Regulatory developments in the UK water and waster water sectors

1. Regulatory approaches and
reform in the UK
Tom Kiedrowski
tom@cedartreeadvisory.com
Managing Director, Cedar Tree Advisory Service
21 September 2018
1

2. Introduction
• Water and wastewater sectors in the UK is governed by four separate
regulatory regimes
• There has been a great deal of experimentation particularly in
Scotland and in England Wales which is different from the approaches
taken elsewhere in Europe and the rest of the world.
• Let me take you through them and then we can have conversation in
a wider context …
2

3. • Water and sewerage management involves a two way process as
follows:
• First, fresh water is abstracted (with separate licences obtained
form the EA), stored and treated and then distributed to
customers by the regional, Ofwat licensed water companies (the
WoCs and WaSCs)
• Second, waste water is collected, treated and disposed by those
regional companies who also have licences from Ofwat to treat
sewerage (the WaSCs)
Abstraction
Storage &
Treatment
Distribution
CollectionTreatmentDisposal
Customer facing
Source: Water UK
Scotland
• Publically owned wholesale
company
• Privately owned retailers
• Fully customer funded
England
• Publically owned wholesale company
• Privately owned retailer
• Fully customer funded

4. Ofwat’s Priorities for PR19
4

5. Source: Ofwat

6. Markets across the value chain
Source: Ofwat

7. Non-household retail competition
• We have had retail non-household
competition in Scotland since April
2008 and since April 2017 in England
• Good for non-household customers in
number of ways

8. Non-household competition: growth of
switching
Source: MOSL

9. Household competition?
• What about households?
• As part of Autumn Statement
Government asked Ofwat in November
2015 to assess costs and benefits
• Ofwat published its emerging findings
in July 2016 and considered it to be a
good thing
• It’s all gone very quite though and the
margins would be even tighter in the
household than non-household market
Source: WICS

10. Customer Challenge Groups in England and
Wales
• Ofwat, created a customer advice panel relating to its overall price review
methodology, while also requiring each water company to set up a customer
challenge group (“CCG”) for the 2014 price review (“PR14”).
• PR14 was notable for its emphasis on including customers’ views throughout
the process. The aim is now for the next periodic review, PR19, to build on
the PR14 experience.
• Subsequent independent analysis of the PR14 process identified four key
areas where there was scope for improvement including:
• a clearer definition of the role of the regulator versus the role of the CCGs;
• the timing of Ofwat’s input;
• the design of CCGs; and
• the extent to which Ofwat should factor CCG-water company agreements into its
regulatory determinations.

11. Customer Challenge Groups in England and
Wales
• Ofwat, created a customer advice panel relating to its overall price review
methodology, while also requiring each water company to set up a customer
challenge group (CCG) for the 2014 price review (PR14).
• PR14 was notable for its emphasis on including customers’ views throughout
the process. The aim is now for PR19 to build on the PR14 experience.
• Subsequent independent analysis of the PR14 process identified four key
areas where there was scope for improvement including:
• a clearer definition of the role of the regulator versus the role of the CCGs;
• the timing of Ofwat’s input;
• the design of CCGs; and
• the extent to which Ofwat should factor CCG-water company agreements into its
regulatory determinations.

12. Ofwat - triangulation of
customer engagement for PR19
]

13. Incentives-based performance mechanisms
• In PR14 Ofwat introduced outcomes-based incentives regime in order to improve
customer service and drive greater efficiencies within the water companies.
• Companies were free to suggest financial or reputational rewards and penalties
that they would apply to the delivery of those outcomes, based on engagement
with their customers and the valuations that they placed on the achievement of
performance commitments (PCs) and financial Outcome Delivery Incentives (ODIs).
• Ofwat did not prescribe the type and form of these PCs or ODIs:
• Companies were to set their own PCs and ODIs in consultation with their customers and these were ratified
through the PR14 process.
• Companies proposed a total of 171 outcomes, 515 performance commitments and 312 financial outcome
delivery incentives.
• In some cases these PCs and ODIs were developed through comparative benchmarking of different
performance commitment levels across companies which were then finalised in the PR14 Final
Determination.
• At the Final Determination reflected a significant change from Ofwat’s initial business plan guidance as issues
arose over the course of the periodic review process as Ofwat and the water companies got to grips with the
practicalities and implications of applying the new approach

