Our goals

Eight weeks ago, Utility Week launched a campaign of coverage to help discover what a New Deal for Utilities could look like.

The series took a long hard look at the industry and posed some big and often difficult questions of a sector facing historic political, regulatory and technological challenges amid low levels of public trust.

Most importantly it asked what might be done to forge a new social contract with the public and what support utilities would need to achieve that goal.

This week we draw together the main thoughts and conclusions shared by some key figures and commentators from across the energy and water sectors.

We look at possible next steps – including potential industry pledges – and how these might be tangibly progressed with policymakers and regulators.

And with a growing range of initiatives being championed as potential solutions, we reflect on how a collaborative and focused approach from across industry could now be more important than ever.

When the utilities story changed…

When we launched our New Deal for Utilities it was no secret that the public mood towards water and energy businesses was changing – but less clear was where things may go and how the traditional business offering should and could respond.

A myriad of questions stretched ahead. What would it take to make a case in favour of utilities against a growing populist swell of consumers concerned about current operating models, including executive pay? How might strategies be revised? How were some companies responding and what was working well? Was a new social contract with the public the answer – or even possible? All this amid a shifting regulatory agenda around fairness and the most turbulent political climate in recent history.

What had until just a couple of years ago been a relatively calm utilities space is suddenly facing a legitimacy crisis, huge technological demands, a credible threat of renationalisation and an international investment landscape dogged by Brexit.

Taking the temperature

Against this shifting backdrop, and increasingly conflicting media and political rhetoric about low levels of public trust, Utility Week launched our New Deal campaign in January with an exclusive survey commissioned only the month before from Harris Interactive to establish the real state we are in.

Getting public opinion on board would be key to the success of any social contract, so gauging sentiment about water and energy companies – including whether they should be renationalised and if so why – was vital.

There were some heartening findings for energy and water bosses, including that, contrary to what many may believe, more than half of those surveyed were not greatly dissatisfied with their utility companies – satisfaction being highest for water suppliers at 66 per cent. Nor do they greatly mistrust suppliers, suggesting that the service they currently receive is reasonably good.

Nevertheless there were warning signs too for those providing the UK’s lifeline water services, electricity and gas supplies, and electricity networks, as the figures showed almost half of customers are undecided over satisfaction.

Other key findings of the survey:

• rising prices are the number one ­factor undermining trust;

• around a third of respondents felt utilities should be nationalised, although almost a quarter were undecided;

• 14 per cent thought utility companies should be owned and managed by private companies – the same number as those who thought it was a job for local government;

• 34 per cent would be more likely to vote Labour based on its policy of nationalising utilities, while over half said it would make no difference;

• the main benefits of nationalising utilities were perceived to be cheaper and better services;

• the major concern about nationalisation was “it costs too much, and we can’t afford it”, (the answer selected by a third of consumers);

• generally, consumers lack an informed view on the pros and cons of renationalisation;

• despite the push towards renewables, over half of those polled were not prepared to pay more for electricity to speed up the transition;

• customers and wider consumers were still unclear about exactly what makes up their final bills.

A sense of ownership

As our policy correspondent David Blackman pointed out in his campaign report on nationalisation, you would have to go back to the days of “Cedric the Pig” in the mid-1990s to recall a time when utilities were last so firmly in the public firing line.

Today the issues are high energy prices and excessive profits in the water industry. And it is this focus on the sector that has seen Labour pledge to bring utilities back into public ownership if elected.

Labour’s vision includes turning water companies into new Regional Water Authorities (RWAs) with a safeguard to prevent reprivatisation; Ofwat being scrapped and regulation transferred to a new National Water Agency; and elected representatives of the region’s councils, the industry’s three biggest trade unions, and environmental and consumer representatives on RWA boards.

Networks would also be in Labour’s sights despite privatisation delivering high investment and increased reliability. Big questions remain over cost, although Labour has threatened to effectively scalp investors, which would itself have long-term consequences for the cost of capital.

The art of the deal

Striking a fair bargain stands more chance if there is acceptance, humility even, that established positions might need to change.

This came through loud and clear in the words of four key industry figures who joined the debate in week two: Pennon chief executive Chris Loughlin; SSEN managing director Colin Nicol; Maxine Frerk, director of Grid Edge Policy; and Eon UK’s chief executive Michael Lewis. Our commentators accepted that improving public opinion wouldn’t be easy as the jury remained out across the piece on value for money, trust and renationalisation – albeit some utilities fare better on reputation with customers than others.

