Utility Week expert view: Karma Ockenden

“The approach adopted by the regulator in Scotland has been inspired and is clearly breaking new ground in empowering customers.”

It has received surprisingly little attention given it is breaking new ground in utility regulation, but the next price control for Scottish Water looks set to be little short of a negotiated settlement – a deal struck between company and customers. Last month, the Water Industry Commission for Scotland (Wics) issued a draft determination for the 2015/21 period entirely consistent with an agreement reached between Scottish Water and consumer representative the Customer Forum.
At a conference on Monday, negotiated settlement advocate Stephen Littlechild described the deal as “a very successful example of full-blown customer engagement”. This was important, he said, because customer negotiated outcomes are better, cheaper, less risky and more productive than traditional RPI regulation.
Pity customers in England and Wales, then, where Ofwat’s early efforts to put customers at the heart of regulation seem to have lost their way. The regulator has promoted an innovative customer engagement policy, delivered via customer challenge groups (CCGs). But its decision to fast-track only two companies through the regulatory process despite evidence of solid customer engagement from many more was disappointing. The rest are busy redrafting the plans, prices and investments their customers had said they were willing to pay for.
With a tight timetable for the rest of PR14, how thorough a say customers will get on the revised plans is questionable. Equally, it is unclear how much of a say they will get on the symmetrical outcome delivery incentives Ofwat is now championing.
So what has been key to Scotland’s achievement? Enthusiasm, executive-level sponsorship, hard work and commitment from Scottish Water and the Customer Forum? Certainly. But we have seen similar dedication and graft from CCGs and water companies south of the border. So credit must go to Wics for shaping a framework in which negotiation could flourish.
Wics’ chief executive Alan Sutherland highlights two key differences between its approach and Ofwat’s. First, Wics openly shared its expectations on vital price control elements including prices, operational expenditure and capital expenditure. This levelled the playing field between Scottish Water and customers and allowed both parties to make informed decisions.
Ofwat was unprescriptive before final business plans and CCG reports went in and is only now saying it is dissatisfied with what they contain. Sutherland notes that lack of early clarity makes “valuable customer input harder”.  
The second important element is that Wics was absolutely clear that it would be minded to accept an agreement between Forum and company, should one be reached (provided it met all statutory duties). Ofwat has never made such an express commitment.
Customer Forum chair Peter Peacock gives “absolute credit” to Wics for allowing what it started with the Forum to run its full course. “I believe the approach adopted by the regulator in Scotland has been inspired and is clearly breaking new ground in empowering customers,” he says. “They are to be commended for giving the Customer Forum such a wide-ranging role where customers have been able to take the initiative and arrive at a customer negotiated settlement in all but name.”
Sutherland and Peacock agree the prospect of reaching a real, lasting agreement with customers, for reputational and operational reasons, also motivated Scottish Water to want to succeed – and hence to go the extra mile. Some 12 hours of meetings took place between Forum and company after the latter published its draft business plan in October – a plan that was itself a product of two years of engagement.
Peacock reports the discussions had material results. Of note are smaller (1.6 per cent) price rises than envisaged in the draft, “locked in” for the first three years of the review to give customers clarity about how much they will need to pay. Scottish Water also agreed to higher overall performance assessment targets and new service measures, including a “high esteem test” that will benchmark it against excellent service providers in other sectors – the Amazons and John Lewises of this world.
Sutherland provides another example: that using traditional approaches to measuring capital efficiency, Wics would have been unable to justify an efficiency challenge of more than 12-13 per cent. Scottish Water actually opted to make efficiencies of 15 per cent to strengthen its bargaining position elsewhere.  
Peacock says the resulting agreement was a genuine negotiation during which “the Customer Forum evolved and developed and Scottish Water evolved and developed… not a victory won in the face of opposition”.
So the Customer Forum and Scottish Water can take pride in what they have achieved and look forward to developing the next stages of the process. Meanwhile, English and Welsh companies and their CCGs could be forgiven for wondering if all their hard work has been worthwhile. If I were a CCG member, I wouldn’t relish the next few months of reworking old ground, and I certainly wouldn’t sign up for PR19.