May 2022 issue

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Soaring green investment v customers in the red: the price review problem

Collision course?

Question: how will the need to keep bills affordable for customers who are incredibly squeezed by soaring living costs be traded off against the need to invest to address the equally compelling needs of an environment that is struggling to survive?

It’s a live topic ahead of PR24 in England and Wales, and challenging the new price settlement in Scotland. The topic came up time and time again at last month’s Westminster Energy, Environment and Transport Forum conference. CCW chief executive Emma Clancy summarised:

“The sector faces two challenges which must be addressed in unison: the challenge of making bills affordable for those struggling to pay, and the challenge of meeting the impacts of climate change, including a set change in how people value water. In short, the sector wants to invest…at a time when fewer people than ever can afford to do so. And most people don't really know why they should.”

Different dynamics

Yorkshire Water’s corporate affairs director, Richard Emmott, explored the scale of the

challenge and its new, and likely ongoing, nature.“The dynamics we now need to deal with are probably the most complex since the industry was privatised back in 1989,” he observed.

Purely to meet the new government targets on storm overflows, Emmott said: “Water UK has estimated that the investment needed will be greater than the industry's entire environmental programme for the last 25 years… And that's without paying for climate resilience and any other environmental programme.”

Demand for customer service investment effectively comes from citizen regulation, empowered by access to the industry's own performance data. Now this is a dynamic which does not respect neat five year periods.”

Real world economics

Less than a year after its implementation, Peter Peacock says Scotland’s long-term water charges settlement is unravelling in the face of cost of living pressures – and this was entirely predictable.

The Water Industry Commission for Scotland (WICS) aspires to a 20-year customer charges escalator, to finance doubling investment in asset replacement in Scotland’s water infrastructure. Scottish Water signed-up. And why wouldn’t they on being offered more spending than they could have dreamed of?

The regulator crunched numbers; produced a target for increased investment; and it was decreed charges needed to rise by CPI +2% on average each year. The target for the first six years, set at the 2021 Strategic Review of

Charges, will lead to another for the next six, with a further narrow gateway to pass through by 2039. A straight line of uninterrupted growth to a new order, with some annualised flexibility.

The regulator sought to lock this all in by setting a minimum price rise. This proved impossible given WICS’ only price power is to cap charges.

Undeterred, a minimum income "expectation" was woven into the Final Determination to incentivise compliance. Scottish Water initially prioritised WICS' demands over the

“In light of the cost of living crisis, the hand of the politicians

was forced and has quickly prevailed.” Peter Peacock

customers' on charges for 2022/23

But in light of the cost of living crisis, the hand of the politicians was forced and has quickly prevailed.

Close to home

Swathes of customers are already struggling to pay their bills, and most prioritise service that affects them directly above issues like pollution, carbon and biodiversity.

Evidence of the more collaborative approach to customer research at PR24 emerged last month, with publication of the findings of two pieces of work jointly commissioned by CCW and Ofwat. CCW also got its plan to oversee more coordination across company customer challenge groups.

In our article Collision course? (above) we discuss the growing tension between cost of living and concern for the environment that the sector will have to grapple with at the next price review. The watchdogs’ Customer spotlight research, undertaken at the end of

2021, makes it clear that a third of all customers were already in the grip of that cost of living squeeze, even before the 2022 price and inflation escalations.

Meanwhile, the watchdogs’ Research on customer preferences report suggests that whatever bill level is ultimately deemed acceptable for 2025-30, there will be tension regarding how the money should be

spent. The study suggests customer priorities do not tally with the issues that are preoccupying policy. Environmental issues generally, and storm overflows specifically, are low down on customers’ lists – though that picture is muddied somewhat by an element of the Spotlight study and a deeper dive on storm overflows CCW conducted in addition.

Hit the roof

Southern Water is responding to anger about sewage pollution by targeting an 80% cut in storm overflow releases by 2030. Nick Mills explains roof and road runoff is the top priority.

Southern Water has nailed its colours to the mast on storm overflows. Its stated goal is to cut releases by 80% by 2030 – going further, faster than Defra’s draft Storm overflows discharge reduction plan, which remains out for consultation until 12 May.

The company appointed its former head of pollution and flooding resilience, Nick Mills, to lead its new Storm Overflow Task Force in November 2021. The team is charged with the unenviable job of working out how to deliver the 80% reduction in eight years.

Mills fully appreciates the significance of the challenge for Southern, given its infamy

for receiving the sector’s highest ever pollution fine, and for the sector as a whole, given the public and political ire that is now wrapped around untreated sewage discharges.

“We want to be seen to be leading,” he asserts, explaining this is crucial for Southern for reputation rebuilding.

He cautions against underestimating the need to address storm overflows which, he argues, is is the most significant and potentially impactful issue the industry has faced since the Urban Wastewater Treatment Directive – “and that privatised the industry”.

When people start to see SUDS in the high street, and overflow figures start to drop, that’s the point at which they start to trust us.” Nick Mills

Mills: "We want to be seen as leading."

Time for a cooperative approach

Henry Leveson-Gower argues cooperative law is better suited than contract law to stacking ecosystem services involving multiple parties.

The Government set out its strategic priorities for Ofwat in February, which included: “The impact of environmental efficient investment by the water industry should be maximised through co-funding with other sectors and green finance opportunities, where appropriate, including through market mechanisms.”

