Ofwat confirms approach to PCC targets

Water company performance against outcome delivery incentives (ODIs) on per capita consumption of water (PCC) will not be assessed or calculated until the end of the current regulatory cycle, Ofwat has confirmed.

Against other ODIs, Severn Trent earned the largest outperformance payment of £25 million for 2020/21 while Thames and Southern will return £53 million and £46 million respectively to their customers.

Thames’  biggest underperformance payment was £10.5 million related to internal sewer flooding performance. For Southern, the largest individual underperformance payment of £19 million related to its treatment works compliance performance target.

Severn Trent’s largest outperformance payment of £39 million was earned against its sewer blockages commitment.

Performance payments and penalties against reductions to PCC will be calculated at the end of the asset management period (AMP) cycle to reflect changes to consumption habits during the pandemic.

In 2020, domestic consumption was pushed up as many people shifted to homeworking or schooling and spent more time at home during lockdown.

The regulator had previously said it would wait until the impacts of the pandemic were better understood before making a decision about ODI payments or penalties.

It has now said it will set out further details on its approach to adjustments when it has sufficient understanding of changes to water use. Information provided in companies’ annual reports next year will be key for Ofwat making its decision. It therefore asked for “sufficient and convincing” evidence about the impacts of Covid-19, along with mitigating actions for each year and plans for recovering any shortfall beyond the final year of AMP7.

The regulator said the incentive framework may evolve for future price controls to reinforce a long-term focus. It said its plans will be set out in the draft PR24 methodology next year.

“Ofwat is committed to ensuring water companies provide the very best service for customers, improving the environment and improving life through water. We set them challenging targets in the interests of customers and the environment and these payments are a key way of ensuring that companies are incentivised to go above and beyond for customers, and that customers receive money back if they do not,” a spokesperson said.

“While we see some evidence of companies stepping up to meet this challenge, these decisions show that companies are held to account where they fall short of expectations.”

At PR19, each company proposed performance commitments, including at least one PCC commitment to incentivise them to help domestic customers cut their usage. These are ordinarily measured each year within the AMP and, with the exception of South West Water, have annually settled in-period incentives.

To varying degrees, companies have seen non-domestic water usage fall and household usage increase from March 2020, impacting the ODI commitments that only relate to domestic PCC. Following a consultation earlier this year, the regulator proposed to change these ODIs from in-period payments to end-of-period payments.