in an overhaul of market governance.
Beating a panel
Who governs the water retail market, how, to what end and to what principles, are all up for grabs as MOSL and the Codes Panel posed a series of questions about market governance fundamentals.
These are all part of an ongoing Market Governance Review which seeks to promote efficient self governance in customers’ interests.
The lynchpin of all the discussion is the Panel’s purpose? Its composition and guiding principles are secondary considerations that will help ensure the desired purpose is delivered, respectively by ensuring it has the requisite skills, knowledge, and resources, and that any changes align with strategic aims.
A few questions
In his responses to questions on the background and purpose of the Market Governance review MOSL's director of market development, Adam Richardson (left) provided a steer on the timing of the review and his expectations of it.
Why now?
Richardson said Ofwat's Review of Incumbent Support for Effective Markets showed that the industry-led approach to market governance "could be improved to further strengthen the customer voice and better facilitate iInnovation. He went on to say "Now is an appropriate and important time to review whether current governance arrangements are fit to deliver stakeholder expectations."
What fundamental changes would you like to see?
"We know that current market governance is seen as slow, opaque and lacking clear focus on delivering the best customer outcomes," says Richardson.
The new panel "must be outward looking and engage effectively with a broad range of stakeholders.
As well as wholesalers and retailers, a Panel should consider customers (who should be the ultimate beneficiaries of the market)," he says, adding: "The proposals outlined in the consultation will likely reduce costs compared to the current governance structures, while welcoming both industry and non-industry/customer voices in decision-making.
Beyond the codes
Steve Hervouet says Affinity Water has heeded the call for wholesalers to step up to support the market and is looking to do more than the minimum.
The publication of Ofwat’s RISE report last summer put the onus on wholesalers to do much more to support markets. Unsurprisingly, the non- household retail market featured prominently. Ofwat found a patchy picture of support wholesaler to wholesaler; called for more board level commitment and adequate resourcing to drive improvement; and recommended governance be worked on, including to boost the customer voice.
Almost a year on and Affinity Water’s regulation and strategy director, Steve Hervouet, says his company has heeded the call. He is clear that this is work in progress rather than a done deal, but takes a very positive stance on the role wholesalers can play in the business market, arguing they are far from passive participants and can in fact “go beyond the Codes”.
Thompson: "personalised service" to members.
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