Price review plans could lead to bill hikes, warns CC Water

Consumer watchdog challenges proposal for enhanced ODIs

Water companies should not be offered greater financial incentives for outperformance under the next price review unless they have customers’ backing, according to the Consumer Council for Water. The watchdog also warned that removing the cap on rewards would “open the door for significant bill increases.”

In its response to Ofwat’s consultation on its methodology for the next price review, PR19, CC Water has challenged the plan to link greater financial rewards and penalties to performance, under the Outcome Delivery Incentive (ODI) model. It warns: “There is a risk of a negative customer reaction, particularly if ODI rewards drive bill increases and inflation also rises.”

The watchdog says the proposed removal of the existing cap for ODI rewards of +/- 2 per cent of the Return on Regulated Equity (RoRE) “opens the door for significant bill increases.”

Water companies including Severn Trent, which made £46.7 million from outperformance rewards in 2016-17, have argued for an enhanced role for ODIs.

CC Water also challenges the proposed model of C-MeX, the new measure for incentivising customer service, set to replace the current Service Incentive Mechanism (SIM). While broadly welcoming C-MeX, it suggests the measure should be split into two parts. The first, C-MeX contacts, would measure customer contacts and complaints handling; the second, C-MeX satisfaction, would measure customer satisfaction with value for money and Net Promoter Score (NPS), a widely used measure of customer satisfaction.

CC Water proposes that these two C-Mex measures are linked to two separate ODIs, which comprise “most or all of the value of the full package of financial ODIs”.

Its consultation response says: “Strongly incentivising companies to continually improve customer satisfaction and customer service performance (rather than ODIs for other service improvements that may be viewed negatively by many customers) would have the effect of focussing companies on their customers and lead to greater segmentation. This would mimic, to some extent, what would happen in a competitive market.”

CC Water’s consultation response also raises concerns about Ofwat’s proposal to index-link the cost of new debt “at a time when interest rates are historically low and are more likely to increase than decrease.” Ofwat’s original document claimed the proposal to index-link the cost of new debt would “reduce the scope for debt outperformance from changes in debt markets.”

CC Water states its support for a number of other measures in the PR19 methodology, including the proposal to test how well companies have addressed affordability and vulnerability in their business plans.

Ofwat’s consultation on the draft PR19 methodology closed on August 30. A spokesman said: “We are very pleased to have received over 60 responses from a wide range of stakeholders. We are now working through those responses and will be publishing them with our response alongside our final methodology in December 2017.”