The Government seems to have given water companies the ‘opportunity’ to lead the way on achieving the holy grail of so-called ‘stacking’ and ‘bundling’. This is the jargon for getting a range of land

managers to collaborate to deliver ecosystem services such as improved water quality to a range of paying beneficiaries including water companies.

This is ‘environmental efficient investment’ as it maximises the funding contributors for land management and use change, hence minimising the cost for each contributor of gaining the related environmental benefits. It also has the potential for delivering economies of scale given the area that could be involved.

Head for the Beech

SES has ambitious plans to provide multi-layered public value benefits at its Bough Beech estate.

SES Water has plans to turn its Bough Beech reservoir and the surrounding estate from ‘the lake you can’t get to’ (as online reviews of the area dub it) to ‘the lake you can’t wait to get to’. The estate, in Kent, covers 570 acres and the dual-flush loo; and the ‘Chilterns to

champions" TV advert screened during the Euros final (watched by 1.2m people in 48 hours) which made the point that the Wembley pitch has the Chiltern chalk streams to thank for keeping it match fit. currently comprises a mix of operational land including

a water treatment works with education centre, agricultural landholdings, a nature reserve, ancient woodland and the reservoir itself, which holds 10bn litres and hosts a sailing and angling club. But there is limited public access, with footpaths confined to patches only.

The company thinks the estate could give the community so much more.

In fact, SES Water has ambitious plans to demonstrate place-based social and environmental leadership at Bough Beech.

Wholesale director Tom Kelly concedes SES has been “behind the curve on some of this” compared to other companies, but intends to make up ground by doing something “subtly different” at Bough Beech.Kelly explains the Kent site offers the best opportunity to demonstrate multiple benefits in one place – from operational resilience and amenity, to carbon reduction, nature recovery and public engagement.

Stepping up for Spring

On 16 May, Carly Perry will become the first ever managing director of Spring, the water sector’s new innovation centre of excellence, which was developed out of the sector’s 2050 innovation strategy. Spring seeks to be the engine behind the innovation strategy by focusing innovators on sector priorities and unblocking challenges related to delivering solutions.

Contracted in from Sia Partners, Perry has served as consultant executive lead since July 2021 and has been integral to the design and development of the Spring minimum viable product (MVP), which went live in December.

There are two main services available: an ideation and collaboration incubator, which seeks to stimulate, create

and nurture new ideas by "facilitating clear lines of communication between water companies and potential innovators"; and an

Carly Perry is prioritising driving value from Spring’s first challenge and finding a funding Plan B as she takes on the role of the innovation hub’s first managing director.

Perry "Our immediate priority is finishing the innovation challenge cycle that we have started and working with the sector to break down the barriers of innovation mobilisation and adoption.”

innovation adoption incubator, concerned with taking promising ideas into practice, including through signposting innovators to practical help, for instance on funding and intellectual

property management.

keep on top of the threats and opportunities in retail and upstream.

It's the eye on the competition.

Affinity and beyond

Affinity Water extends its lead at the top of the R-MeX table, as the overall service picture also nudges up.

Retailers ranked Affinity Water the best, and Severn Trent the worst, wholesaler in for service provision, in the latest Retailer Measure of Experience (R-MeX) survey.

The survey was completed in February by retailers supplying 96% of supply points in the market and accounting for 93% of consumption. At 7.41, the market average overall service score improved by 0.15 compared to the August 21 survey. Overall service also increased for all wholesalers

except Severn Trent and South East. MOSL remarked on the significance

of South East’s drop, from 7.1 last August to 6.43 in the latest survey.

Further, within the subcategories that contribute to the overall performance score, MOSL noted two of the largest decreases were against South East Water for "speed and quality of responses to service requests" (- 1.14) and "level of engagement and support" (-1.21). It saw a large fall at

Severn Trent Water (-1.04) in the "Effectiveness of systems and notifications’ category. MOSL said it would review the feedback given for Severn and South East “and work with them to put the appropriate steps in place to make improvements”.

As well as keeping the top spot, Affinity Water secured the highest overall service improvement of 0.72, significantly extending its lead at the top of the table.

Ofwat shuts Thames smart meter competition case

Regulator rules no breach took place because its concerns have been sufficiently addressed.

Ofwat has closed its investigation into whether Thames Water breached competition law in its approach to smart meter installation, following its acceptance, with minor adjustments, of commitments pledged by Thames and consulted on in February.

The adjustments concerned two minor changes to improve clarity, and a request from Thames – which Ofwat accepted – to amend the expected delivery dates for five individual commitments because of delays caused by contractual discussions with some of its suppliers.

Thames was not found to have breached competition law, because it sufficiently addressed all of Ofwat’s original concerns. These related to abuse of a dominant position under Chapter II of the Competition Act 1998.

Ofwat's senior director of markets and enforcement, Emma Kelso, said: “Smart meters can provide many benefits and as other companies start to roll out smart metering programmes, there will be helpful lessons to draw from

this investigation.”

Bilaterals benefits exceed expectations

Annual benefits are 100% higher than was estimated in the business case for the Bilaterals Transaction Programme for six of the 15 financial benefits identified, according

to initial analysis reported by the retail market operator, MOSL. In its April Market Focus newsletter, MOSL said efficiencies from these six processes were worth £937k a year,

compared to the £468k estimate. It said that total annual savings for all bilateral processes could top the "high case’"of £1.7m.

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