So what has to change, we asked? And what support do utility executives need to make genuine progress on forging a social contract with customers?

Our four industry leaders accepted that the old days of the untouchable utility had long gone. The public deserves – and expects – more say about lifeline services, the behaviour of monopolies, sustainability and the sharing of rewards – a message echoed throughout the business world.

“Evolve” and “innovate” were the watchwords for Chris Loughlin of Pennon, who sees “how” – as well as “what” – services are delivered as being equally important.

Colin Nicol of SSEN said utilities as custodians of critical national infrastructure must do more to show they “respect their privilege” and offer clear evidence of how responsible private investment can cut costs and raise performance.

An overwhelming focus on rates of return misses some of the wider mood music, believed Maxine Frerk of Grid Edge Policy.

And Eon UK’s Michael Lewis said the industry “could not ignore the clamour for change”, including challenges around energy efficient housing stock and a smarter energy system. This would need widespread support, he said, especially from customers whose backing was critical.

Trust us, we’re utilities

Public image is difficult to change, Fridrik Larsen, chief executive of consultancy Larsen Energy Branding, told our campaign. A positive image “must be earned”, and building a strong brand is vital.

In a split second, people judge a brand by everything they know about it. The best way of creating a positive public image, he suggested, was to develop a brand that “communicated effectively and built lasting relationships with the public”.

It was a point supported by Ben Quigley of brand and creative agency D.fferent, who said while price was an important factor for customers choosing a utility provider, putting the corporate focus on cost disregards the power of a strong brand.

Greg Jackson, chief executive of Octopus Energy, agreed, adding: “I often hear people from legacy utility companies bemoaning their public perception. But the reality is that people’s experience of companies shapes their perception.

“Earning trust from the public, press and policymakers is the only way we as businesses can justify a leading role in shaping the new market.

Failure to do so will lead to Blockbuster-like failures, but those who can emerge as consumer champions and value-driven innovators can be the Netflixes of this new world.”

Sharing the rewards

Our week five report explored how water and energy companies needed to go beyond delivering a “largely invisible” public and often emergency service, to shouting more about what they do. They also need to reveal more about how they were doing or were planning to share rewards with the public.

Utilities were, we heard, already getting better at finding innovative ways of delivering more for less. And touchpoints with the public were building – for example a spokesperson for Energy UK said energy companies now provided “a broad range of support and benefits to their customers and communities”, from investment and apprenticeships to schools’ programmes, community funds, charity partnerships and support for customers in vulnerable circumstances.

However, Tony Smith, chief executive of the Consumer Council for Water, said more companies should ensure customers get some of the rewards from outperformance, and that social tariffs “relied too heavily” on other customers’ willingness to fund them. “That goodwill is in danger of running dry,” he warned.

Collaborative projects such as the recently launched Corporate Forum on Sustainable Finance initiative to encourage businesses and policymakers to view sustainable finance as critical were cited as strong responses. As was Anglian Water’s record tackling plastic waste in the East, driving down leakage, consulting with customers and its second green bond to generate sustainable finance.

However, Luke Pollard, Labour shadow environment minister added his voice to the campaign debate and criticised water company dividends and lack of sufficient action over resilience, climate change and consumption.

In terms of networks, maintaining the country’s energy infrastructure during extreme weather can be tough, and it is important companies are visible and communicate with customers when there are risks of interruptions, said ENA’s chief executive
David Smith.

High pay: are you worth it?

Wading into the thorny issue of executive pay, part six of our campaign asked if the utility captains of industry were worth their pay grade.

A year earlier when Michael Gove berated water executives for rewarding themselves “handsomely”, his remarks, while apparently designed as a wake-up call – inevitably chimed with the populist groundswell of dismay over economic disparity in the UK, as well as Labour’s determination to make political capital from it.

But how, we asked, do you measure the market worth of those in water and energy’s top jobs? Are salaries justified and what is a fair rate? And should we not strive to attract the very best to run our lifeline services.

Labour had a crack at it by revealing it would see the earnings of chief executives of government-owned companies set at no more than 20 times that of its lowest-paid worker, in a bid to ensure “fairness within our economy”.

Based on even the average wage, rather than the lowest, this means a chief executive could be paid no more than £552,000, 20 times the UK average of £27,600. Other highly lucrative parts of pay packages, such as share options and personal bonuses, could also be scrapped, with any rewards distributed among all those within the company.

But while half a million pounds may sound a small fortune to lower income earners, would such a sum attract the high achievers needed to lead our vital water and energy firms?

