No leaders but fewer laggards in 2023/4 performance report

The ‘leading’ category remained empty from last year as Ofwat published its annual report on water company performance for 2023/24 last week, though four firms did pull themselves out of the ‘lagging behind’ category.

Thames, Yorkshire, Bristol and South East joined all other companies in the ‘average’ category, except for Anglian, Welsh Water and Southern which stayed in the bottom band (see graphic). Ofwat specified that Thames remained in its Turnaround Oversight Regime, but had met six of its performance commitments and improved on leakage and water supply interruptions.

Those in ‘lagging behind’ as well as those who have just moved up to ‘average’ have to publish service commitment plans setting out when and how improvements will be made.

At an industry level, Ofwat plans to impose a £158m net penalty – the final number will be issued in December. Four firms – United Utilities, Severn Trent, Northumbrian and SES Water earned rewards, while the rest were issued with varying degrees of performance penalty (see Table A – note that the numbers do not include end of period payments that are accruing annually, deferred payments from previous years, abatements / deferrals or bespoke adjustments and so are not the final payments that will be applied in customers' bills).

Ofwat called the results “disappointing” and highlighted many firms had fallen further behind on key targets for pollution and internal sewer flooding. On the former, it said there had only been a 2% reduction despite companies committing to a 30% cut, while on the latter there had been a 10% reduction in four years against a 41% target for five years. It also said customer satisfaction had deteriorated further, to its lowest point since 2020.

Ofwat chief executive David Black said culture change and leadership were needed, as well as investment. Severn Trent got a special positive mention for its fast action on sewage overflows.

On the positive side, progress was reported on asset health, reducing supply interruptions and ensuring more vulnerable customers are on Priority Services Registers. Leakage also fell 6% and drinking water quality continued to be excellent.

All companies overspent on their combined water and sewerage allowances in 2023-24 but there were nuances in AMP trends (see below).

A Water UK spokesperson said: “We know there is much more to do and companies are fully committed to boosting performance. It’s important to note that water companies have delivered improvements under almost every measure since 2020. Water companies have worked hard to deliver the lowest level of leakage ever recorded, cut unplanned outages at treatment works by nearly two-thirds and reduce sewer flooding incidents by 10%.” In a blog, the trade body explained that companies can improve but still miss targets and incur penalties. 

**********************************************************************************************

Analysis: Wastewater expenditure laggards under the spotlight – by Verity Mitchell

The publication of Ofwat’s Water Company Performance Report 2023-24 reveals how the companies are deploying their financial resources.

As highlighted in Ofwat’s Draft Determination publication, one of the key risks for AMP8 is the proposal to introduce a revenue clawback mechanism for companies failing to invest in a timely manner. It is the companies that propose their investment programmes for each AMP, on which revenues are set by Ofwat. If they fail to deliver these, Ofwat wants the excess cash returned to customers mid period.

Ofwat says that in 2023-24 “the sector made improved progress against its forecast enhancement allowance, increasing the cumulative expenditure as a percentage of forecast enhancement allowance from 73% in 2020-23 to 84% in 2020-24.” Of the largest water companies, Yorkshire has the second largest underspend of 31% with Thames on 35%. Anglian is slightly below the average on 18% but is ranked by Ofwat as ‘lagging behind'.

Anglian and Yorkshire though are wastewater laggards on a cumulative enhancement expenditure basis. This puts them under regulatory scrutiny. They have each spent only 53.4% of their allowances for 2020-2024 compared to the sector average of 75.6%. In the three wastewater performance metrics, Yorkshire has suffered an 0.48% ODI penalty and Anglian a 0.53% penalty. Southern’s penalty is larger at 0.78% but it has ramped up wastewater enhancement expenditure to 75.9% of its allowance. Thames has spent 80.9% of its allowance as it seeks to deliver on its turnaround plans and the penalty it has incurred, 0.3% for the three wastewater metrics, includes a small reward for wastewater asset health.

Ofwat said: “Given the step up in investment that is likely to be required for the 2025-30 period we expect companies to improve their delivery capabilities so that they are in the best possible position to deliver their PR24 enhancement programme.”