Preparing for AMP6: Doing more with less

Ofwat has published its final determinations for PR14 – and the targets are challenging for water companies. WNS identifies areas where you can improve efficiency and protect profits.

Capital Investment:

Ofwat has capped capex for 2015-20 at £44.3 billion, short of the £45.7 billion wanted by the water companies. This gap indicates that water companies need to enhance productivity and become more cost efficient .

WNS view: A sharper focus on asset management, efficient project delivery, and cost and supply chain efficiency can help manage capex better.   

Cost of capital (for wholesale business):

Ofwat has lowered the cost of capital from 4.5 per cent to 3.7 per cent in 2015-20. This will reduce revenues and profitability of water and sewerage companies compared with the previous period and help customers save up to £2 billion.

WNS view: Enhance revenue assurance capabilities across  customer lifecycle encompassing order management, credit management, billing, remittance processing, collections and dispute management.

Capital incentive (total expense for wholesale business):

Instead of the earlier mechanism of rewarding companies on capital efficiency only, Ofwat aims to incentivise companies on totex efficacy in AMP6. Operational performance will be incentivised and penalised in order to achieve higher cost efficiency and customer satisfaction. Ofwat has assumed a lower allowance than requested for by most companies, resulting in a totex gap of around £1.5 billion.  

WNS view: Create a scalable cost structure for general and administrative (G&A) spending in areas such as finance, HR, IT, legal and procurement.

Retail Household Margins:

Ofwat has asked companies to reduce retail household costs by £0.9 billion and has suggested an improvement in average cost to serve efficiency to achieve the same.

WNS view: Optimise costs in order entry, customer invoicing, cash application, deduction and claims management, and dispute reconciliation, and increase adoption of self-service channels such as e-billing.

Non-household retail ­margins:

Underscoring the need for stricter cost discipline, Ofwat has asked companies to cut 10 per cent costs and fix 2.5 percent net profit margin on costs. In terms of promoting competition, AMP6 will also allow non-household customers in England to choose their retailer from April 1, 2017.

WNS view: Adopt new technologies such as Customer Interaction Services (CIS) platforms to foster customer loyalty and boost operational efficiency.

Price limits:

National average bills should fall by approximately 5 per cent.

WNS view: Control wholesale costs, improve opex efficiency through reduced G&A expenses and enhance customer service to earn incentives.

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