May 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

Stretch

or snap?

Alterations needed?

We took early soundings from

           the sector on how regulation might take account of the Covid 19 impact

on bad debt, targets and totex and more.

With the trajectory and impact of the pandemic still unclear, it is impossible to nail down a precise action plan. But there is no doubt that the sector will be hit broadly – across revenue, operations, spending and performance – and therefore that a need for some kind of regulatory response is likely. Indeed the effect of business closures on the non household retail markets of England and Scotland prompted policy and regulatory interventions within days.

In a new paper, Frontier Economics stresses that any regulatory response to Covid 19 needs to be based on sound evidence (see box). That’s quite right, but in the meantime we have taken early soundings from The Water Report Expert Forum – a group of sector leaders and opinion formers we poll regularly on topical issues, in partnership with Accent – on what policy and regulatory responses the sector considers valuable at this point. 

The wheels of what could be year-long Competition and Markets Authority cases to examine Ofwat’s final determinations for AMP7 are underway. Four companies – Northumbrian, Anglian, Yorkshire and Bristol – have each submitted a Statement of Case. And submissions are invited from third parties, such as customers, representative groups and other water firms, by 11 May.

Anglian Water said fundamental underfunding was top of the bill: “Almost every aspect of Ofwat's FD falls short of providing Anglian with the means to carry out the work necessary to meet the stated preferences of its customers and the requirements set by the quality regulators – the Environment Agency and the Drinking Water Inspectorate – in terms of water quality and environment.”

 

Yorkshire Water pointed out that the final determinations, the decision to appeal and the basis of its case all happened before Covid 19 surfaced. It said: “It would seem appropriate to suggest that in the current climate there are measures that either Ofwat or the CMA could take to bring this redetermination to a timely conclusion in the national interest."

Conveying a sense of bewilderment at Ofwat’s FD, Northumbrian Water's chief executive, Heidi Mottram flagged up the company’s track record including 91% customer approval for its plan and the deepest bill cut in the sector at 15% teamed with a pledge to eradicate water poverty by 2030. She said Ofwat’s "complex web of interventions across the settlement’s various components" have created "an overall unacceptable level of risk for the delivery of our AMP7 programme and the financeability of our business."

Bristol Water’s dispute is purely over financeability. “The decision was reached on the grounds that Ofwat’s FD is not financeable for a small water only company like Bristol Water. Bristol cannot efficiently finance delivery of its plan for customers as a consequence of erroneous decisions by Ofwat.”

Which way ahead?

Anglian, Yorkshire and Northumbrian have told the CMA they have different visions of the future to Ofwat; while Bristol is revisiting its small company financing dispute.

Digital points the way

Arup and British Water are developing a digital platform to map resources across the supply chain to support the water sector through the pandemic – and beyond.

Covid-19 is a significant, disruptive issue facing the water sector, and – based on latest information – is one likely to be present for the next 12-18 months. So far, companies’ operations are holding up well, in some cases with significant reductions in workforce, as they quickly learn different ways of working.However, operational resilience could be tested further by secondary events, such as critical asset failure or widespread flooding or drought.

For the sector to succeed in the context of Covid-19, it will have to show great persistence and adaptability, juggling the need to advance critical planning and capital delivery work with the management of significant risks in operations and the supply chain.

Now more than ever, collaboration and sharing of knowledge and
resources will be the key to keeping water flowing and the sector on its feet.”

Business unusual

Weekly calls hosted by British Water to discuss the impacts of the pandemic show the sector – water companies as well as the supply chain – adapting to the new normal and looking forward.

Weekly calls on Covid 19 impacts hosted by British Water show the sector – water companies and supply chain – adapting to the new normal and looking forward.

 

Pretty much as soon as the coronavirus epidemic took hold, British Water mobilised a weekly Zoom call for its members, featuring updates from key sector figures on Covid-related developments. Chief executive Lila Thompson has explained the objectives are to promote collaboration and support during isolated times; to provide insight to help the supply chain do business; and to champion issues raised on the calls on behalf of British Water members.

She pointed out on the call at the end of April that cash flow and forward sight of projects are two key priorities for the supply chain.

Many of her members who have featured in the online meetings over the weeks have endorsed those points, most making the case that the health and readiness of the supply chain will be critical for the success of the whole sector as it emerges from the pandemic. 

Long-term disruption

Caroline Wadsworth tells Anastasia Maseychik about Twenty65’s search for solutions for a sustainable water future in 50 years – by getting people to think disruptively.

In outling the primary aims of Twenty65, the project's innovation manager, Caroline Wadsworth, said she wanted to go beyond the usual five-to-ten- year outlook to a half century timeline.

 

When asked how the programme aimed to achieve this, Wadsworth emphasised one word: collaboration.

Wadsworth: truly collaborative

“It is a truly collaborative research programme working across academic and industrial capabilities," she says adding: "Whilst it is led by the University of Sheffield, we have six academic partners and we also engage with hundreds of stakeholders across the sector.

"Basically, we’ve tried to include all the key players to engage and help direct/co-create the research," she says. “The next stage is that we have a strategy board that gives us insight from outside the water sector." this arrangement she says assists innovation transfer into and out of the water sector.

 

"We can learn from them strategically – particularly the energy sector which has been through a very similar process to what water is going through now."

If the company is out of balance with the community and the environment, in the long term, that’s not good for shareholders. Peter Simpson
relationships

Thompson: "personalised service" to members.

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

 

It's the eye on the competition.

Further liquidity relief and some debt mutualisation feature in Ofwat’s April consultation on how best to share Covid-19 pain between trading parties.

Perhaps in an attempt to encourage restraint in what is inevitably a fraught situation, Ofwat has couched its suggestions for the next stage of action to get the business retail market through the coronavirus outbreak in terms of customer protection. It cautioned, in a consultation issued on 16 April and only open until 21st: “This is a national crisis and all parties need to share the burden in order to keep the market as a whole functioning, in the interests of customers.”

That plea was perhaps largely addressed to wholesalers. While Ofwat said it appreciated the liquidity support wholesalers had already extended to retailers through code changes implemented in March (see box, The road to the consultation), it indicated the question was not one of whether more help is needed, but rather how far it might push wholesalers to go. It observed: “In order to

Retail rescue continues

protect customers, we need the retail market to work, and any consequent pressure on wholesalers to be acceptable.” The consultation proposed measures to deal with three main issues: liquidity problems facing retailers from coronavirus-driven customer late payment; retailers’ exposure to elevated levels of customer bad debt; and wholesalers’ exposure to retailer insolvency.

This is a national crisis and all parties need to share the burden in order to keep the market as a whole functioning, in the interests of customers.”
Face up to failure to save the market                                                INDUSTRY COMMENT

How should Ofwat best respond to the effect of Covid 19 on the business retail market? Regulatory policy expert Nick Fincham offers some advice.

The public policy case for liberalising the non-household (NHH) retail market was always a bit thin.  The Government’s original impact assessment envisaged benefits from opening the NHH market that were five times lower than the forecast costs, with the case resting on so called "spill-over benefits" in household retail and wholesale services. 

Nevertheless, the dynamic benefits of opening the NHH retail market were powerfully advocated by Ofwat.  And so it was that – at least according to one ex-regulator – in return for Ofwat support on the need for the Thames Tideway Tunnel, Government ministers agreed to open the NHH retail market to competition.

Loans to retailers, whether from banks backed by the government or
from wholesalers, won’t fix an insolvency problem.”

A cost efficiency gap persists for slow track firms in Ofwat’s draft determinations.

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