Roger and I are on Ofwat’s mailing list. My goodness, they really went to town with 20+ press releases in October, November and December 2017! I was also amused, given how niche UK water regulation news is, that a few were even embargoed… I mean, I’m not knocking the importance of water sector news. But are there really news outlets out there for whom this stuff is breaking news…?

At any rate, all the press releases made me realise I haven’t posted about Ofwat in a very long time. And so this post is a bit of a chronological catch-up.

Changes at the top in Ofwat (Dec 2017)

First up, Ofwat is now under the leadership of its third Chief Executive since Regina Finn took up the inaugural posting of this then, new role, back in 2006. After some water sector and media kerfuffling, Cathryn Ross took over in October 2013 but then recently resigning at the end of 2017, reportedly to move and chance stance from ‘regulator’ to ‘regulated’, at BT. Rachel Fletcher now takes on this role from about a week ago, on 8 January 2018, having left a senior role in gas and energy markets regulator, Ofgem.

(In spite of my over-active nepotism-radar, Rachel Fletcher is happily also no relation to the former Director-General [2000-2006] and Chairman [2006-2011] of Ofwat, her partial namesake, Philip Fletcher.)

I’ll post up separately about how the tenure of these three chief executives has been discussed in water-related circles. For now, it’s great to realise that, in a very male-dominated UK water sector, there have been three women chief execs, in a row at Ofwat.

Customer bad debt still a major issue (Sept 2017)

Back in September 2017, Ofwat reminded us that “[w]ater companies are lagging behind other sectors where it comes to dealing with customers who are struggling to pay their bills” and that bad debt adds “approximately £21 annually to each customer’s bill“. Back at the time of the Walker Review in December 2009, I recall this debt level being described as follows:

“The cost to paying customers is about £12 a year, which many customers can ill afford. Debt in the water industry is three times higher than in the energy sector, although bills are a third of energy bills.”

£12 inflated from 2009 to 2017 is about £14.70, so the fact that it is around £21 is not good! However there’s a detailed analysis presentation by PwC from the same day as this press release, which can be found here. It suggests the median bad debt across the England and Wales water sector, as a percentage of revenue, fell from 3.1% to 2.8% from 2012 to 2017.

However PwC also explained there is a less mature debt management environment in the water sector compared to other utilities and services. This point was reinforced by the fact that the bad debt charge as a percentage of revenue in the energy utilities was 1.5%, and it was 0.8% in telecommunications, according to this analysis. More telling still was the fact that the ‘doubtful debt as a % of net debtors’ was a staggering 86% for water, versus 23% for energy utilities, and only 19% for telecoms!

In the press release Ofwat called on the England and Wales wtaer companies “to do more for those who are struggling to pay their bill,” “to identify customers who are having difficulties before the debt becomes too big,’ and – not surprisingly given the above figures, “to do more to deal with those customers who can afford to pay, but won’t pay their bills.” Ofwat recommended that water companies:

  • Do more with affordability schemes’ availability and take-up;
  • Make better predictive use of debt-related data;
  • Have more billing options (such as more frequent payments);
  • Make sure tariff and payment methods are appropriate;
  • Take ideas from other sectors about “ways to deal with customer debt“; and
  • Ensure “there are real consequences for those customers who can afford to pay, but choose not to do so.”

Water-related bad debt is something I’m more used to seeing discussed for water utilities in more materially developing parts of the world, e.g. in our MOOCs. However it remains a really big, long-standing, and contentious issue for the UK water companies, and has lingered practically the whole time since privatisation in 1989. Here’s hoping there is some innovative action on it soon…

Vulnerable water customers, affordability, trust and legitimacy issues (Oct & Nov 2017)

During October there were several Ofwat press releases on themes of water customers in vulnerable situations, and related issues of affordability and customer trust of the water companies.

Ofwat stated it was going “to report [publicly] on how each water company serves, supports and protects customers in vulnerable circumstances, showing clearly those companies that are leading the field and those that are letting their customers down” – and that it was going to make “vulnerable customers a key focus” of the upcoming Price Review in 2019 (PR19).

