Ofwat is making confident strides towards its next price-setting round. Its draft framework for PR19 was published in August, accompanied by statements from senior regulatory figures that left little doubt that this will be a “challenging” review for companies and investors alike.
For those that impress the regulator, the rewards in store will be far from puny. Ofwat has promised attractive reputational, procedural and financial benefits for any company that receives an “exceptional” stamp on its business plan. But in the same breath, Ofwat has made it abundantly clear that very few companies are expected to achieve this status. Business as usual will not be enough to keep companies in the upper quartile, and where business plans disappoint, the prospect of “significant scrutiny” throughout the next asset management plan period looms large. With the regulator wielding stick and carrot so heftily, it is more crucial than ever that water companies get their PR19 business plans right.
At the core of the price review’s draft methodology are four themes, which Ofwat wants companies to embrace and display ambition on in their business plans: customer service; affordability; innovation; and resilience.
The latter emerged as a new duty on Ofwat and water companies following the 2014 Water Act and has seen increasing profile during PR14. In the next price control, Ofwat’s expectations around how water companies demonstrate resilience look set to take a step change, formalising a broad set of performance criteria and pushing for meaningful displays of innovation and customer involvement.
Ofwat has invited chief executives and other senior leaders from water companies to attend an event on 14 September where it will explain its new expectations in greater detail, and give an opportunity for dialogue around the finalisation of the regulator’s methodology.
Utility Week talked to John Russell, Ofwat’s senior director for strategy and planning about the event, and the challenges that “resilience in the round” will pose for companies in PR19:
An evoloved vision
“Clearly resilience is not a new theme for us,” says Russell. “We see it as a key component to customer trust.”
However, “what we’ve put forward [for resilience] for PR19 is an evolution”. This means that resilience, now termed “resilience in the round”, will push companies to prove they have robust, long-term coping and recovery strategies for risks to financial, operational, and corporate resilience.
The latter in particular will ask for new clarity from companies on their thinking around workforce planning, whether they have the right skills to take their organisation forward and how they will deal with succession issues.
Russell also explains that the evolved definition of resilience will “emphasise the role of innovation and encourage companies to think harder about how they are involving customers in developing resilience”. It will also require companies to show an awareness of resilience best practice in other sectors.
For companies hoping to impress Ofwat with their approach to resilience, Russell says a number of areas are likely to prove challenging. First off, he says, companies will have to do more to show clear links between innovation activities and resilience outcomes, including “involved thinking” about how customers are being included in the creation of novel methods for improving resilience, like demand management schemes.
Additionally, Russell says companies may need to start thinking beyond their own boundaries. “We expect to see plans for cross-sector collaboration on common resilience areas,” he confirms, before emphasising again that companies hopeful of scoring highly on resilience will also need to display a “proactive approach to learning from other sectors”.
If companies believe they are already doing well on all of the above, Russell makes it clear the regulator wants more: “We really think the sector needs to rise its game here”.
In revealing its draft methodology for PR19, Ofwat sent some robust messages to the investor community about the likelihood of reduced returns for companies who fail to push beyond “business as usual”.
So far, however, Russell says Ofwat has seen a “very positive” response from the investor community with regards to its raised expectations for resilience. “They appreciate the long-term view and they can see this is an evolution of the PR14 approach,” he says.
Nevertheless, Russell admits that Ofwat has “made no bones” about how challenging PR19 will be. For investors who want to protect their interests, he suggests they lend their support to ambitious business plans. “They [investors] can see that under the outcomes-based approach we’ve taken with the development of ODIs [outcome delivery incentives] it means there are very attractive rewards for top performers.”
Ofwat’s resilience event on 14 September will “showcase some of the challenge that companies will see in PR19”, says Russell.
High level attendees, including many chief executives, will benefit from insights into what Ofwat considers to be resilience best practice, and will get some hints on where to look for those all-important cross-sector benchmarks the regulator has said it now expects from ambitious plans.
“We’ve pulled together a raft of speakers to talk about how resilience is viewed in other sectors,” says Russell. These will include speakers from insurance company Legal & General and Heathrow Airport, as well as insights from the aerospace and food and drink sectors.
There will also be a strong focus on corporate resilience and the question of what a resilient workforce and skills strategy ought to look like. But the event is about more than simply telling companies what Ofwat wants, Russell is keen to emphasise.
“We want to create a genuinely interactive process,” he says, and Ofwat will be ready to listen to challenges and concerns around the draft approach.