One penalty and two rewards in year-end ODI draft determinations

Ofwat has imposed a penalty on one water company and rewarded two in its draft determinations on their performances under the outcome delivery incentive (ODI) scheme during 2015-16. The penalised firm, South West Water, has requested holding off payment of its penalty until 2019 to avoid yo-yoing of customers’ bills.

The independent governing panel of South West Water’s WaterShare scheme – through which the firm shares financial benefits gained from outstripping regulatory targets – has asked that the £1.73m ODI penalty settlement be deferred until the end of the price control period in 2019. At that time, the penalty could be swallowed up by £3.56m in outperformance rewards already accrued.

In its draft determination Ofwat has said it was “minded to accept South West Water’s proposal” adding “In South West Water’s specific case the in-period ODIs need to be seen in the context of its WaterShare framework.

The WaterShare scheme distributes net benefits under totex incentives, ODIs and other items such as debt outperformance in a timely manner.

South West Water has already gained £3.1 million from items including outperformance on the cost of debt and it has opted to reinvest it in improvements to services for customers. The panel opted not simply to return the outperformance gain to customers because that would create volatility in bills.

Ofwat said it had made an in-period ODI determination for 2015-16 even though South West had not requested one.

According to Ofwat South West’s decision not to request a determination for 2015-16, was in part based on its calculation that a penalty of only £0.11 million was due. But the regulator said the firm had wrongly classified its water restrictions placed on customers ODI reward of £1.624 million as being in-period when it was end of period.

Ofwat said its reasons for deciding to make an in-period determination included “a material error in the information South West Water provided to us and because it allows us to consider the issues and ensure a full and transparent discussion of them with stakeholders.”

The regulator’s provisional view was that South West Water incurred a penalty of £1.873 million due mainly to its shortfall on category 1 and 2 wastewater pollution incidents by seven incidents. Ofwat said the company had earned “a small net reward of £0.141 million in water” leading to a net penalty of £1.731 million.

Severn Trent Water beat its commitments in three areas. It exceeded commitments on pollution incidents by 32%, on internal sewer flooding by 21%, external sewer flooding by 7% and leakage by 2%. Ofwat has proposed ODI reward of £18.8m.

And Anglian Water has outstripped by 1.5% its commitment under its only in-period ODI for leakage. Ofwat has proposed a £500,000 reward.

South West, Severn Trent and Anglian were the only companies to opt for in-period determinations in some of its ODIs.