Price review set for scrutiny

Ofwat’s customer advisory panel has raised a number of issues for consideration in the regulator’s review of PR14 as it firms up its strategy to put customer outcomes first, says Karma Ockenden.

Chief executive Cathryn Ross put customers firmly at the centre of the water industry when she presented emerging thinking on Ofwat’s strategy refresh earlier this month. The watchwords, she said, would be “trust” and “confidence” delivered via strong, positive relationships between customers and “service providers” (a term perhaps chosen to hint at the more fragmented nature of the industry going forward).

Ross concluded: “The two defining characteristics of our emerging strategy are: i) a focus on what customers need, want and can afford, ie, outcomes; and ii) a recognition of the fact that those outcomes result from a complex set of relationships” [in which Ofwat would play its part but others had to, too]. Indeed, she described PR14 as just a “start” on the road to focusing on outcomes that matter to customers.

So we can safely assume that when Ofwat gets its promised “review of the review” (PR14) underway, scrutinising what has been achieved for customers – and how – will be a major area. We can glean some early pointers on what issues might surface from the final meeting of Ofwat’s customer advisory panel (CAP), a group of customers and their representatives, convened in February 2012 to challenge and influence price review policy.

At the meeting in May, Ofwat’s PR14 portfolio director, Giles Stevens, set out the positive achievements for customers in PR14 so far: more information; a greater say; a better deal. While the panellists broadly agreed with this positive assessment, the big ticket issues raised in discussion are instructive.

First, customer appetite for outcome delivery incentives (ODIs) is contentious. Ofwat has unflinchingly promoted this system of rewards or penalties for over- or underperformance on customer priorities; however, the Consumer Council for Water argues customers find the notion difficult and unwelcome. Companies seem, rightfully, to base their stance on what their customer engagement tells them.

Stevens reassured the CAP that Ofwat would allow rewards and penalties only where companies provided evidence that their customers were willing to support them and that rewards could never be about ‘business as usual’ – companies would have to stretch themselves.

Nonetheless, it is safe to assume Ofwat will want to see considerable movement on ODIs from the non-fast or medium tracked companies when they submit their revised business plans today [27 June]; Stevens’ latest communication to company regulatory directors suggested it would be “prudent to prearrange a time for possible dialogue regarding your revised [ODIs]”.  

The CAP raised a number of other issues. It questioned whether water companies whose business plans were turned down for enhanced status had returned to the old ways of trying to please the regulator. Stevens said no, they were still very aware of the need to consult their customers and customer challenge groups (CCGs) on material changes. It questioned the degree of consistency of outcomes that could be achieved and how much Ofwat had done in the way of comparing and contrasting plans. And it questioned Ofwat’s record on communicating (in a way stakeholders could understand and digest) the large volume of information it had made available throughout the process.  

With regard to the CCG model specifically, Roger Darlington, chair of South East Water’s CCG, raised several points. His remarks should be seen as constructive criticisms of an innovative and valuable consumer engagement process.

The timetable was tight, he said, particularly in the final throes of reviewing the business plan, where his CCG had a lot of material to digest and the document/discussion exchange with South East Water was complex. CCG members had more work than they had anticipated – indeed at the time of the meeting, they continued to work on South East Water’s ODIs – and more complex work (on incentives, for instance). He also felt the statutory appointees’ resources (bodies required to sit on all CCGs) were stretched and that while Ofwat provided plenty of helpful information, this could have been done in a more accessible, concise way.

Perhaps most significantly, Darlington reported that his CCG members felt the “willingness to pay” research (undertaken to establish customer views on how much they were willing to pay and for what exactly) had less impact on the result than the external cost of living debates initiated by government and Ofwat. If this is true, it does undermine a good deal of the point of the process.

Discussion following Darlington’s presentation raised a few more interesting points on the CCG model. For instance, starting earlier may have been advisable – some companies had already started their customer engagement activities when their group was convened. And while some CCGs relished the lack of prescription from Ofwat on what their reports (submitted with company business plans in December 2013) should comprise, others struggled without clear guidance.

The panel concluded that the following points should be considered:

•    Does Ofwat need to consider whether to mandate customer groups?

•    Given the likely future constraints on Ofwat resources, to what extent should there be an ongoing role for CCGs beyond the price review process – for instance, in monitoring outcomes and challenging on the examination of the Water Framework Directive?

•    The process should be made simpler to avoid complexity and fatigue.

•    The “golden thread” from customer priorities to outcomes must remain clear to all.

•    The issue of whether CCG chairs and members should be remunerated for their or their organisation’s time should be carefully considered.

•    Should CCGs include more members with the relevant expertise, for example in customer research?

•    Should the statutory regulators be required to be on customer groups? There was a need to look at the resource that this required for PR14.

Two things are certain: the customer will take an even greater role in the future water industry and the PR14 model looks set to be refined and developed rather than replaced.