Of the 17 largest water and wastewater companies and water only companies, Ofwat “does not have full confidence” in the quality of data of four firms: Bristol Water, Dee Valley Water, Southern Water and Thames Water.
They all found themselves in the prescribed assurance category within the regulator’s 2017 company monitoring framework (CMF) assessment, published at the end of last month.
It will have come as little surprise to many to see Thames Water demoted to the bottom rung of the framework’s performance rankings, joining Bristol Water, Southern Water and Dee Valley (now part of Severn Trent).
Although Thames met Ofwat’s expectations for many of the framework’s measures, the regulator concluded the significance of its concerns relating to two particular areas within the framework – financial monitoring and outcomes – meant the company “did not instil sufficient confidence” about its ability to deliver, monitor and report performance.
Ofwat’s rulings in the year’s CMF assessment are particularly relevant and sensitive in the shadow of the upcoming price review.
The regulator is clear that it considers the framework a key weapon in its arsenal as it battles for trust and confidence in the sector. And the CMF’s focus areas, including financial monitoring, the transparency and governance of boards and the consistency and quality of reporting for stakeholders are clearly relevant to the challenge Ofwat has laid down for companies in PR19, to set a new bar for the quality and robustness of business plans.
This doesn’t bode well for those companies languishing in prescribed assurance – and least of all for Thames, whose very public problems of late – it has been attacked for lack of financial transparency and failing to deliver value for customers – have already put it on a shaky footing for engaging with customers and delivering an AMP7 business plan which Ofwat can believe is credible, and has consumer support.
Building trust: why the CMF matters to Ofwat
The CMF is one of a suite of tools which Ofwat has introduced over the course of AMP6 to improve its ability to track and compare company performance against key “hygiene” factors which impact their legitimacy.
Data quality sits high in the rankings of these hygiene factors. As the 2017 CMF assessment states: “if stakeholders are to have trust and confidence that the sector is meeting its promises, and that it will be held to account if it doesn’t, they need to also have confidence that information published is of high quality”.
Speaking to Utility Week, an Ofwat spokesperson explains further: “Water companies’ boards are accountable for the quality and transparency of the information they provide on their performance. As the regulator, we aim to help the sector build trust and confidence with customers and wider society. The company monitoring framework is an important tool to help us understand how well companies are doing on this and to encourage them to get better at the assurance they provide.”
Overall, Ofwat says it has observed improvement against the CMF’s measure since it was introduced in 2015. More companies are meeting its expectations and the regulator’s spokesperson claims it is generally “encouraged” by the signals this gives about the quality of submissions for the upcoming price review.
“We are encouraged that companies responded to feedback and strived to improve,” they say.
Reiterating the importance of this improvement, the spokesperson adds: “If stakeholders are to have trust and confidence in the information companies provide, they need to be able to understand it and believe that it is a fair and balanced view of how a company is performing.”
The 2017 assessment: company movements
Overall, the 2017 CMF assessment delivered relatively little movement in terms of water company categorisation when compared with 2016. And Ofwat is satisfied that the three companies now occupying the self-assurance category can consistently display “solid processes to gather, test and present information”.
In addition to Thames, the only other companies to move categories were Severn Trent, Northumbrian Water and Yorkshire Water. Severn Trent was demoted to “targeted” this year, having previously been in the self-assurance group, swapping places with Northumbrian Water, which moved out of targeted assurance. Meanwhile, Yorkshire Water moved out of prescribed assurance and into targeted.
The regulator says Severn Trent met its expectations in “many areas”, yet the company “had not consistently met the high standards expected in order to be assessed for self-assurance.”
While 10 companies are now listed in the targeted assurance category, Ofwat says they generally did “many things well” but still have room for improvement.
Companies in the targeted or prescribed categories must now carry out a risks, strengths and weaknesses exercise and publish a statement based on the findings. They must also consult stakeholders and publish draft assurance plans on the areas identified as risks and weaknesses. Consultation on these exercises should be carried out by end of January 2018, Ofwat says.
The regulator’s spokesperson, adds: “Stakeholders need confidence that all the information companies share and publish is of sufficient quality and is explained in a clear and transparent way. The CMF seeks to encourage companies to do this and to ensure companies don’t just see this as something that matters at a price review. We were very clear in the draft methodology published in September of the importance of good assurance and it will form part of our assessment of the quality of business plans.”
For companies sitting in the prescribed assurance category, this message from the regulator should ring alarm bells. A failure to show real zeal in addressing CMF issues, alongside other shortcomings, could land a company in the “significant scrutiny” for business plan assessment, a precursor to a poor final determination for the AMP.
But the framework’s laggards are certainly not being reticent in displaying a proactive approach to improvement. If they stick at this, and report robustly on the measures they are taking to allay Ofwat’s concerns, they may yet create better foundations for their business plans, and their ongoing relationship with the regulator.
Take Thames as an example. The company has had a high public profile recently for all the wrong reasons. But it has largely responded with openness and has taken significant steps to repair its reputation.
A week prior to the release of the CMF report, Thames announced the appointment of former SSE chief executive Ian Marchant as its new independent chairman. He has been tasked with leading a review of the company’s corporate structure and governance.
The company has also promised to close its offshore banking arrangements in the Cayman Islands as it looks to ensure the “best possible transparency” for customers and stakeholders with regards to its financial structure.
The company has also shown penitence for “letting customers down” by missing its leakage targets and has pledged to return £40 million of penalties to customers.
Thames clearly hoped that this kind of positive PR activity would make an impact on the regulator’s assessments. A spokesperson for the company told Utility Week: “In view of the extensive efforts we are making to be open and transparent about the performance of our business, we are disappointed by Ofwat’s decision to classify Thames Water as ‘prescribed’. We will be working hard to rebuild trust and achieve self-assured status as quickly as possible.”
But Ofwat wants more. Although it has welcomed Thames’ action to increase its financial transparency, a recent report detailing water company performance against the financial monitoring framework found that Thames had allowed “a series of errors” to creep into published financial information.
These errors were sufficient in volume and importance to merit “serious concern” said Ofwat. Thames and all its contemporaries in the prescribed assurance CMF group, will need to deliver exceptional attention to detail now if they are to soothe the worries they have roused at the regulator.
Constructive criticism: company responses to prescribed assurance assessment:
• Bristol Water says it notes Ofwat has seen evidence of improvement from last year’s assessment, but accepts “more has to be done”. The company has already acted, having launched a consultation on its ‘risks, strengths and weaknesses on Information’.
• Dee Valley Water says: “We’re very pleased that Ofwat has seen and highlighted the improvements we’ve already made at Dee Valley, together with its high expectations for future reporting. We look forward to working together over the next 12 months to ensure we provide even greater assurance for our customers.”
• Southern Water says: “We remain committed to providing clear, transparent and accurate data to our regulators as well as making sure all the information we present to our customers and stakeholders is accurate and engaging.
“We have dedicated teams working on those areas Ofwat has highlighted as needing continuing improvement and would like to thank our regulator for their feedback – which recognises the ‘significant progress’ we have made over the last year as well as providing helpful guidance on where we can demonstrate best practise.
“We are working hard to earn our customers’ trust and confidence and will continue to work closely with Ofwat to improve our performance.”