Thames’ Cathryn Ross calls for a vision for water and investible PR24 determinations

Water companies, customers, communities, government and regulators need to co-create a shared vision for water, Thames Water’s strategy and external affairs director Cathryn Ross implored at the Future of Utilities conference last week.

The sector is critical for health and the environment, and we need a shared vision that “unites and inspires people within and around the sector to work together; that creates the confidence to have an open conversation about how we can make the future better; and that paints a picture of a prize worth striving for,” she urged.

In her keynote speech, Ross championed the sector’s achievements since privatisation, including on investment and leakage. But she also highlighted the “real challenges” faced from climate change and population growth, as well as from perceptions – from people being sceptical about private company motives and regulatory effectiveness; to water being taken for granted; and anger about ‘failings’ in river health, supply disruption and water quality. “We do need to turn these perceptions around,” said Ross, so people pay their bills and play their part in the water system. 

She offered three thoughts on what is needed: 

A change in mindset – The sector needs innovation, collaboration and more nature-based solutions “and yet the dominant mindset…especially among some of our regulators…is entirely antithetical to that”. She offered the example of the narrative about companies “falling short, lagging, failing and regulators ‘holding to account’” as encouraging: “Less ambition because we will only try to do the things we are really confident we can do. Less collaboration – because why would anyone want to work with a failure or a laggard? Less innovation because it’s ‘safer’ to stick to what you know. More defensiveness and blaming because people don’t feel open and confident but are instead frightened of being challenged and wanting to deflect challenge onto others.” This is “precisely the opposite of what we need,” Ross argued. Hence a new co-created vision is needed to shift this mindset and behaviours. 

More transparency and engagement – To support a change in perceptions, companies should resist the temptation to “batten down the hatches” and instead be transparent (as Thames has been with its sewage discharge map) and open in their engagement with stakeholders and critics. “We need those conversations – human being to human being, honest and open, on the issues that matter – if we are to change minds and win hearts.”

Delivery to be enabled – Companies need to deliver higher levels of service and resilience, to “show not tell,” said Ross. Thames has targeted a 22% leakage reduction on Ofwat’s 2021/22 baseline in its PR24 business plan, as well as a 17% cut in sewer flooding and a 30% cut in pollution incidents. The whole industry is targeting unprecedented levels of investment for AMP8 and likely beyond.

To deliver this, a massive amount of new equity is needed, but at present, two-thirds of water firms are not making returns in line with Ofwat’s view on their cost of equity. Ross argued: “If we are going to show customers and communities we are delivering, using private finance to spread the cost of that investment over a long period, keeping bills affordable... we need help. Specifically, we need Ofwat to deliver a set of PR24 determinations that make companies – all companies – investible.”

She continued: “This doesn’t need any new regulatory technology, just the exercise of judgement on things like the benchmarks it sets for cost efficiency and performance, the incentives it puts around those benchmarks, the WACC…and a willingness to depart from a one-size-fits-all cookie-cutter approach…to enabling each company to have a reasonable chance over a reasonable period of earning a reasonable return for the level of risk that company faces.”