I first met Peter Peacock 18 months ago, when the Customer Forum (see box overleaf) he chairs in Scotland had been up and running for about seven months. He was optimistic about the prospect of working with Scottish Water to agree price and service levels for the coming regulatory period 2015-21. He was full of praise for the company, saying it had bought into the idea “in a big way”.
Before meeting him in Edinburgh late last month, a couple of weeks after Scottish Water published its draft business plan for 2015-21, I wondered how much of his positive feeling would remain. But Peacock’s early view is unshaken: “So far, it’s not even been a negotiation, it’s been an engagement process that has delivered results.” The draft plan, he says, is a product of genuine engagement, transparency and co-operation between his Forum and Scottish Water, built on joint learning, hard work and a willingness to listen on the water company’s part.
Two key activities that have taken place over the past 18 months have been instrumental in getting to this point, he explains. First, the forum and Scottish Water shared a research programme and jointly analysed the findings. “That was instrumental in prioritising investment,” he says. “We struck an agreement about what tell us, and therefore what should we prioritise by way of potential investment.” Customers didn’t want any deterioration of service and among their priorities for service improvements were sewer flooding, supply interruptions, leakage and drinking water quality.
That said, Peacock notes customer understanding of water and what it costs is very low in Scotland, possibly because it is not billed directly. “When we asked people what they were paying, they might say £30 or £300 – they hadn’t really a clue.” The same cannot be said of businesses. “They are more hawkish on price,” says Peacock. “They don’t see any reason for prices increasing at all unless there is some clear justification for it.”
The second activity that aided the creation of a mutually acceptable draft business plan was the forum’s detailed scrutiny of in-depth service improvement reports provided by Scottish Water. These covered every aspect of the business, including maintenance spending, capital investment needs, efficiencies and financing. The Forum quizzed the water company – most often its chief executive – at regular meetings and highlighted what it liked, what it had queries about and what it found unsatisfactory.
Peacock says: “The importance of that is, when you get to the business plan that’s out now, a huge amount of that has already been subject to discussion. The business plan reflects that engagement process, because the ground has shifted on a number of things. For example, one of the service improvement report discussions was about discretionary spending. We went through a process with Scottish Water when we went through every aspect of that, and agreed or disagreed, asked for a bit more spend on that or a bit less on that, relating back always to customer priorities.”
The Water Industry Commission for Scotland’s (Wics) ongoing comment and input has also been helpful. “We’re not working in the dark; we’re working in the absolute light,” says Peacock. “The Wic has been completely up front in saying… we think more could be done on that or whatever. There would be no point in us coming to agreement with Scottish Water that was a million miles away from what the Wic thinks.”
So how is the 2015-21 plan looking, and what has been the forum’s key input? The stand-out factor driven by the customer body has to be affordability. Scottish Water has a good record on this anyway; it was the only company in 2010-15 to deliver sub-inflationary price rises. But this time around, the forum has pressed the issue hard.
As well as its joint research with Scottish Water, it commissioned independent research into affordability: a report from the Child Poverty Action Group and Citizens’ Advice on changes to the benefits system and its impact on families; and an academic study on changes in the Scottish economy. Says Peacock: “It became very clear that water is less affordable now than it was in 2010.”
A significant resulting development is that Scottish Water has framed price changes for 2015-21 in the context of the lower Consumer Prices Index (CPI) rather than the more traditional Retail Price Index. CPI is the inflation measure used by the government and the index for changes to pensions and benefits, so a more relevant measure for customers. Peacock comments: “In fact, tuck under the CPI measure (see box – Business plan highlights). I think that’s a significant sharing of understanding between Scottish Water and ourselves.” He adds: “Down south, they’re still thinking in terms of RPI.”
Peacock is keen to stress that far from being reluctant, Scottish Water has been more than willing to listen and act on its customers’ affordability problems. He gives a concrete example: “We’ve been saying internally to them there’s only three ways you can get money. You can borrow more – and in Scotland, the government is the banker and if you believe there’s a lot more money there, you’re deluding yourself. Another way is to go to the customer’s pocket a lot of people have been there before you and there’s not much left. The third way is to be more innovative, more efficient over time, and that’s where the customer would expect you to start… With credit to Scottish Water, they are saying without any degree of reluctance, ‘yes, we’re going to go there first’.”
In fact Peacock is complimentary about the way the company has conducted itself across the board. “Scottish Water are highly expert in what they do… Under their new chief executive, they’ve also got a much tighter vision of how to engage with customers, and they’ve wanted to hear and wanted to act where ever they could.”
So Peacock is very happy with progress to date and the draft plan. He says he is confident what’s on the table is not a bidding document from Scottish Water but as near to the final plan as is possible at this stage. Could anything be improved? He won’t give specifics away, though he concedes that in the coming months, engagement will move to negotiation. “We’ll be having discussions with over the next few months over whether that’s the end point or is there progress, evolution that can be made. We’ll certainly want to explore that, as we want to explore some other parts of the business plan.”
The spoke in the wheel could come from other quarters, however. The plan is based on various assumptions, chief among which is the level of borrowing the Scottish Government will provide. Scottish Water has pencilled in £120 million a year for each of the six years of the review – lower than historic borrowing levels but significantly higher than this year’s loan. Should that fail to materialise, the plan would have to change. Clarity won’t come until the Scottish Government’s spending review.
In the meantime, the forum is working out precisely what in the draft plan it can sign off and what it wants to raise for further exploration. What’s Peacock’s prognosis for March 2014 when the final plan is produced? “We’re aiming to find agreement. We don’t want to go to the Wic if we can possibly avoid it without agreement.”
And what of the forum itself once this strategic review of charges is done and dusted? In the shorter term, Peacock wants to see a role for the customer through to 2021. In particular, he thinks customer interests should be represented at IR18, a mid-term investment planning review designed to offset risk resulting from the greater innovation planned in the period. Similarly, he thinks customers should have a say if Scottish Water over or under performs significantly under the regulatory “tramlines” arrangements. He gives an example: “If there’s outperformance, do we accelerate investment in the customer’s interest? Do we hold prices more firmly or reduce them? Does the company reduce its borrowing? What do we do?”
In the longer term, regulatory specialist Stephen Littlechild is conducting an independent evaluation of the Customer Forum. “How much value did it add? What can we learn from it? Is it worth continuing?” muses Peacock. Whatever the outcome, he notes: “Scottish Water is saying in their business plan, Wic is saying, we’re saying, we can see a role for customers right through. Whether it’s in the form of this Forum or whatever, that’s for someone else to say. But the principle that customers should be intimately involved is pretty much beyond dispute.”