This is clearly a fine balance with the ‘bad debt’ issue they raised back in September, but it is a good step to see that water companies will be held to account publicly on this issue, and that they will have to build plans around it into their thinking. (There’s a 2016 Ofwat report on this issue available here.)

Later in October Ofwat also reported on its cross-utility sector work within the UK Regulators Network (UKRN) on the issue of vulnerable customers and affordability. There’s a October 2017 report available about this work. In a nutshell though the main issues seem to be that:

  • The various utilities can learn from each other, and share ideas, about how to support vulnerable customers.
  • If a customer of one utility finds themselves in a vulnerable circumstance, then they are likely to need help from multiple utilities that provide them with services. The press release suggested, e.g. “where a customer needs additional help from their energy company, they will likely need the same from their water company and vice versa.” Utilities could share data, predict and act positively upon such instances.

Underlying these issues – and the bad debt issue above – for me however, is the level of trust water companies manage to establish with their customers. As well as companies identifying vulnerable people, it’s also useful of course for customers to have sufficient trust to feel able and willing to approach proactively the companies that are there to serve them.

Ofwat did address this related issue in a related press release during October. Cathryn Ross reportedly gave a speech to Moody’s UK Water Sector Conference where she noted “lingering public concerns” about whether investors’ interests rather than customers’ ones drove the water companies, and overall a “challenge” to the water companies’ legitimacy and their ever-present need “to demonstrate that, despite people’s suspicions, water companies are indeed being run in the public interest … in the best long term interests of customers and society” and not just in “the long term interests of their shareholders.”

In November 2017, Ofwat also released some information that might undermine such trust. First, it ‘challenged’ the water companies over ‘transparency and information quality’, by noting it did “not have full confidence in the information provided” to it by four of the 17 companies it reported on at this time. This is under the still fairly recent ‘assurance framework’ that Ofwat operates, where water companies are allowed to ‘self-assure’ their information quality, if they meet certain prerequisites around data collection, data transparency, and customer engagement in their routine business planning and operations.

Full details are available here, but in a nutshell these four companies now fall into the ‘prescribed’ regulatory category, where they get more micro-scrutiny by Ofwat. Another 10 of the 17 companies fell into Ofwat’s new, medium, room-for-improvement or ‘targeted’ assurance category. Only three of the 17 companies met the ‘self-assurance’ criteria to receive a lighter touch assessment by Ofwat. This framework is still bedding in, so one might expect a gradual movement of the water companies up these categories, towards ‘self assurance’ for many or all of them, eventually. But as things stand, there is still the potential for mistrust here.

Second, also in November, Ofwat announced a ‘new crack-down on leakage’, as part of proposals for 2020-25 where water companies’ would be challenged “to save up to 170 billion litres of water a year by targeting leaks” – noting this would be “enough water to meet the needs of everyone in the cities of Birmingham, Leeds, Manchester, Liverpool and Cardiff combined (3.1 million [people]).

We’ve posted up a lot about leakage here at Waterstink. Methodologies for reporting it have changed over the years, and phrases like ‘economic levels of leakage’ have changed into ‘sustainable levels’ and so on, but it remains a major source of potential embarrassment for the water companies and the sector as a whole. (I’ll post about the separate mini-scandal about water companies’ using ‘divining rods’ for pipe and leak-detection at a later date… That was a remarkable few days of bad press for the sector as a whole, during this very same month that this new ‘challenge’ related to leakage was issued!)

Utility services ‘ripe for revolution’ (November 2017)

Another issue that Ofwat presented to the water companies, back in November was the possible ‘revolution‘ that might occur ‘in how customers buy utilities and home services‘. Here, again, Cathryn Ross was speaking at an industry conference (Water 2017). She outlined how:

“in the coming years, customers would no longer have multiple providers for home services and utilities. Instead … just one company which would take care of all the administration and much of the decision making when it comes to their bills and contracts for water, energy, broadband, home insurance and home emergency cover. … [T]his profound change will be shaped by specialist companies emerging and using leading edge data analysis to better understand customers’ needs and priorities and find the best combination of services at the right price.”

