Ofwat annual report out

It looks like my post about what’s been keeping me so tied up in recent months is going to have to wait! This morning Ofwat launched its annual report, ‘Service and delivery – performance of the water companies in England and Wales 2009-10’. News sites, such as the BBC, picked up the story right away – by highlighting that six of the (currently) 22 water companies missed their leakage targets.

We’ve talked at length about leakage issues previously here at Waterstink, so I won’t repeat myself today on that particular point. Well, except to say that in the full text of the annual report, Ofwat still insists on using phrases like, ‘leakage levels are about 35% lower than they were at their peak in the mid-1990s’ [see page 4] – rather than presenting the full graph of how leakage levels have gone up then down… then back up before recently coming down again!

Also, following hot-on-the-heels of my annoyance yesterday with Defra’s assertion that the current regulatory regime has kept ‘household bills around £110 per year lower than they would have been’ without it, Ofwat also claims in its latest annual report that ‘bills are more than a third lower than they otherwise would have been, as a result of [Ofwat’s] challenge to companies to be more efficient’. Once again to call Ofwat out on this… What exactly does ‘otherwise’ refer to here?

Given these increasingly frequent claims that appear to be unsupported by (any) evidence, I must say that I’m seriously thinking of writing a paper – or even putting in a proposal for a full research project – on a topic something like, ‘Developing a ladder of alternative innovation-sustainability mixes to better assess the first 20 years of UK water privatisation’. I imagine Roger – and some more of my colleagues (e.g. Maria Nedeva, Jean Shaoul and perhaps even Dale Whittington) would be quite eager to help me with this kind of challenge, given their experiences with what and how to measure in the area of impact assessment! (Of course, a full assessment based on these alternative mixes would need to be done to actual quantify things – and would be best to be agreed to be reasonably robust by key water sector stakeholders…)

Ofwat’s annual report goes on to rattle off triumphalist, ‘monument syndrome’-style figures too, e.g. that the sector has ‘invested more than £90 billion (in today’s prices) in maintaining and improving the water and sewerage infrastructure’ and ‘will invest another £22 billion over the next five years’ – and that both momentous feats have been apparently ‘made possible by the stable and transparent regulatory framework that [Ofwat] provide[s]’ [also page 4].

Moving to overall company performance, Ofwat additionaly notes the following:

‘The companies need to continue to make sure that they maintain stable serviceability (which is the capability of the system of assets to deliver the right level of service to consumers now and in the future). In the case of three companies (Southern, Northumbrian and Dwr Cymru), we are requiring them to deliver action plans to restore stable serviceability. We are also considering whether to require three other companies to do the same.’

‘We are concerned about the number of properties that are flooded as a result of overloaded sewers and other causes. We are also concerned about the lack of consistency in reporting and the poor quality of data. We have told the companies that we expect them to improve this over the next few years.’

‘We are pleased by the way in which the companies have responded to the challenge of carbon accounting and believe that the quality of the data is improving. The industry has a significant carbon footprint and we are making sure the companies do all they can to improve their carbon management.’ [All page 7]

All three of these points related to climate change, sustainability and resilience issues.  Delivering ‘the right level of service’ in the future is going to be a critical issue – and will be very sensitive to future climate variability and related supply-demand changes.  Flooding will similarly be drawn into this picture. Lastly, yes, the carbon footprint of the sector is substantial. Furthermore – as Roger can attest having had an insider’s view on the topic – very few of the water companies apparently seem to know how to meet their carbon reduction targets in the long-term!

It’s also interesting that all three of these important issues, largely speaking, are also only very recent concerns of the sector. Well, people may have been talking about them at various events for about a decade or so. But in terms of properly planned and costed actions to address them, as we’ve noted here at Waterstink, we’re only looking at initiatives launched during the past few years.

Ofwat’s annual report also highlights that they plan to move to a new performance assessment framework for next year’s reporting:

‘This i the last year that we will publish and use the overall performance assessment (OPA). In 2010-11, we will publish the results from the first year of the service incentive mechanism (SIM), which we introduced from April 2010.’ [page 8]

Ever keen to find out what’s coming up for the future of the water sector – and acutely aware that I’ve been (partially!) ‘living under a rock’, as it were, due to ongoing commitments these past six months or so – I decided to look up further details about Ofwat’s new ‘SIM’ system.