14. More standardised performance measures
in PR19
1.A Customer Experience Measure (C-MeX): a mechanism
that seeks to incentivise companies to provide an excellent
customer experience for residential customers, across both
the retail and wholesale parts of the value chain, replacing the
existing Service Incentive Mechanism (SIM);
2.A Developer services Measure of experience (D-MeX): a
mechanism that seeks to incentivise water companies to
provide an excellent experience for developer (new
connections) customers. These customers include small and
large property developers, self-lay providers (SLPs), and new
appointments and variations (NAVs);
3.Water Quality Compliance: to improve day-to-day
performance in the quality of water provided by the
companies
4.Customer water supply interruptions: this is to improve
day-to-day performance to reduce interruptions to service but
also to incentivize future performance and resilience in terms
of the combined length of each interruption to supply
affecting each property each year as a proportion of total
properties
5.Leakage: again this is to improve day-to-day performance to
reduce interruptions to service but also to incentivize future
performance and resilience
6.Per capita consumption: ditto because in both energy and
water the aim is to reduce consumption not to increase it
unlike broadband
7.Internal sewer flooding (applies to WaSCs only)
8.Wastewater pollution incidents (applies to WaSCs only)
• 9. Risk-based resilience metric (water): This to
improve incentives for both WaSCs and WoCs to
improve their performance with respect to
drought risk;
• 10. Risk-based resilience metric (sewerage): A
WaSC only commitment designed to better
address flooding risk
• 11. Asset health (water mains): for both WaSCs
and WoCs, the number of burst water mains
that a company experiences in a given period
(seen as a measure of the health of the assets)
• 12. Asset health (unplanned outages): the
extent which unplanned events lead to a
reduction in the maximum sustainable
production capacity of a company and the
length of time and impact of those events (also
seen as a measure of asset health).
• 13. Asset health (sewer collapses) (applies to
WaSCs only).
• 14: Assesst health (sewerage failure causing
pollution) (applies to WaSCs only).

15. Views of domestic customers
• On 26 July 2018, CC Water published its latest annual research report , which
tracks household Customers’ views on their water and sewerage services and
how these have changed over time.
• The research found that satisfaction with water and sewerage services
remained high in 2017, with most customers reportedly confident that their
water supply will be available in the longer term without restrictions.
• Most customers believe that water companies care about the services they
provide and this level of care is ahead of energy companies, as is the level of
customer trust in water companies, which has increased since 2011.
• Satisfaction with the value for money of sewerage services has also increased
since 2011, whereas satisfaction with the value for money of water services
has remained static. Perceptions of fairness and affordability of charges are
also flat over the last seven years.

16. Changing attitudes towards privatisation
• A poll last year undertaken by the think tank, the Legatum
Institute, and polling company, Populus, found that
respondents supported nationalisation as follows:
• Water (83%)
• Electricity (77%)
• Gas (77%)
• Railways (76%)
• There have been similar finding in polling conducted by
YouGov

17. EFRA Committee concluding its inquiry into
water regulation
• In May 2018 the Environment, Food and Rural Affairs Committee
(EFRA) began an inquiry into:
• how well the water industry serves consumers and the environment;
• how innovation can be encouraged; and
• whether current regulatory enforcement mechanisms are fit for
purpose.
• The terms of reference of the inquiry extend to consideration of
the potential benefits of regulatory divergence post-Brexit.
• EFRA has received written submissions which were published on
5 September.
• Final report will be published in due course.