This kind of world, where customers have a contract with an intermediary that arranges multiple utility (and other) services for them, at a single price point, to me is something for which the UK water sector is extremely ill-prepared (although I might be wrong). This was therefore the press release that stood out the most for me! It also seems to flow naturally from the idea of a joined-up approach to vulnerability and affordability from Ofwat’s other press releases above.

Once again, the focus on (presumably big) data is there too. Cathryn Ross also summed up very nicely this kind of paradigm shift in customer relations, when she asked companies across the various UK utility sectors to:

“stop thinking in our silos about water bill payers, energy bill payers, telecoms bill payers, insurance customers and start thinking about ‘home services’ customers. Or better still human beings, with busy lives and competing demands on their money and time.” 

A gradual paradigm shift for water and sewage markets too? (Oct 2017 to Jan 2018)

Amongst the other press releases were a smattering that suggest Ofwat is also holding firm on the reimagining of markets in the water sector that is has been driving since 2006, but which – after various legislative and regulatory stepping stones – now seems finally, 25+ years since privatisation, to be bearing some fruit…

For now the ‘market’ in the water sector remains at the non-household/business/retail end of things – and is a fairly small slice of the overall business value chain. However there are changes afoot at least, with Ofwat reporting in October 2017 something like 61,000 switches in the business retail water market in the first six months since it opened (on 1 April 2017) – albeit this figure suggests some slowing, as Ofwat reported earlier last year (in August) that 36,000 of these switches were in the first three months since launch (so 36,000 in the first three months; 25,000 in the next three). Non-household customer complaints were also up in this first quarter (370 compared to 232 the same period the previous year) – perhaps related to switching issues…

Ofwat has also been making some moves related to market codes to make things easier and fairer for new entrants (and related to new appointments and variations, or NAVs), and has been signalling encouragement for more new entrants generally. Whether the early switching will fall off, after the enthusiasm of the market opening wanes, and at what level it will stabilise as evidence of dynamic competition in terms of service offerings, time will tell.

Ofwat has also reported about new entrants (e.g. First Business Water, in Nov 2017; Marston’s PLC brewer being allowed to self-supply; Yu Water in Dec 2017) but again we’ll have to wait to see how encouraging the overall regime is, in terms of how many new entrants enter (and how many retailers exit) in the coming months and years…

Keeping on the same track of market encouragement though, Ofwat also in October said in a separate press release that it had “taken the next steps in opening a new market that uses treated sewage to generate energy.” The guidance notes mentioned in this release, on ‘bioresources market information’ no longer seem to be on the same hyperlink, but essentially Ofwat is driving:

“guidelines and requirements on water companies to share common, consistent information about the waste – including about quantities and its moisture content – so those interested in buying it can make informed decisions on the value of the product they are buying.”

AOB…

That’s probably already too much information in one post, but it’s worth noting there were a few other issues Ofwat mailed out about during the past few months. These included:

  • Water companies need to plan more for long-term financial resilience (Nov 2017);
  • New details of outperformance payments and underperformance penalties in the sector (Oct 2017 and Dec 2017); and, finally,
  • A challenge to the water companies, in their plans and in the price settlements for 2020 to 2025 and beyond, to deliver “a decade of lower bills and better service for water customers“, where water companies seek to be “ever more resilient, efficient and innovative in the services they provide.”

This last point looks very interesting. It also seems to be staking out a position for how Ofwat wants to see the future of the sector. Related to this, overall, I’m not sure whether there was some purposeful logic behind the apparent glut of press releases from Ofwat in the past 3-4 months. Was it all a ‘parting shot’ by departing Chief Executive, Cathryn Ross? Was it a statement-of-purpose to stakeholders about the expected direction-of-travel for the sector, to prepare the ground for incoming Chief Exec, Rachel Fletcher?

Whatever the reason, it made for some interesting – if rather extensive – reading in the run up to Christmas 2017. Well, that’s a wrap for this post. Hopefully now at least you and I are all caught up, and ready for whatever Ofwat signals it is up to in the coming months… in its ever-important run-up to the next price review (PR19).

Duncan Thomas

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