Typically, Ofwat has a full page of links to various documents about it. The main report, ‘Putting water consumers first – how can we challenge monopoly companies to improve?’, does indeed provide some interesting reading indeed! Below are some (very) select highlights from this document that caught my eye:

‘In the absence of a competitive market for water, we need to make sure that good incentives are in place. The time is right to refresh how we do this’ [page 3] Waterstink response: ‘Quite right!’

‘Because it is based on narrowly defined quantitative measures of service (such as the speed of response), the OPA may deter the companies from innovating in their communications with consumers. We want a mechanism that allows and encourages innovation.’ [page 5] Waterstink response: ‘We agree!’

‘The SIM encourages the companies to understand and take responsibility for delivering what consumers, rather than the regulators, expect’ [page 7] Waterstink response: ‘Laudable – and long-overdue!’

‘…only 63 [percent] of consumers had their issue resolved with a single call; the remainder had to contact their company at least twice, including 5 [percent] who said they needed to make at least six calls’ [page 11] Waterstink response: ‘Yikes!’

‘If implemented by the UK Government and Welsh Assembly Government, the recent review of competition and innovation in water markets (the ‘Cave review’) would transform the structure of the sectors and extend consumer choice.’ [page 14] Waterstink response: ‘Here’s hoping this happens!’

‘Encouraging innovation … We want to allow the companies the freedom to innovate. While the OPA was appropriate for checking that the companies met required service standards, it did not necessarily reflect innovative service improvements which consumers would value. Information collected for the SIM measures will provide the companies with useful evidence about how better to meet consumers’ expectations. It should help them to improve service, innovation and technology.’ [page 15] Waterstink response: ‘Hurrah! But don’t forget that ‘consumer’s expectations’ are not just about superficial things like call-answering-times. We want a sector that is innovative and sustainable – both now and for generations to come…’

Lastly, on page 6 of this document, there’s a fascinating plot of the successive performance of the sector at the 1999, 2004 and 2009 price reviews. It’s easier to discuss if I present it here in full (just quickly to note that this is for academic, not-for-profit use and I’m fully acknowledging the source, in case Ofwat’s legal people are reading this!):

Source: Ofwat.
Source: Ofwat.

(Please note: You may wish to open the full-size image in a new tab to see it more clearly…)

If you’re a regular reader, you’ll recall that part of our ‘water sector bad habits’ series (which, sadly, we’re well behind with!) was about ‘plateaus/diminishing returns‘. (You can read the specific post here.) So what does Ofwat have to say about this plot of successive performance scores? This:

‘This graph illustrates how the companies are now ‘bunching’ together at the top end of the range for the OPA score.’ [page 6]

What’s another way of saying this? How’s about the text of my post on that topic, copied below:

‘… the industry’s performance levels – in any particular area you may wish to choose – have reached some ‘plateau’ or else are … running up against ‘diminishing returns’…’

Why is this happening? Is it because the performance measurement systems used within the regulatory framework need to change? Yes. Is it because what is measured is insufficiently broad and comprehensive? Yes. Does this show that the sector has reached the limits of its current technical and innovation strategies? We would contend, yes, most definitely. (In fact, looking closely at Ofwat’s plot, there’s even an argument for the fact that not only have the main water and sewerage companies bunched up/reached a plateau, they’ve actually regressed. You can see this in the fact that the line of ‘light blue’ performance scores, representing levels for the 2009 Price Review, is actually lower on average than the ‘magenta line’, which indicates the scores from five years before!)

One final point is also worth making before we leave you to go off to read these documents and come to your own conclusions about what they are saying about the ‘successes’ of the past 20 years of UK water privatisation. This is to set in writing a defence of any possible comeback on this point, e.g. that even if the companies have plateaued, what does it matter? They’re all bunching in the mid- to high-90 percent ranges, right? That’s pretty exceptional, is it not?

Well, if 100 percent on this scale represented a minimal carbon footprint, flexible, sustainable, innovative condition for a UK water company, then yes – I’m sure we’d both heartily agree that we’d have reached a pretty optimal point for the UK water sector!

Sadly, as we’ve gone to great lengths to point out – both here at Waterstink and in both our careers up to this point – it’s extremely unlikely that that’s what the top of this particular scale represents. Count us both as sceptics if you will, but we both strongly feel there’s still a long, long way to go yet on this issue!

Duncan Thomas

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