South East Water’s Customer Challenge Group (CCG) was set up to challenge its host water company to produce a business plan for 2015-20 that reflected customer priorities and budgets. It has done that, and upped the ante by providing challenge to regulator Ofwat as well.
After nearly two years of chairing the group, veteran consumer champion Roger Darlington remains full square behind the CCG principle. He commends Ofwat for taking the bold, innovative move of essentially using customers as partners in regulation.
Moreover, he believes the approach has proved its value. His CCG’s report, which went to Ofwat on 2 December alongside South East Water’s business plan, concludes: “The effective embedding of the CCG within the company’s business planning process has enabled a level of challenge that would not have been possible in the past.” Darlington says the positive impact his CCG has had is clear if you compare earlier drafts of South East’s business plan with the version finally submitted in December.
In fact, his support of the model is such that he believes it could well have value outside of water. He mulls: “There’s no reason why BT or Sky or the BBC might not say ‘this model is interesting, why don’t we set up a group of people who can really get to know us to challenge us?’.” Darlington has also raised the model for review by the Essential Services Access Network, which looks out for consumer interests across must-have services including water, energy, finance and communications.
Given his level of enthusiasm, it is unsurprising to find that Darlington’s CCG was able to commend South East Water’s business plan to Ofwat in December. Darlington praises the company’s willingness to embrace the group and to be flexible and responsive to its concerns. His group also found South East Water’s customer engagement programme (which featured 13 pieces of research, seven of which fed directly into the business plan) “impressive”.
He stresses, though, that it wasn’t all plain sailing: “We had some tough conversations at board level, especially over the early drafts of our report.” The CCG was particularly critical of South East’s track record on complaints (per 10,000 customers, two years ago it had the highest number of complaints in the sector and last year the second highest). While programmes to address the issue have been implemented and progress made, the CCG “felt it right to highlight the issue both because of its centrality to the customer experience and because of a marked reluctance by the company to acknowledge the matter publicly as fully and frankly as we would have wished”.
Although pushing its terms of reference, the CCG also drew attention to South East Water’s relatively high gearing ratio and “somewhat opaque” corporate structure. The latter includes entities in Luxembourg and the Cayman Islands. “We’re not challenging its legality,” Darlington explains, “but how customers might perceive a company located wholly in one part of one country with legal entities overseas and not in countries where investors are from” is relevant in terms of customer trust and reputational risk.
Back to the day job, and after various interactions the CCG found South East Water’s business plan ticked all the boxes: it meets statutory obligations, is based on sound customer engagement, is evidence-based, promotes outcomes that matter most to customers, and is affordable.
South East Water’s willingness to pay (WTP) research found customers are not willing to pay any more than they do now for service improvements. The company commissioned acceptability research on its business plan proposals with a nil increase in bills in real terms – although the actual proposition in the final plan is for a 1 per cent reduction in real terms. This acceptability research found around 80 per cent of households and businesses found the plan somewhat or completely acceptable.
The only aspects of pricing the CCG has raised for Ofwat to take forward are to check how proposed South East Water bills compare with those of other water companies, and whether the bill profile South East has earmarked for 2015-20 could be flattened without affecting financeability.
There are other business plan matters beyond the CCG remit for Ofwat to judge, too – notably most financials and in particular cost of capital (the business plan puts this at 4.45 per cent, higher than Ofwat had indicated it would like). Darlington also wants Ofwat to carefully check that cost allocation to each part of the business plan – household retail, business retail and wholesale – is fair, with a view to ensuring costs are not unjustly loaded onto monopoly customers.
He hints too that he is not entirely convinced the Outcome Delivery Incentives (ODIs) are substantial enough to be effective in changing company behaviours and delivering benefits for customers. The proposed regime offers a maximum bill reduction of around £2.45 per customer per year in the event of South East Water’s failure to achieve all the targets and a maximum bill increase of £1.44 per customer per year if it succeeds. In percentage terms, the upside/downside potential (-1.23 per cent to +0.73 per cent) is in the same ballpark as that offered by the Service Incentive Mechanism (-1 per cent to +0.5 per cent), which has been effective.
