Severn Trent set for reward and penalty for performance

Severn Trent is expected to be rewarded for its outperformance for reducing sewer flooding and pollution but faces a penalty for supply interruptions and leakage, Ofwat has warned.

The regulator will today (1 November) begin consulting on proposed outperformance and underperformance payments for four of the 17 water companies in England and Wales, to be applied from April next year.

Ofwat said Severn Trent has made “major progress” in reducing sewer flooding, which the regulator describes as one of the “worst service failures customers can experience”.

The water company has also reduced pollution levels. Ofwat proposes that Severn Trent takes £24.9 million of its outperformance payment for wastewater services now, with its additional outperformance payment deferred until 2020.

Overall Severn Trent expects a net outperformance payment of £72 million, part of which the company has chosen to take in subsequent years to keep customer bills low in the future.

However, Severn Trent has underperformed on supply interruptions, leakage and drinking water complaints. As a result, Ofwat proposes the company makes a net underperformance payment of £29.6 million for water services.

New water company Hafren Dyfrdwy has incurred a proposed net underperformance payment of £62,000, which relates to the area formerly served by Severn Trent Water.

Severn Trent now serves customers based in England (including those formerly served by Dee Valley Water) while Hafren Dyfrdwy serves Welsh customers formerly with either Dee Valley or Severn Trent.

Ofwat has also revealed South West Water faces a penalty of £0.27 million for its “continued underperformance” on pollution incidents despite its progress in reducing leakage.

Meanwhile Anglian Water is set to benefit from financial incentives for outperformance. The company’s reduction in leakage levels by nine million litres a day gives Anglian a proposed net outperformance payment of £4.6 million.

All water companies have committed to improve their performance for 2015-20 based on customer consultation. Under Ofwat’s outcome delivery incentives system, companies that deliver above and beyond for customers, can earn outperformance payments while companies that do not meet their commitments can incur underperformance payments.

Where underperformance reflects breaches of licence conditions, Ofwat may take further enforcement action, as it did against Thames Water in June of this year.

Thames Water returned a total of £120 million to customers for failing to tackle leakage.

Severn Trent applied for the limit on the amount of money it can receive in outperformance payments to be removed. As a result, Ofwat is also consulting on changes to how Severn Trent’s outperformance and underperformance payments are calculated in future.

The proposed changes reset Severn Trent’s targets for sewer flooding and pollution, to ensure that its performance does not fall, and that only improvements above and beyond those it has already made could receive outperformance payments.

Ofwat also proposes to reduce the rate at which outperformance payments are earned.

David Black, Ofwat’s senior director, Water 2020 said: “For companies that go truly above and beyond, setting new standards across the sector, our approach means there can be hard-earned payments; but companies that fail to live up to their commitments will have to return money. This helps to push companies to focus on what matters most to customers.”

Ofwat’s consultation closes on 21 November 2018.

Response from companies

Severn Trent: “Customers are at the heart of our business, so we are delighted to be delivering an industry-leading performance on many of the things that matter most to them. Sewer flooding was down by 34 per cent, serious pollutions down by 71 per cent and water quality complaints down by a further 12 per cent.

“There is more to do but that outperformance has been recognised through a net outperformance payment of £72 million, part of which we have chosen to take in subsequent years to keep customer bills low in the future.”

South West Water: “South West Water continues to make good progress in the delivery of its sector leading 2015-20 business plan, outperforming many of its targets and achieving best ever levels of performance in some areas. Today’s draft determination from Ofwat covers 11 of South West Water’s 42 performance commitments, four of which incurred a penalty against the stretching targets the company had set itself for 2017/18.

“We continued to outperform our leakage target, earning a net reward for our overall water performance.

“Category 1 and 2 pollution incidents reduced from four to three, among the lowest number of serious incidents in the industry. Nonetheless, the stretching performance commitment we set ourselves resulted in South West Water incurring a penalty for overall wastewater performance for 2017/18.  As a result we have proposed to return £0.27 million to customers from April 2019, which will reduce the wastewater bill.”

They added: “Wastewater performance remains a key focus for us and we fully recognise there is more to do to meet our exacting standards. Indeed, we are the only company in the industry to commit to tough in-period wastewater targets, reflecting the importance both we and our customers place on protecting the environment in such a beautiful region.”

Anglian Water: “Ofwat’s proposed performance payments this year recognise our good performance in many areas, and especially our ambition to push the frontier further in driving down leakage, building on our industry-leading performance. We are absolutely committed to continuing to meet our regulatory targets up to 2020, and beyond.

“Through our extensive engagement with them, our customers have clearly told us they want us to continue to make tackling leakage one of our top priorities, and we agree. This is why our next business plan from 2020 outlines proposals for a further £240 million investment into doing just that.

“By 2025 we’re aiming to cut leakage by a further 23 per cent – this will take Anglian Water to world leading levels of low leakage; it’s the right thing to do for our customers and the environment.”