Letter from the Editor: High expectations

Water companies have slaved away for months to deliver their PR19 business plans in a volatile political and regulatory climate. So it’s no surprise that they’ve become attached to them.

Thames Water boss Steve Robertson even admitted to Utility Week he felt like the “proud dad” of his “baby” – a plan which includes a new strategic reservoir and the exploration of water transfers. No parent likes their child to be criticised, so it is understandable that he is unhappy with Ofwat’s initial critique and call for the company to resubmit its plans.

It’s a disappointment that has reverberated around the industry since Ofwat gave its verdict on 31 January – that no company is exceptional. The regulator had signalled that it would push companies harder than ever before on behalf of customers and the environment. But until now, no-one knew how much. And just when they may have thought the environment secretary had gone away, Michael Gove waded in on the same day to reiterate how he fully expects the revised plans to deliver more.

Yet the feeling in the industry is that this set of plans is decidedly better than those put forward in previous price reviews, which makes the lack of an exceptional company even more striking.

Congratulations must go to Severn Trent, United Utilities and South West, whose plans have “set a new standard”. All three were fast-tracked, so they can take a short breath while the rest of the sector works to get their proposals up to scratch.

However, some industry players question how they are supposed to deliver more for less. In Thames’ case, it is expected to cut costs from £11.7 million to £9.4 million – the biggest reduction in the sector.

Perhaps “exceptional” is an unreachable goal – a symbolic category placed there to prove how strong the regulator is. If that’s the case, it’s certainly worked.

Maybe companies just didn’t think it was worth going for exceptional status. In its final methodology, Ofwat said exceptional firms would get 20-35 basis points added to their return on regulated equity – only 10-15 basis points more than fast-track companies get. Plus, both categories get the same level of early certainty.

Or is it really because no company demonstrated a high enough level of ambition? As one source told Utility Week, it would have taken something truly earth-shattering to turn Ofwat’s head.

Whatever the reason, the fact the top spot remains empty is evidence of just how tough PR19 is. Many “proud parents” have been told their babies are ugly. Now, it is up to them to respond.