“There is still a problem with some companies on complaints, despite the service incentive mechanism, and despite CCWater’s pressure”

Tony Smith has always chosen roles that have two things in common: change and customers. It’s fitting, then, that he has ended up as chief executive of the Consumer Council for Water (CCWater), a consumer group overseeing a sector going through a period of immense transformation.

Smith has worked in all manner of industries. His early career was in strategy and marketing, implementing business turnarounds in oil, aerospace, automotive and fast-moving consumer goods businesses. Later, he joined the energy sector where he worked at senior level in electricity distribution. He has been at the helm of CCWater since its creation in 2005.

When we meet earlier this month at Utility Week Congress 2018 in Birmingham, Smith is about to rush off to take part in a panel debate about going “beyond utility and price control boundaries”. He believes regulation often gets in the way of true customer focus, and that water companies need to act more as though they are in a competitive market.

“The good news is the industry is a lot more focused on customers now than it was when I first got involved in regulation in 2004,” he says, in between mouthfuls of a buffet lunch, snatched before our interview began. “I’d characterise the customers’ involvement in the 2004 price review as essentially just asking the question: ‘How satisfied are you with the service?’ The customers would come back and say: ‘We are pretty satisfied with the service’, and then the real business began.”

Smith was Ofwat director of competition and consumer affairs at the time the 2004 price review was being conducted. The sector is now in the throes of PR19 and Smith is encouraged by the fact that customers have started making an impression on the price-setting ­process. “All the companies major on how much work they’ve done with customers. You’re seeing quite a lot of evidence for customer priorities being addressed to some extent.

“Also, the price picture is more attractive than it has been in the past, although everybody in the water sector, including the regulator, still always talks in ‘real terms’. You’ve got to add inflation into that – customers are only worried about the bill they pay. Inflation quickly wipes out the small price reductions that may occur before it is added in. That’s an issue.” Water companies, he argues, are still not dealing with customers as they would in a competitive market.

That goes, too, for the way they innovate. “Water companies are trying things, but it’s not to the same speed or level of urgency as in other sectors, which are absolutely dependent on satisfying customers. They try things very quickly and if it doesn’t work, you stop doing it and try something else. You don’t see that speed of piloting things in the water sector yet.”

So how do you get water companies to act more like they might in a competitive market? Rewards and penalties. “What we’ve argued with Ofwat is that one of the ways to try and increase the level of urgency of water companies is to have a very big penalty and incentive around the customers’ views of that company in every respect.

“This would cause the companies to segment their customers more, to try and satisfy customers on a more individual basis than they are at the moment in all sorts of very important ways for customers.”

One area where Smith suggests this method could work well is complaints. In September, the consumer watchdog released a report revealing that households made more than 2.1 million calls to resolve problems last year. It found that nine out of 21 water companies in England and Wales reported an increase in calls from customers to resolve problems – known as “unwanted contacts”. Four companies also reported an increase in written complaints, although the number for the industry as whole fell by nearly 17 per cent.

Although the number of complaints has undoubtedly improved a great deal, Smith points out they still aren’t always handled in the way they should be. “There’s been a 70 per cent reduction in complaints since the highs the sector saw before CCWater came along and put pressure on the companies. But there are still problems.”

This lack of proper incentivisation has been part of the cause of the legitimacy issues that have plagued the sector of late, Smith argues. “The regulatory system doesn’t very directly incentivise companies to improve the things that really matter in that regard. They incentivise companies to improve their services, which has an effect, but not directly driving the companies to really think about their customers, and to get the interests of shareholders and customers much more aligned. We think if you had a very big incentive on the companies, then boards would be interested and they would start to do things that other companies in other sectors do automatically.”

Will Ofwat’s new customer service measure, C-MeX, help? It’s a step in the right direction, says Smith. “It starts to do what we said it should, which is include the perceptions of customers who haven’t contacted the company.”

However, he has questions about the measure. Is the overall incentive big enough to make a difference relative to other incentives, for example the outcome delivery incentives? And will C-MeX – which could have the effect of reducing the focus of complaints – prompt the poor performers to improve dramatically, and will it encourage the mediocre to do better?

“There is still a problem with some companies on complaints, despite the service incentive mechanism, and despite CCWater’s pressure. We want those companies to be rattled out of that position.”

Another way of getting companies to act more like they are in a competitive market would be to introduce competition. Does Smith see the household market being opened any time soon?

The business market must first prove its mettle, especially for smaller businesses which have, so far, not benefitted greatly from competition. Following an announcement in 2015 from the Treasury that it wanted to introduce competition into the domestic market by 2020, Ofwat conducted an analysis of the benefits this would bring to customers.

At the same time, CCWater did its own research which found there was a lot of appetite for consumers to have a choice of their water retailer, but this level of interest quickly dropped away once they realised what was on offer. “What’s on offer in the retail bit of the business is maybe £10 off the bill. At the very most, if you took all the value out of the retail business and did it at zero marginal cost, it could be £40. Many customers don’t find that very interesting.”

Smith also recommends that government and regulators keep an eye on whether the energy market works for domestic customers “better than it has done in the past”. “If you can’t make a market work that’s got maybe £200 on offer to customers, it’s going to be very difficult to make a market work that’s only got £10-£40,” he says.

Whenever talk of renationalisation looms, the industry’s favourite figure to quote is the £150 billion that has been invested by companies in England and Wales since privatisation in 1989. Smith says the figure is beside the point. He believes companies should be focusing on improving customers’ perceptions of them and showing them what’s improving – as locally as possible. “The legitimacy issue is nothing new,” Smith suggests. “We’ve been flagging it up since 2007/08.”

He argues that although customers are very satisfied with the service they get overall, they’re far less satisfied with value for money and fairness. “When you explore the reasons for that it is to do with when prices have gone up suddenly and unexpectedly and a lack of understanding about what companies are doing to justify that.” He also cautions the industry against making “super-normal” returns.

Since 2015, Ofwat has been criticised by CCWater, the National Audit Office and the Parliamentary Public Accounts Committee for its “over-generosity” to the industry. While Ofwat had a lower cost of capital assumption when prices were last set in 2014, water companies’ financial performance since 2015 shows they are “still raising finance at a cost lower than their regulator assumed”. CCWater did, however, welcome signals from Ofwat that it would set a record low cost of capital at PR19 (2.4 per cent in RPI terms). “The industry has been making returns in excess of what you’d expect in a low-risk industry for a long period of time – that is not sustainable,” says Smith.

“You’ve got to address all of these things, you can’t just be picking out the good bits. You’ve got to address the underlying issues. The combination of proving to customers that you’re investing on their behalf and not making super-normal returns for a low-risk industry is absolutely fundamental.”

For the future, Smith would like to see a sector that truly does good things for customers, whatever the model. “What I love is urgency towards making sure customers are happy with service, value for money and fairness. This will undoubtedly improve perception.

“The assets can be owned by government or they can be owned by the private sector, but the crucial thing is customers believe that what they’re getting is good and not a rip-off – that’s got to be the most urgent issue the industry faces. And the thing about utility customers is that it’s not an overnight success. Those companies that are improving on those metrics are doing it because they’re doing it every day for years and years.”

Smith says sternly that customer service shouldn’t be a “box-ticking exercise”. “It’s about analysing what your customers are doing and thinking. That to me is the vision. You want customers going: ‘yeah the water industry is pretty good’. Then I think we’ve got a success on our hands.”