Expert analysis for a changing water industry
November 2023
Issue 98
This website includes excerpts from the latest edition of THE WATER REPORT.
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PUBLISHED BY
KEW PLACE
Will they stick?
The Water Report Expert Forum finds bumper PR24 business plans to be highly vulnerable to multiple challenges.
The business plans are highly fragile on all key fronts: affordability, financeability and
deliverability.”
Bill impacts not withstanding, water companies’ supersized PR24 business plans are a clear and public response to higher expectations for the environment and demands for improved performance.
The near doubling of investment to £96bn has at last given the industry a positive story to tell in response to criticism and eroded trust. It won’t win everyone over at a stroke, but it’s a start and screams ‘we get it’ and ‘we’re doing something about it’.
It is standard price review practice for Ofwat to challenge – and usually pare back – companies’ first business plan offerings. That much is to be expected. But rowing back from lofty promises substantially, or failing to deliver them, risks further deterioration of trust.
According to our latest Expert Forum survey, the business plans are highly fragile on all key fronts: affordability, financeability and deliverability.
Be careful what you wish for
Actual disgruntlement with prices could replace perceived disgruntlement with performance, Moody’s warns after looking to international comparators.
Bad reputation is not wholly deserved – the title of an analysis paper published by Moody’s – is something of an understatement when you consider that the ratings agency finds water and wastewater services in England and Wales compare favourably globally on the very issues UK water firms are vilified for.
The context is of course negative opinion and falling confidence in the English and Welsh water companies on the back of relentless
media, campaigner and political criticism. This is driving investment to spike, starting in 2025.
In a striking change from standard commentary, Moody’s found:
England and Wales is in the pack on leakage – and risks to supply, while rising, remain lower than in other countries. And treatment of wastewater is good, with more extensive sewage networks and more intensive treatment than other developed economies.
Radical change is needed in water regulation to keep pace with a more complex and faster changing world – but how radical, exactly, and where? An Indepen roundtable explored the issues.
Regulation in the water sector was established for a simpler world, and one in which water was not at the centre of political and media attention. The regulatory model up to the 2000s was characterised as linear – see a problem, do a study, spend customers’ money, problem solved. That said, the reluctance of all parties to see bills rise resulted in what we would characterise as close to systematic underspend.
Now the acknowledged complexity of the water ecosystem, dynamic challenges such as climate change, and the range of externalities associated with the sector means that bolt on adjustments to the basic model have become problematic and ineffective. We need
twice the spend we have recently seen on "enhancements" to environment, assets and climate resilience. Worst of all it has resulted in a complex regulatory regime that is opaque and inaccessible to customers and the public and has discouraged investor appetite for the sector.
The high public profile of water has also, many think, led to a heightened degree of risk aversion: among politicians, regulators and companies. Doing the ‘safe’ thing and keeping one’s head down can in such an environment mitigate against innovation and alternative approaches.
Water regulation: revolution or evolution?
PR24 business plans: all change
Company proposals mark an inflection point in the water sector’s history, in terms of priorities, work programmes and how we pay.
The industry has shown real ambition in putting forward stretching plans, albeit largely driven by statutory requirements. Its aims are clearly to comply with new legislation, rise to higher public expectations and remedy performance shortcomings.
The context is difficult though. Public trust is depressed and higher bills couldn’t really have come at a worse time in cost of living terms – and yet postponing investment any longer would likely cost even more, be irresponsible for nature and the environment, and further damage trust.
Meanwhile we are told investor confidence is in the doldrums; that shareholders in particular may not have the stomach to put in the equity that will be necessary to support enlarged expenditure – at least not at all companies unless returns increase.
The situation is further complicated by the staggering variety in the plans. Despite Ofwat’s drive for greater commonality, companies have used different assumptions and proposed different mixes of activities, and presented them in different ways. This will make benchmarking tricky, particularly as the past seems to be an increasingly inadequate predictor of the future.
Equity retention will not be sufficient to
fund the investment needs and new equity
injections will be required.”
Stefanie Voelz, Moody's Investors' Service
So much to gripe about
Water companies are performing so differently on customer complaints that industry-wide numbers mean little.
Wessex Water was the best performing water and sewerage company (WASC), and Portsmouth Water the best performing water-only company (WOC), on household complaints in 2022-23, according to CCW.
Both companies attracted the fewest complaints per 10,000 connections compared to their peers, and were better than average at handling them. CCW noted: “Wessex Water has consistently held a sustained lead in this area.” Other high performers were Hafren Dyfrdwy, Severn Trent, and Bristol.
At the other end of the scale, Southern Water attracted the most complaints per 10,000 connections of the WASCs, ten times more than Wessex and three times more than the overall WASC average. It was worse than average at complaints handling.
Overall complaints to CCW remained stable (1% increase) at 6,197. However, the number of complaints it received from customers of WOCs increased by a huge 66%, whereas complaints about WASCs fell by 3.7%. Again, complaints were most commonly about bills
We have been unimpressed by Southern
Water’s apparent lack of understanding of
what drives customers to complain in the first place and therefore its ability to address the the root causes.” CCW
Water and sewerage companies
Water only companies
will keep you on top of the threats and opportunities emerging from retail and upstream competition.
It's the eye on the competition.
The best of both worlds
MOSL’s new strategy teams robust core services and systems, with addressing vital water security issues and continuing to advocate for market progress. Chief executive, Sarah McMath, explains.
MOSL has matured as an organisation, the world around it has changed, and the water market continues to evolve. Those three factors underpin changes to MOSL’s strategy, which the market operator updated last month.
Relevant developments in the world of water include new Retail Exit Code (REC) price caps, the production of updated Water Resource Management Plans, a severe drought in 2022, statutory water demand reduction targets including for non-household users, and a surge in public concern for the environment.
The wider economy has seen a push for growth, decarbonisation, digitisation and innovation – all of which either are, or could well be, water-hungry. Meanwhile, MOSL has stabilised and grown its skills base, expertise and capacity.
The market operator’s first strategy ran from 2021-24 and contained four priorities:
• service excellence – delivering simple, effective and easy to access services;
• market improvement – resolving frictions and pain points;
• Data insight – to enable evidence-based decisions.
• Organisational capability – building a high performing team.
Its new strategy covers 2024-27 and again lists four priorities: market confidence, market systems, water security and market evolution.
CONTENTS November 2023 full contents of the magazine
THE WATER REPORT EXPERT FORUM How robust are the PR24 business plans?
REPORT PR24 business plan analysis.
INDUSTRY COMMENT Water regulation: revolution or evolution?
INDUSTRY COMMENT The happy marriage of construction and AI.
REPORT The NIC’s new National Infrastructure Assessment.
INDUSTRY COMMENT Look beyond water for net zero.
REPORT Moody’s finds solace in international performance comparisons.
INDUSTRY COMMENT New approaches needed for the supply chain.
NEWS REVIEW Labour looks to “special measures” for water.
INDUSTRY COMMENT Invite the journalists in!
NEWS REVIEW The SMF calls for consistent social tariffs.
REPORT Household complaints and Water Mark 2022-23.
INDUSTRY COMMENT Why men’s loos need sanitary bins.
NEWS REVIEW PFAS overhaul for drinking water standards.
will keep you on top of the threats and opportunities emerging from retail and upstream competition.
It's the eye on the competition.
FEATURE MOSL’s new strategy for 2024-27.
NEWS REVIEW Southern Water launches business water efficiency grant scheme.
