PR19: challenges lie ahead… for companies and for Ofwat

"While Ofwat has rightly lauded those companies that have made it into the fast-track category, I think it will be disappointed that none managed to reach the heights of exceptional"

So the waiting is over and Ofwat has given us its initial assessment of water companies’ business plans (the IAP). For seasoned sector-watchers there were some surprises in terms of where individual companies landed but it is the overarching themes that are even more interesting and that suggest Ofwat has some challenges of its own.

It is noticeable that there are no companies in the top category of “exceptional”. In its methodology, Ofwat defined exceptional plans as those that were “high quality with significant ambition and innovation for customers and that push the boundaries of the industry and set an example for others”. While it has rightly lauded those companies that have made it into the fast-track category, I think it will be disappointed that none managed to reach the heights of exceptional.

In companies’ defence, achieving exceptional was always a stretching ambition. My colleagues, Liz Parminter and Mark Fitch, wrote an article for Utility Week in November last year highlighting that although PR14 was a more forward-looking regime, the scale of change required to position water companies for the demands of PR19 is much greater. This pace of change is all the starker when compared with the challenge energy companies will face moving from RIIO1 to RIIO2 and I think the lack of companies in Ofwat’s highest assessment category bears out this view.

A second theme emerging from the IAP is the continuing need for water companies to grapple with innovation more successfully. Whilst Ofwat acknowledges that all companies’ plans reflect the importance of innovation and there are some examples of best practice, it’s clear that innovation as business as usual is some way off.

The regulator talks of companies needing to show “how innovation is supported and encouraged across the business.” Liz and Mark also recognised this in their article, highlighting the need for water companies to “rapidly embrace digital and innovation”.

While it is important to recognise that digital is just an enabler it will drive water companies’ future success. All of this will require an enduring innovation culture and, in particular, the effective use of data. My colleague, Alex Mahon, has spoken recently about the challenges utility companies face in changing their culture. He is an expert in helping utility companies across the globe use data analytics to improve performance and has found little consistent conversion of analytical insight into action and demonstrable performance improvement.

This stems from a lack of recognition from senior leaders in utilities that technology or analytics projects are just the start of improving performance. Analytical insights only truly start making a difference once end users, usually a company’s field force, understand, incorporate and utilise the insight into their day-to-day activities. It is this understanding that water companies will need if they are to get anywhere near the exceptional category on innovation.

So how should we sum up the IAP scorecard? Obviously, there will be companies that are pleased, those that are disappointed and others in-between. From Ofwat’s perspective it shows that there are still challenges to be met. It has pushed companies hard, but the pace of change appears to have been too much for some.

Equally, there remains work to be done on getting the sector to embrace the latest thinking on digital, technology and cultural change. Ofwat will only be able to give itself top marks when there are clear signs that water companies are making real progress in these areas.