While not easy to get the industry’s chief executives to expand on pay and packages, Northumbrian Water’s chief executive, Heidi Mottram, was happy to field the question. Mottram, who earned £667,000 in 2017/18, said: “It’s important that we articulate and describe the contribution that we make and the service that’s provided to our customers.

“Generally, when the debate goes on around executive pay, I think the public get frustrated if the CEO is not successful or delivering but still appears to be well remunerated.

“But these calls will cause us to reflect again about a greater level of transparency and a link to what we’re delivering.

“If you deliver and you lead, and you make success, then I think the public typically go: that’s okay.

“It’s when there isn’t success, I think, is where that anxiety comes from.”

Reforms from Ofwat last July tapped into the theme and called for boards to boost transparency around dividends and executive pay, “both matters which have a significant bearing on customer trust”.

Each water company, the regulator said, must now “show clearly how it is linking performance-related executive pay to stretching performance for customers.”

Labour MP for Plymouth, Sutton and Devonport Luke Pollard pointed to how executive pay had “skyrocketed” with England’s top nine water and sewerage companies earning a combined £23 million in 2017. The highest paid executive took home £2.45 million – 16 times the prime minister’s salary.

“Instead of lining their own pockets, water companies need to be investing their profits to provide a resilient service. We have had plenty of sound bites from both the secretary of state and Ofwat, but where is the action?”

Meanwhile, non-party think-tank and lobby group the High Pay Centre called for remuneration committees charged with setting executive pay to be significantly reformed, in particular highlighting the “myth of super talent” and how there needs to be much greater diversity among those responsible for setting pay.

Many executives, within utilities at least, are accepting it’s an issue that increasingly goes with the territory.

Boards know public, political and regulatory expectation is now only going one way and that it will gain even greater ­traction in the challenging months and years ahead.

At the launch of our New Deal campaign in January, some industry voices from across the sector joined the debate to say they recognised customers wanted to see benefits “being shared fairly”, that listening willingly to customers was “vital”, and that taking clear action on things such as fair tax and wage levels will prove far more powerful tools in addressing the legitimacy challenge the sector faces than being ­corralled into such action by a regulator.

If companies can run their finances in a different way, with an overt focus on matters such as fairness and profit-sharing, then the issue of executive pay will surely become less of a factor.

The shape of water

The political narrative around how water companies should operate has come full circle – and continues to change, our week seven report revealed.

It’s a complex scene. Renationalisation under a Labour government has become a very real prospect. Meanwhile, some savvier water companies have already acted to adapt their privatised models and public images with strategic corporate moves around fairness and transparency.

But privatisation and nationalisation, we found, were not the only games in town. The idea of mutualisation is growing fast as a serious alternative. Mutual ownership is viewed by some as the best way of reversing the industry out of privatisation, which they say is insufficiently competitive and weakly regulated.

Labour MP Gareth Thomas has been a vociferous campaigner, calling for water companies to be turned into co-operatives that would remain in the private sector and continue to be regulated by what he described as a more effective Ofwat, branding the current regulatory regime “woefully weak”.

Responding, Ofwat said that through PR19 it had challenged water companies to deliver “more of what matters to customers in the coming decade, by being ever more resilient, efficient and innovative in the services they provide”. “We’re confident that the sector can rise to this challenge,” it said.

What the shape of our water sector will end up looking like is therefore far from clear, but getting the model right, whether through regulatory reform or more structural policy change will prove a ­crucial decision.

The regulatory challenge

Our week eight report found that in an era of growing consumer power around energy retail, water, and increasingly networks, a fairer deal for customers has become a vital consideration – a regulatory challenge of our times.

All the noises point to a system needing to adapt. And the winds of change sweeping through the corridors of the UK’s utility regulators were clear when the energy regulator’s chief executive, Dermot Nolan, used his keynote speech at its Future of Energy conference to proclaim that updating Ofgem’s consumer vulnerability strategy will be “the single most important thing” the organisation will do this year.

Meanwhile plugging the legitimacy deficit and addressing the digital divides among different sections of society are key issues.

But to ensure the regulatory model continues to be attractive for investment, transparency and predictability will continue to have to be at the heart of it, industry told Utility Week.

This isn’t just about protecting investors’ pockets, some warned. The short-term price concerns of today’s customers must be balanced with long-term investment requirements.

Concerns were also raised about endangering innovation through regulatory creep and confusion. Another fear was that straitjacket, one-size-fits-all, regulation could be detrimental in today’s climate as industry and consumer needs continue to evolve.