Ofwat to raise cap on Severn Trent’s ODIs and consults on in-period determinations

Ofwat is consulting on increasing the cap on the wastewater outperformance payments Severn Trent can receive under the Outcome Delivery Incentives (ODI) framework. This follows the company outperforming all its in-period wastewater ODIs to date, and almost reaching the 2% of RORE cap set at PR14 by April this year.

Severn Trent applied for the cap to be removed completely in July, but offered a number of options for Ofwat to consider. The regulator said last week that it agreed that keeping the PR14-set cap of 2% of RoRE in place would not be in customer interests, but set out its own proposal rather than accepting any of Severn Trent’s.

This is to increase the cap from 2% to 2.6% of RoRE, which would increase the maximum out-performance payments for Severn Trent by about £45m to around £200m. The regulator set out a number of conditions concerning increased service levels, a reduced incentive rate for external sewer flooding, and sharing best practice with other companies.

Ofwat is consulting on the plan until 21 November as part of a wider consultation on in-period ODIs for 2017-18 for those companies that opted in to the scheme at PR14. This proposed a net reward for Anglian Water only, with the other companies receiving net penalties, though in the case of Severn Trent this resulted from a company proposal to defer the bulk of its wastewater reward until 2020. The details were:

  • Anglian Water secured an outperformance payment of £4.6m to wholesale water bills in 2019-20 (an increase of £2.45 on the average annual household water bill in 2019-20). This was because of leakage outperformance: 9m fewer litres of water are leaking from the company’s network every day. Anglian does not have an in period wastewater ODI.

  • South West Water received a net penalty of £0.27m, comprising a reward of 0.5m on water (leakage was 1m litres per day lower than its performance commitment and it had resolved 96.1% of its operational customer contacts first time in 2017-18) offset by a penalty of £0.78m on wastewater (primarily because it had three Category 1 and 2 pollution incidents rather than its commitment of zero in 2017-18, and 237 Category 3 and 4 pollution incidents rather than its commitment of 218 in 2017-18.)

  • Severn Trent’s situation is more complex. It received a net penalty of £4.7m, comprising £29.6m water penalty (primarily because it underperformed on supply interruptions by 23.49 minutes) offset by £24.9m wastewater reward. However the company earned a total wastewater outperformance payment of £87.8m, primarily because its number of external sewer flooding incidents was 49% lower than its commitment; its number of internal sewer flooding incidents was 31% lower than its commitment; and its number of Category 3 pollution incidents was 13% lower than its commitment.

Severn Trent proposed deferring the remaining £62.9m to future years. Hafren Dyfrdwy adopted Severn Trent’s ODI framework for the customers in and around Powys and Monmouthshire that transferred to it following Severn Trent’s takeover of the former Dee Valley Water and the resulting realignment of company boundaries along the Welsh border. Hence for the first time Hafren Dyfrdwy falls under the in period ODI regime, but only for its customers that were formerly with Severn Trent. The firm received a net penalty of £0.06m comprising a water penalty of £0.17m offset by a wastewater reward of £0.11m – though like Severn Trent, Hafren Dyfrdwy secured a larger wastewater reward but has proposed deferring the remaining £0.28m to future years.

Ofwat will make its final determinations of in-period ODIs for 2017-18 by 15 December 2018.