Ofwat should reconsider financial incentives, says customer group

Financial rewards for water companies that outperform may need to be reconsidered, according to the chair of the Consumer Council for Water (CCWater), Dame Yve Buckland.

Talking to Utility Week at the annual Institute of Water conference last week, Buckland said a lower Wacc, as proposed by Ofwat of 3.85 per cent, down from 5.1 per cent in the current cycle, was welcome as it would lead to lower bills.

However, she said the way in which companies could make up the shortfall on allowed returns through financial rewards when they out-perform targets, would not be welcomed by customers.

“Customers don’t like variations in bills. They expect companies to perform and not to have to be financially incentivised to deliver services. They expect companies to be penalised by the regulator if they get things wrong.”

“Whilst we were happier with Ofwat’s decision on a lower cost of capital than previous price reviews, what remains uncertain is whether customers will react negatively if water companies try and rebalance this through financial incentives,” she said.

“We have got greater uncertainty about [water companies] reloading through the financial incentives mechanism.”

“It may make good economic regulatory sense but if that doesn’t meet common sense or customer expectations Ofwat may need to start thinking about alternatives,” she added.

Ofwat says companies will not get a reward for “simply doing their job”, and argues if firms fall down on service, “they will be hit in the pocket.”

However, Buckland argued that financial incentives could lead to water companies varying their price proposals year on year.
“That’s when it will start to become unpopular,” she said.

“This is going to be a continuing conversation that companies must have with their customers. If they are going to take financial rewards they must justify why, and explain the impact on customers’ bills,” Buckland said.