Throughout the whole price review process, the most important relationship is the one between the companies and their customers. We have said this all along and now want the companies to show us how successfully they have talked to and listened to them.
There are real opportunities for companies to pass on efficiency savings and the benefits of the low cost of finance to their customers over the next five years.
I am hoping that companies are giving this serious thought. At a conference earlier this year, I used the midpoint drawn from analyst reports of a 4.1 per cent vanilla return to highlight what a large impact a 1 per cent fall in the cost of capital could have on customer bills. I could see at the time that companies could do better and I hope that companies will do better than that, given the opportunities presented by the current economic environment.
With nominal bond yields down around 1.2 per cent since prices were set in 2009 and record low interest rates, I would like to think that in their business plans some – if not all – companies will go lower than that, especially as we will be setting retail margins on top of their capital costs. And the market uncertainty that justified a conservative return on equity at the height of the financial crisis has passed.
Efficiencies from setting separate controls for retail and wholesale along with other changes such as totex, water trading and the use of an average cost to serve control create the scope for bills to be reduced even further.
Can companies show how they listened to their customers? While some companies haven’t always believed us, we meant it when we said we want water companies to listen to their customers.
That’s why we genuinely do not have a target figure in mind when it comes to final bills.
It may be that a company’s customers want to see significant improvements in service or better environmental outcomes rather than a reduction in bills. For a company that is not proposing falling bills, I would expect their plan to be supported by clear evidence that this is backed by its customers.
Evidence like this is going to be important in each company’s plan. We’ll be looking for a clear, coherent and evidenced “golden thread” running through the whole of a plan so it is clear how each element fits together. This will be particularly true where a company is proposing major step-changes in its performance. We will want persuasive evidence that shows that such improvements are realistic and achievable.
Companies’ final plans should show us that their boards accept full accountability and are responsible for the leadership, transparency and governance of their management teams’ work.
We want to be able to understand the assurance process that the board has gone through to reach the point where it is satisfied that the final business plan will deliver the best for its customers. This means we expect to see more than just a list of meetings. We want boards to show how they have challenged and held their management teams to account.
Our information note Board Assurance for the 2014 Price Review – Board Leadership, Transparency and Governance has opened further opportunities for companies to demonstrate that they are well governed.
Sonia Brown,chief regulation officer, Ofwat