What’s in this article?
- Introduction
- Background: Ofwat’s approach to the initial assessment of business plans
- Initial business plan assessment: projected performance and defying expectations
Introduction
The countdown to final determinations for PR19 has begun. On 30 August 2017, water regulator Ofwat published its draft methodology for the review. And on 13 December the regulator cemented its approach, following through on its threat of a challenging Weighted Average Cost of Capital (Wacc) and its proposal to reform the way in which customer satisfaction is measured in the water sector by bringing forward C-Mex to replace the service incentive mechanism (SIM).
In addition, the regulatory hurdles set out by the final methodology include Ofwat’s proposal for a new approach to the assessment of business plans, the single most important vehicle for companies to display their strategies for performance in AMP7.
This assessment process is unapologetically tough, threatening dire penalties for disappointing plans and setting the bar high for companies aspiring to gain the procedural, financial, and reputational benefits attached to being deemed “exceptional”.
Critically, though the new approach to assessing business plans in PR19 will also anchor itself firmly in information about the current performance of companies, unlike previous reviews which have assessed plans in isolation.
This development, which according to CC Water chief executive Tony Smith will make the categorisation process “more meaningful” and avoid awarding “prizes for promises”, also opens up another opportunity.
For commentators with a thorough knowledge of the sector and the PR19 methodology, and with access to information about company performance against key frameworks and metrics, it makes it easier to make some educated assumptions about the outcomes of the PR19 business plan assessments.
With less than a year to go before companies must submit their plans for review, Utility Week sought opinion from a select panel of industry experts on the likely outcomes individual companies will achieve.
The identities of individuals within this group of six experts have been protected in the interests of allowing candid and open predictions to be made. But they include city analysts, regulatory specialists, and leading consultants, all with an active working knowledge of water company strengths and weaknesses and of Ofwat’s PR19 methodology.
This analysis focusses on the fortunes of England’s major Water Only Companies (WOCs) and is a follow up to an earlier article which assessed the likely performance of the English and Welsh Water and Sewerage Companies (WASCs).
To add context to the predictions set out by our panel, Utility Week also approached a wider group of industry commentators for general reflections on the key considerations, influences and tactics which need to be taken into account when speculating about the categorisation of business plans in PR19.