Northumbrian to CMA: We see a different future to Ofwat

Northumbrian Water's chief executive Heidi Mottram talks Utility Week through the company's submission to the Competition and Markets Authority (CMA), challenging Ofwat's final determination on its business plan for 2020-25. It asks for greater balance between investment and bill cuts while defending its proactive approach to climate change.

The company with the most ambitious bill reduction for PR19 has said Ofwat’s reluctance to let it carry out resilience work for the sake of lower bills flies in the face of customer wishes.

Northumbrian’s chief executive Heidi Mottram told Utility Week resilience planning was central to customers’ wishes for its business plans but Ofwat had misunderstood the relevance of schemes to proactively address the effects of drought in the south and flooding in the north.

Mottram said projects addressing climate change were overlooked by the regulator. “A significant number of companies argued the climate was changing and we all need to be more responsive to that change and that intense rainfall. Ofwat are not seeming to respond to the fact that something is changing. They are trying to argue this is business as usual, but the fundamental point is the climate is changing so we must do things differently. We are scratching our heads to understand why Ofwat is not seeing the same thing the rest of us are seeing.”

She cited a scheme in its Essex & Suffolk Water patch designed to boost the resilience of the raw water supply by moving water around more easily in the drought-prone area. She also pointed to a group of developments to deal with the risk of sewer flooding in the north where increased heavy intense rainfall combined with higher urbanisation left surface water with less space to drain away.

“We want to deal with these problems proactively,” Mottram said. “I don’t think Ofwat fully understood what we were trying to deliver and confused it with a separate scheme that had a resilience impact. Ofwat said they didn’t want customers paying twice for resilience when in fact they are two different things.”

She suggested the models used by Ofwat were unhelpful to the reality of rapidly changing weather patterns now and for the immediate future. “Sometimes Ofwat looks to the past for the evidence of why something should happen but this is a function of here, now and the future. Their models don’t really help with that, but we argued this is something we need to plan ahead for.”

The company engaged with more than half a million billpayers who were “very clear” that investment for future generations was more important than saving money.

Mottram defended the company’s original business plan, which offered improved service, resilience for future generations and lower bills, with a risk profile the company felt was appropriate.

Mottram said: “In most scenarios offering customers a 15 per cent bill reduction for an improvement in service is a really good thing. We don’t understand why Ofwat wanted to focus on the short-term of an even bigger bill reduction and not on resilience. It doesn’t make sense.”

She went on to point out that Northumbrian had received a 91 per cent customer approval rating for its business plan.

“By the time we got to the final determination, we felt we were still giving high standards of performance but it seemed Ofwat had switched its focus to even bigger bill reductions at the expense of investment for the future, which was so important for our customers.”

Ofwat ruled that greater efficiencies should be found and permitted Northumbrian an overall allowance of £2.7 billion. Since the draft determination Ofwat had ceded some funding, but the final determination remained £156.1 million lower than the company proposed.

The company’s Statement of Case to the CMA argues for greater balance, which Mottram insisted the original business plan had provided.

She added that further reductions to cost of capital – something felt by companies across the sector –  increased the overall level of risk to one that wasn’t appropriate for what Northumbrian wanted to deliver.

Mottram said the balance of risk profiling, financial stability and investment for customers felt wrong and led to the unanimous decision to request a referral to the CMA.

The performance targets set by Ofwat included leakage reduction ranging from 11 per cent for the Northumbrian region to 18.5 per cent for Essex and Suffolk and a 5.3 per cent cut in PCC.

“We are a high performing company and we are prepared to rise to the challenge of higher performance, but asking for these standards in every area from everyone is a really big ask,” Mottram said.

In its Statement of Case, Northumbrian said the efficiency challenges go beyond regulatory precedent or what could objectively be justified by robust evidence.

Looking at cost challenges, the company acknowledged these might be less stretching than other appellants but were still too onerous for it to remain an efficient company and deliver what Ofwat had outlined.

Northumbrian added that Ofwat’s plan did not offer the reasonable returns on investment necessary to stay economically viable while fulfilling commitments to customers and stakeholders.

This, it said, would deter investors and make it increasingly difficult for the company to secure resilient and sustainable development and investment for the future.

The likely range of returns from outcome delivery incentives equated to a return on regulatory equity range of between –1.54 per cent and +1.36 per cent.

“We want to do right by our customers who have told us time and time again of course they want great service now but also, they want the right thing for their children, and their children’s children,” Mottram said.