The CCG has also taken the opportunity to list some other – unsolicited – recommendations for Ofwat in its December report. Darlington admits this “pushes our terms of reference”, but wanted the views captured in an official document. He says other CCGs have hinted procedural matters could be improved but that “no-one else has been so bold as us” in setting them out unequivocally. The recommendations concern the following:
Price review timetable: In future price reviews, Darlington wants CCGs set up before firms begin drafting customer engagement plans – not after, as was the case this time.
Critically, he says more time should also be allowed for a “considered dialogue” between companies and CCGs over the complete, final business plan. According to his group’s report: “South East Water showed us five drafts of the retail plan for households, four drafts of the retail plan for businesses, five drafts of the wholesale plan, and one draft of the overall plan. Only at the last CCG meeting before the submission date did we have detailed information on prices and outcome delivery incentives and only two weeks before the deadline was the CCG shown a business plan comprehensively populated by most of the relevant financial, outcome and incentive statistics.
“Essentially this was a consequence of the tight PR14 timetable and the common deadline for submission to Ofwat of the business plan and the CCG report.”
Consequently, Darlington calls on Ofwat to take a fresh look at the case for permitting a short interval between submission of the business plan and submission of the CCG report. “With 18 business plans, Ofwat should have enough to be getting on with to permit CCG reports to come in a little later,” he remarks.
Payment of CCG members: Companies should consider paying volunteers a modest monthly retainer or an attendance allowance or alternatively make a donation to the organisation releasing the individual from other work. Darlington says the time commitment required of his CCG members turned out to be “way beyond what they’d expected”. He adds: “The pressure on regulators has been enormous. Just two or three people from the Drinking Water Inspectorate (DWI), for example, have done all the CCGs. We need the recognition that if you want customers to be at the heart of the process, it has to be resourced in some way, both for individual volunteers and regulators like the DWI, which releases staff for CCG work.” He commends his eight group members for sticking with the process, for their good attendance and full participation despite these issues.
Smoother organisation from Ofwat: Meetings for CCG chairs were set one by one, not timetabled in advance, making it difficult for chairs to schedule attendance. Moreover, frequent changes to the Ofwat personnel liaising with the group made relationship-building difficult. “We want to put down the need for a proper timetable and consistent staff,” Darlington says.
Research: The CCG would like a review of the current WTP methodology used across the industry ahead of PR19. In particular, it was concerned about the “stated preference” approach used to discern customer priorities. It worked with South East Water and researchers to conduct research using a different method to cross-check findings in the south east.
Independent review of the CCG process: In time, Ofwat should commission an independent review of the CCG model with a view to informing both subsequent price reviews in the sector and debate in other sectors. According to Darlington, it is too soon to start such a process now because lessons are yet to flow from Ofwat’s allocation of business plans to performance categories. He explains: “When Ofwat allocates companies to categories , I hope they spell out exactly why they have been allocated as they have. I’ll be disappointed and surprised if they don’t refer to the CCG report. Ofwat should be clear whether individual CCG reports have been helpful or not.”
The immediate future holds more PR14 work for the CCGs, although Darlington says it’s “still not terribly clear” exactly what this will entail. For sure, the groups will play a role commenting on the revised business plans of any companies filed in the resubmission category, and will have the opportunity to comment on companies’ risk and reward menu choices.
As for PR19, Darlington sees the spirit of the CCG model continuing, but in a developed form. He speculates that now companies have tasted the benefits of working side by side with customers, the model may not have to be compulsory next time. Or there may be a more ongoing role for customer representatives, whereby they also help monitor implementation.
South East Water is already planning a move in this direction. It is set to introduce two new Customer Panels in the spring – one for household customers and another for business customers – to review on a quarterly basis its performance against its plan from April 2015.