How much money do water companies make? How well are they performing? These questions are not as easy to answer as you may think. Indeed, with the private ownership and complicated group holding structures behind many water companies, information about both their finances and performance can be difficult to find – and once found, difficult to compare.
All that is set to change, however, as Ofwat steps up its campaign for greater transparency in the sector. This drive from the regulator dates back to Jonson Cox’s appointment as chairman nearly three years ago. In one of his earliest speeches, in March 2013, the ex-chief executive of Anglian Water called for greater transparency from water companies, as well as clearer board leadership and a renewed focus on affordability. With PR14 finally concluded and Ofwat chief executive Cathryn Ross implementing her vision for both regulator and companies over the next five years, transparency is top of the agenda.
Earlier this month, the regulator set out a framework guiding companies about how they should share performance and financial information with their stakeholders. This, says the regulator, will be central to achieving its overarching vision of “trust and confidence” in the sector. “More than this,” says Ross, “if the sector has the right conversation on the basis of the information it publishes, this will help it to identify and manage risk, benefiting everyone over the long term.”
For companies, there is work to do. According to an Ofwat spokesman, there is still “room for improvement” on transparency in the sector in areas such as board governance and financial reporting. The PR14 price control has a much greater emphasis on customer engagement, as well as encouraging firms to focus on total expenditure (totex) approach to cost assessment. However, the regulator warns that the new approach to transparency “must not become a box-ticking exercise”.
“Companies need to take responsibility for clear, open, and effective conversations with customers and stakeholders,” it says. “This will be crucial to further building trust and confidence.”
Additionally, water companies are expected to put in place their own governance codes, with boards taking ownership and accountability for company performance. Minimum expectations are that companies report transparently, as well as operating and meeting their obligations and commitments.
The ball is firmly in the companies’ court, says Ross: “We’ve put the onus on companies stepping up and taking the lead to make available the right information, properly assured. That’s vital if the sector is to have a clear and open conversation about whether it is delivering what customers and wider society want.”
So what’s in store for water companies?
Perhaps the biggest step is the “strategic dashboard” Ofwat wants companies to provide, with accessible comparative information – both for their own benchmarking and for customers and other stakeholders.
The dashboard will be a collaborative tool owned by both the sector and the regulator, with agreed, standardised data sets.
The proposal was at first a controversial one for companies, but the industry has now accepted the challenge. Water UK has agreed to lead the work, and is in the process of setting up a steering group to agree with the regulator and other stakeholders what metrics should be included and how the information should be presented.
Publishing and stress-testing
From 2015/16 onwards, water companies will be obliged to publish an annual performance report. Ofwat says this is because the statutory accounts they currently publish are “not detailed enough” for the reader to be able to clearly assess their performance. Additionally, the reports must be accessible to all stakeholders so that they show how the sector is delivering for its customers, environment and wider society.
Firms must also publish a summary of the results of the data assurance that proves the information provided is accurate. Where there is a lack of confidence in the information individual water companies provide about their performance, Ofwat will step in to protect customers by increasing assurance requirements.
South West Water and Affinity Water, both fast-tracked through PR14, currently fall into the self-assurance category. All other companies are in the targeted and prescribed assurance categories, meaning they must publish more detailed information for stakeholders. Additionally, Ofwat expects them to engage with their customers and other stakeholders to identify and address issues, and publish this each year.
Financial monitoring
Ofwat has now introduced a financial monitoring framework, under which it will publish financial information on the sector annually. To make this accessible for stakeholders, the framework will include a high-level review of that information which identifies key trends and significant changes.
“Alongside the company monitoring framework and annual performance reports, this represents a key component in building trust and confidence in the sector,” the regulator says.
At the moment, the financial monitoring framework only applies to regulated companies, so Ofwat is considering also examining the financial arrangements for holding companies. Ofwat also consulted on requiring companies to stress-test their business plans and provide information on the outcomes, to help assess industry financial resilience and risks to customers posed by financial structures.