Utility Week expert view: Karma Ockenden

“There is a danger that customer choices as represented by CCGs risk being crowded out by populist politics.”

How loudly will the customer voice be heard in PR14? Theoretically it should come through loud and clear, but it remains to be seen whether the considered opinions of customers will be heard over the din of politicians.
Since work on this price review began, Ofwat has championed the customer agenda, proposing innovative Customer Challenge Groups (CCGs) and handing them a considerable role to influence companies’ customer  engagement processes, chosen outcomes and charges.
The CCGs have delivered. Eighteen group reports are now with Ofwat alongside company business plans. By all accounts, CCG members have worked  hard and with dedication – which is of particular note because many of them are unpaid or are doing the work on top of their day jobs, and many didn’t anticipate the amount of work.
The water industry, too, has played its part well in ensuring customers get a real say. By and large companies seem to have embraced the CCG concept, furnished groups with the information they needed, answered their questions and been responsive to their concerns.
The amount of research undertaken by companies under customer engagement plans – particularly on customer willingness to pay (WTP) – has been extensive. Research company Accent has compiled a Comparative Review of WTP results, which makes interesting reading.
Overall, household WTP has remained relatively flat across the industry in real terms between PR09 and PR14, but at company level both large increases and decreases in WTP were recorded. There was also a large range across companies in terms of customer WTP for individual service measures in PR14.
These differences are curious. The Accent report suggests further work to understand the causes would be worthwhile and would improve the validity and reliability of WTP results in future.
But right now there is a danger that customer choices as represented by CCGs – uncovered over two years and via extensive, high-quality research – risk being crowded out by populist politics. Companies have come under considerable political and regulatory pressure to pitch 2015-20 bills at or below inflation. Take the nice friendly letter from environment secretary Owen Paterson just four weeks ahead of the business plan submission deadline, for example. This reminded the industry of the plight of the hard-pressed masses and backed up Jonson Cox’s call for firms to think twice before implementing agreed 2014/15 price rises. The message is loud and clear.
Most companies have responded and opted to tread on the cautious side of WTP findings in their business plans. The table shows all but Thames (exceptional circumstances) of the water and sewerage companies have gone for flat or reduced prices. With the exception of Dee Valley, which is proposing an 8.9 per cent rise, five of the water-only companies plan to keep bills flat and the others to offer reductions. Sembcorp Bournemouth has pitched the biggest reduction at 9.1 per cent.
It’s hard to argue that consumers will be anything but grateful for any bill cuts that result from last-minute political and regulatory pressure. In that sense, you could conclude that politicians and regulators have effectively turned up the volume on the customer voice.
But equally you could forgive the CCG members, who have slogged for two years, for wondering if all their efforts were worth it.
So far there are no deal-breakers. All CCG reports submitted on 2 December ultimately commend – or at least accept or support – the company’s business plan. There is no outright disagreement. But whether the deals the CCGs have signed up to remain intact remains to be seen. Ofwat has already indicated it is dissatisfied with companies’ stances on risk and reward and intends to publish further guidance on 27 January.
Crucially, this suggests the regulator thinks company cost of capital assumptions are too high. The industry’s assumptions (particularly on cost of capital) are critical, and the strategies for 2015-20 on the table today could be vulnerable should the numbers shift too far. It would be a pity if an innovative, well-thought-through regulatory policy is swept away by political expediency and if the costs and outcomes subscribed to by informed customers were significantly rethought.