The sector’s three listed firms – South West Water, Severn Trent Water and United Utilities – are the only companies to have secured the green light from Ofwat for their PR19 business plans.
Each has received ‘fast track’ status in Ofwat’s Initial Assessment of Business Plans, published at 7am this morning. All three plans feature hefty pre-inflation price cuts ( 5% ST, 14% SWW and 11% UU) and voluntary benefit sharing mechanisms ( SWW’s Watershare Plus company share offer for customers, ST’s community dividend and UU’s funding of support for customers struggling to pay their bills).
Ofwat said the threshold for fast track is high, and that the plans “set a new standard for the sector”. It also highlighted the following features of the three plans:
Ongoing expenditure reductions
Additional investment to improve resilience and the environment
Stretching Performance Commitments that reflect customer priorities
Other improvements such as increasing the numbers on social tariffs and Priority Services Registers.
The companies will benefit from early draft determinations and receive a financial reward of £18m for Severn Trent, £6.5m for South West Water and £22m for United Utilities. Ofwat said the differences reflect the relative size of the three companies.
At the other end of the scale, Ofwat put Thames Water, Southern Water, Affinity Water and Hafren Dyfrdwy in the lowest business plan ranking category, ‘significant scrutiny’. It said these “fall well short of the required quality and need extensive material intervention to protect their customers’ interests”. Ofwat elaborated: “Each of these companies faces different challenges, and each is going through a period of change. The categorisation of these plans recognises the challenges that these companies face and that they need to substantially rework their plans.” It will consider whether to allocate lower cost sharing rates and capped incentive payment rates to these firms, depending on the quality of their plan resubmissions.
All other companies’ plans were categorised as ‘slow track’. Ofwat said these “have elements of high quality but fall short of high quality… in-the-round” and need “material intervention to protect their customers’ interests”.
The top category available, for ‘exceptional’ plans, remained empty. The regulator explained: “Many companies had elements of ambition and innovation. However, no company’s business plan was sufficiently ambitious, innovative and high quality to be awarded ‘exceptional status’ and receive higher financial rewards than ‘fast-track’ companies.”
Ofwat assessed the quality of company plans in the round against three overarching characteristics:
High quality – efficient, resilient and affordable; including stretching performance commitments that really deliver for customers; and providing confidence the company can and will deliver it.
Ambition – pushing the boundaries of efficiency and delivery for the sector, setting a new standard.
Innovation – developing and implementing new ways of working including looking beyond their boundaries using new markets; cooperating more effectively with third parties; and moving from successful pilots to swiftly embed best practice into day to day business.
The remaining milestones for PR19 are as follows:
o 1 April 2019: companies categorised as either significant scrutiny or slow track must submit revisions to their business plans addressing the shortcomings Ofwat has identified.
o 11 April 2019: publication of draft determinations for companies with fast track plans.
o 18 July 2019: draft determinations for companies categorised as either slow track or significant scrutiny.
o 11 December 2019: final determinations for all companies.