What now for the Water sector? – Blog by Paul Horton & Richard Laikin

This week brought AMP6 to an end and marked the beginning of the new 5 year price control period (AMP7) covering 1st April 2020 to 31st March 2025. Bills have gone out to customers and we will all be paying the new charges set under PR19. Companies will be required to meet the new targets for service delivery and performance and will be seeking to meet or beat the cost allowances set by Ofwat. Many will have spent months gearing up to do so, including revisiting investment plans and operating models, and extending, revising or re-letting many major contracts with suppliers and partners. Much of this activity continues in the background with contract tender and awards announcements on an almost daily basis.

This applies equally to the four companies – Anglian, Bristol, Northumbrian and Yorkshire – that have appealed their PR19 determinations to the Competition and Markets Authority (CMA). The review process will probably run all the way through the year, and changes, if any, to their price limits or performance commitments determined by the CMA will be applied retrospectively back to this April (through a true-up in next year’s bills and beyond). In the meantime, however, they have to operate as if their Final Determination from Ofwat applies.

Confusion & COVID-19
COVID-19 is leading companies to refocus onto short term operational priorities to maintain the flow of water and the sewerage system, and to assist customers through these very difficult times.

Companies may find it more difficult to meet their cost allowances, performance commitments and other regulatory requirements because of a shortage of both frontline and back office employees at work. Customers may behave differently, making it more difficult to meet, say, water efficiency targets. They may be less likely to pay their water bills because of pressure on finances. On the other hand, some pressures on water companies may ease – less economic activity means less pollution to deal with and potentially less water being pumped around the network; less traffic means less congestion when responding to emergency pipe network repairs.

Looking forward, change is the key word – the general economy has slowed down, major infrastructure schemes and projects are stopping, and the timing of the post-pandemic recovery is uncertain. This will play havoc with water companies’ demand and growth projections for the coming period and hence how their network and asset maintenance and development plans might need to be adjusted over the rest of the AMP. Many discretionary (or not time critical) projects and programmes could be put on the back burner during the pandemic period – and who knows which ones will be resurrected. Operationally, the sector will need to operate on the assumption that 20-30% of staff may not be available at the peak point of the pandemic.

A lot of focus has been on emergency measures to stabilise the non-household retail market and ensuring that this continues to function at a time when so many business customers are either ceasing to operate or looking to defer their bills. Retailers, wholesalers, Ofwat and MOSL have worked together to agree temporary measures to reduce the costs of operating the market itself, and to keep liquidity in the market while deferring some wholesale charges payable by retailers for an extended period.

In addition, Government and all the regulators have been looking to see if and how any environmental or quality regulatory reporting requirements and targets, or scheduled policy development activities, should be deferred or slimmed down during this period. For example, the new Environment Bill has been paused.

The Chief Executive of Ofwat has written to the water companies indicating that they should “prioritise meeting their core service obligations” and that “incentives and penalties in our regulatory regime should not get in the way of effective prioritisation in the interests of customers”. She goes on to say that “companies [should not] wait for our approval before implementing prioritised working arrangements” and that Ofwat “will consider the need for any ex post adjustments to our regulatory system following an in-the-round assessment as part of our normal reconciliation process. This will require that companies can demonstrate how their operations have been impacted by COVID-19 and how they made their decisions”.

How can suppliers help their customers
Apart from continuing to be customer-focused, agile, flexible and responsive, and working in partnership with your company clients, suppliers can:

Keep a clear, separable accounting of the impacts of COVID on your own business activities for water companies – how it is affecting performance, costs and revenues – and the reasons for this. When the emergency is over, the water companies will need to report to Ofwat and the other regulators on how COVID has impacted them. This will be input to a debate about lessons learned and whether any of their cost allowances or performance commitments should be relaxed or forgiven.

It may well transpire that:
• Some companies had easier or more difficult operating conditions than others (for example around economic activity or staff absence levels);
• some were better prepared than others; and
• some will have coped and recovered better than others (as has been the case with previous major weather events, for example).

The more that you as suppliers can help water companies in their reporting and developing their narrative for the regulators with good, separable, data and insights the better. This is where the Association and the members can help steer how this AMP period unfolds.

Read Ofwat’s response to COVID-19 here

                                                                     

Richard Laikin                                                                                           Paul Horton
Director, RL Strategy Consulting Limited                                          CEO, Future Water Association
Email: richard@rlstrategyconsulting.com                                          Email: paul@futurewaterassociation.com

9 April 2020