In a well-working open market, customers are inevitably king as companies compete to win their orders. Monopolies, by their nature, have a captive customer base, so there is little incentive to keep them happy or respond quickly to their complaints.
This has resulted in the traditional monopolies having a quite dreadful reputation for customer service, be it through a lack of 24-hour hotlines for big businesses that are dependent on water and electricity, or a pensioner presented with a massive bill because of a leak.
There have been improvements as the media has increasingly focused on these issues: written complaints in the water sector were 40 per cent down in 2011/12 on the 2007/08 peak of 273,463. Still, 163,027 complaints about issues such as sewerage, billing and metering is an awfully high number, while the ombudsman responded to 74,505 complaints relating to energy in 2011/12.
As a result, regulators Ofwat and Ofgem are looking to greatly improve customer service in their next control periods as they look for results that would better reflect an open market. For water, this involves better scrutiny of next year’s periodic review, which will set the industry’s asset management plans for 2015-20, while Ofgem will introduce the highly incentivised “RIIO” regime for the next electricity distribution price control period of 2015-23.
Ofwat has looked to get bill-payers directly involved in shaping water companies’ business plans through the establishment of customer challenge groups, which will closely examine the 22 water companies’ business plans. These eight-to-ten-strong groups include representatives from business customers, residential bill-payers, water sector experts and local authorities.
The groups will assess how well the utilities have spoken to, and reflect the views of, their customers – and will report to Ofwat any utility that has essentially ignored consumers. They will also seek to ensure that the business plans reflect customers’ preferences and priorities, be they a desire to keep bills low or for maintenance and repair work to be speeded up, even at a cost.
Barbara Hughes, Ofwat’s director of consumer policy, says: “Historically there has been a tendency for companies to be overly focused on what the regulator wants, rather than thinking in a practical way… this has led to missing the point, largely getting the letter of what the regulatory regime requires.”
In effect, water companies have been “tick-boxing” through the Overall Performance Assessment. This approach has chalked up some successes: in the early 1990s, consumers were five times more likely to suddenly find they had no running water and eight times more likely to find their homes flooded by sewage. However, most of the major gains have now been made, which means any further improvements to an assessment score can be only minor and the rate of improvement in customer service cannot be maintained.
Hughes says: “The aim of the review groups is to give customers a greater voice. There will be incentives for those companies who can show they have listened to their customers, and whose business plans reflect their views. Those who can’t will get a far rougher time in the process.”
Deryck Hall, head of policy and research at the Consumer Council for Water, argues that this will avoid utilities “hiding behind Ofwat”, blaming the regulator for not providing them funds to deal with issues like discoloration of water.
He is, though, concerned that the relatively recently introduced Service Incentive Mechanism, which allows utilities to charge an extra 0.5 per cent or be forced to reduce a bill by 1 per cent for good and poor service, respectively, are sufficiently tough. Utilities have huge balance sheets and half a percentage point here or there will not necessarily force a company to do the right thing, particularly if, say, expanding the number of emergency call centre workers is costly in itself.
“At the moment, 1 per cent off the bottom line is a few hundreds of thousands of pounds,” says Hall, who is pushing for more dramatic rewards and penalties during the next control period. “For some companies that is chicken feed, so there is not the scope for utilities to do some major innovation as if they received a bigger reward or punishment. The question is: are the incentives going to be strong enough to get the water companies to think more holistically?”
Some also question whether customer service should be under the supervision of a regulator, which may be better placed to look at more fact and figure based problems rather than softer, qualitative issues.
However, Francis Yeoh, managing director at Wessex Water owner YTL Corporation, tells Utility Week he has “no problem with a strict services charter” because the worst thing a utility can do is “annoy people”.
He adds that Ofwat helps utilities focus on their core responsibilities, so it is appropriate that the regulator is leading the drive for improved customer focus. “Smart regulators, like those in Britain, prevent you from spinning off a cliff,” he argues.
The priority for electricity distribution network operators in the next control period – RIIO-ED1, for jargon lovers – is considered to be linking more low-carbon sources to the grid in order to meet the government’s strict emissions targets.
However, energy regulator Ofgem is clear that distribution companies must not meet this challenge at the sacrifice of consistent, effective customer service. In a strategy document published in March, Ofgem stated: “They will need to enable these loads and generation to connect in an appropriate timeframe, without causing network problems and without incurring excessive costs.”
Ofgem’s head of distribution, James Veaney, says that consumers generally “don’t know much about distribution” – they just want a constant flow of electricity and want bills to be reasonable. However, the regulator has identified the need to make sure that networks link businesses to the network promptly and keep interruptions to a minimum.
“Most people wouldn’t be able to tell you who their distribution network operator is, why would they?” says Veaney. “That is, until it’s critical to get the lights on or if you’re a new business customer looking to connect to the network – then you need to know who they are.”
Ofgem wants to increase the proportion of revenue that can be confiscated if companies score poorly in customer satisfaction surveys, which includes assessing whether there are repeat complaints or whether complaints are not dealt with within 10 or 31 days. Networks that do well could be allowed to increase their revenue by up to 1.5 per cent, one-third of which would be linked to showing improved contact with customers. Those that fare poorly could see revenues hit by as much as 2 per cent.
A spokesman for the Energy Networks Association (ENA) says the big numbers involved show that the regulator has “set a priority on customer service”. The distribution networks are currently compiling business plans to meet the stricter criteria, and these are due to be submitted in the summer.
The ENA spokesman says: “There is a clear recognition from industry of the importance of this sort of framework. Every element of this industry is regulated, so this was always the approach that Ofgem was going to follow.”
Regulators in both electricity and water, then, are using the bluntest, but still most effective, method of incentivising utilities – hitting or boosting their bottom lines. In both instances, customers should be able to find their calls answered quickly, leaks fixed promptly, and no unexpected bills for work they didn’t even know had been undertaken.
This article first appeared in Utility Week’s print edition of 17th May 2013.
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