Interview: Chris Loughlin, chief executive, South West Water

“This price review was supposed to be a philosophical shift, a refocus on the relationship between the company and the customer. We really, really got that.”

Sometimes the simplest questions are the hardest to answer. But in the matter of how South West Water succeeded in being the only big water and sewerage company to be fast-tracked through PR14, it is a simple answer that may pose difficult questions for those in the industry still wrestling with their business plans.

Chief executive Chris Loughlin says there was no silver bullet. South West Water simply embraced the new price review philosophy and based its plan full square behind what its customers said they wanted. “I don’t think there’s any special magic to that,” Loughlin smiles.

He elaborates: “This price review was supposed to be a philosophical shift, so rather than double-guessing what Ofwat wants and filling in Ofwat spreadsheets as accurately as possible, there’s a refocus… on the relationship between the company and the customer. We really, really got that. We really bought that and accepted that as a principle. So that’s the agenda we set off with.

“Frankly, if you look at it at the beginning and say ‘we want to be enhanced, what’s Ofwat’s criteria to make us enhanced and let’s tick those boxes’, you’ve missed the point.”

So the South West Water board never once sat down and discussed how to become enhanced. Instead, it focused on putting together “a good quality plan, well supported by evidence, with a thorough audit trail that went right back to the customer research every single step of the way”.

In this it succeeded, earning particular praise from Ofwat for its extensive, responsive engagement programme. Plus it secured support from an impressive 84 per cent of customers for its real terms bills to 2020. Note that in PR09, the company’s price plans were only acceptable to 34 per cent of customers.

Fair play. But was it not a bold choice on Ofwat’s part to fast-track a company: a) whose small, below-average-income customer base has long-struggled with high bills (not South West Water’s fault but nonetheless a sensitive local issue); and b) which was languishing near the bottom of the service incentive mechanism table at last count (14th out of 18 in average scores for 2011-13)?

Loughlin takes the point but bats it away. “I certainly observe that given we’ve got a historical position of relative high prices, the bar for Ofwat to jump over to be comfortable to give us enhanced status could well have been perceived to be higher. You could look at it a different way though. Ofwat was trying to devise a rational process that wasn’t based on the politics, wasn’t based on what looks to be the right thing. Had they decided we were enhanced but then decided not to make us enhanced because it wouldn’t look right, that would really undermine their process.”

For the record, South West Water’s 2015-20 business plan will directly address both high price and customer service issues (see box).

Reading between the lines, it was a no-brainer for South West to accept enhanced status once it had pre-qualified on 10 March. It had already modelled the implications of Ofwat’s January risk and reward guidance and found them acceptable. It is now in the enviable position of having received and responded to [by 4 June] its draft determination while its peers continue to pour blood, sweat and tears into reworking their plans.

As a listed company, the reputational benefit of being singled out for praise is not insignificant either. And then there’s the financial reward of £11 million, and a possible £6 million more available from enhanced menu rates.

Loughlin welcomes all these benefits but adds: “The biggest thing is not just that we can get on with delivering the plan, but there is a reform agenda coming. 1 April 2017 is one milestone but there are other milestones. It will give us time to think, reflect and prepare for the reform agenda.”

A summary of the draft determination is set out in the box, but a few features are of particular interest. First, South West Water has done its utmost to balance the interests of different stakeholders. Loughlin explains it is this sentiment that lies behind the company’s wholehearted embrace of symmetrical outcome delivery incentives (ODIs). While some water firms have only timidly adopted Ofwat’s favoured policy of rewards and penalties for over/under performance (many opting if anything for far more penalties than rewards), South West has built an extensive array of reputational, penalty-only and reward/penalty incentives into its plan.

Loughlin says the concept of higher payment for higher service is unfamiliar in water but commonplace in many other industries, and that his company fully buys into the idea. “It was illogical in our minds to have only penalty mechanisms or not many of them. It was perfectly logical to have both positive and negative incentives – rewards and penalties – in the areas customers value.”

What of the Consumer Council for Water’s concern that paying extra, even if it is for superior service, is unpopular with customers, and could at worst be perceived as a trick to make base prices seem low while actual bills come in higher? Loughlin won’t be drawn to comment on ODIs beyond his patch, but is crystal clear that South West Water customers are supportive of rewarding good performance and penalising failure (with the proviso that penalties should be higher than rewards). He says: “We did an awful lot of research and I’d be surprised if CCWater had done more research into our customer base than we have.”

The company’s desire to balance the interests of different stakeholders is also evident in its decision to set up an independently monitored performance-sharing framework, known as WaterShare. It will annually publish a performance scorecard so any net benefits can be shared with customers in a transparent, timely manner.

Loughlin says WaterShare is simply an evolution of its long-standing policy of sharing outperformance gains fairly between stakeholders. He cites as examples: a 2006 extra return to shareholders which was teamed with a price reduction for customers; last year’s reinvestment of £60 million for the benefit of customers; and this year’s foregoing of allowed price rises.

“WaterShare is no more complicated than codifying what we perceive we’ve been doing for a good few years,” Loughlin explains. Put simply, an independent panel will be involved, openly, annually, instead of the board doing it on an ad hoc basis.

Understandably given the high historic prices, affordability features highly in the plan too. Loughlin explains the company wrestles with both genuine affordability problems and a sense of unfairness among the wider customer base – a small rural population burdened with paying for the upkeep of a third of England’s bathing waters. The annual £50 bill reduction from the Treasury is welcome, while a 7 per cent price fall for household customers by 2020 will help too.

For those in real hardship, the company plans to extend its assistance schemes to a further 10 per cent of customers (from 21,000 to 23,210). Loughlin says that “people like CAB [Citizens Advice Bureau] are kind enough to say we’ve got the most extensive support mechanisms for people struggling to pay their bills in the country”. These schemes include a social tariff that could add up to £2 to ineligible household bills – the first to be introduced in the industry.

Finally, there are lots and varied examples of innovation in the plan, many of which will be delivered through local partnerships. Loughlin comments: “There’s a perception that the industry isn’t that innovative. I think that’s slightly misplaced, but then I guess I would say that… people often think of innovation as clever technology and clever kit and it often is, but it’s also about ways of doing things.”

In fact, South West Water has built both innovative technology and innovative processes into its plan. Key examples of the former include a water treatment works for Plymouth which will deploy “brand-new-to-this-country technology which will have much lower environmental impact and hopefully a much lower operating cost performance – it could be a step change in how we treat water in this country”. And the next phase of a programme to roll out remote asset monitoring and automation – a boon given the company’s multitude of small, geographically disparate works.

Among innovative ways of working are plans to extend or roll out projects including: Upstream Thinking – industry-leading catchment management; Downstream Thinking – sustainable drainage; and the general consideration of more sustainable, cost-effective solutions rather than capital ones.

So less a silver bullet, more a golden combination of: a genuine attempt to build a plan for customers rather than to achieve enhanced status; receptiveness to new ideas; and an ingrained predisposition to try to be fair and to keep a keen eye on affordability because of historic high prices and customer sensitivity.