Water companies must bridge the PR19 operational gap

The regulator has set out its intentions of the water companies in PR19. Former Ofwat director, now a water sector expert at PA Consulting, Richard Khaldi, writes for Utility Week what this means.

The operational performance of water companies has been a growing concern. There has been criticism of both the level of performance and the postcode lottery where customers have received differing levels of service depending where they live. It has also been very difficult to get the right information to compare performance across the sector.

Ofwat responded, at the back-end of PR14, by providing a comparative assessment of five common performance commitments linked to upper quartile performance targets. Now, though, they have stepped up that focus further.

The PR19 methodology consultation has made it clear that there will be new higher expectations of company performance across 14 common operational and customer measures. This will also make it possible, for the first time, to make meaningful comparisons between companies.

However, companies need to understand that the prime reason behind the new measures is to raise the operational performance of the sector, and that is going to be challenging. Ofwat has underlined that it wants stretching targets on all 14 of the common performance commitments.

On particularly key commitments – water quality compliance, water supply interruptions, internal sewer flooding and pollution incidents – it has gone a step further. It wants commitment levels for the entire period to meet at least the forecast level for upper quartile performance in 2024/25.

“[Water companies] need to recognise that a step change in performance will also need a step change in approach and that means embracing new ideas.”

There will also be no glide-path for any of the common performance commitments, so the stretching performance targets will have to be met from day one of AMP7. Add in plans for ambitious leakage targets to meet the challenge laid down by Defra in its draft strategic policy statement, and it is clear that Ofwat means business on improving operational performance.

At its City briefing on the methodology, Ofwat made clear that PR19 will be tough on “average” companies and that those who find themselves at the bottom of the league on efficiency will be subject to particular scrutiny.

They also highlighted that where Ofwat chooses to intervene through the price review process and adjust a company’s PR19 performance commitments for not being stretching enough, that company will inevitably start AMP7 behind and incur more penalties under the ODI regime. This is because the ODI penalties themselves will also be more severe. Ofwat favours enhanced penalties on common performance commitments which will make the financial hit even bigger for those companies that don’t deliver the requisite performance.

Although the outlook for some companies may seem bleak when it comes to meeting the operational challenges Ofwat is setting them, the good news is that their fates rest in their own hands. Companies can start today on developing a genuinely detailed, accurate and defensible understanding of their businesses.

This should include understanding the efficiency frontier, baselining current operational performance, and assessing the capabilities of staff and management teams. They should also look to maximise the benefit of existing supply chain contracts and alliances, and learn from best practice inside and outside the sector.

Companies must be open to one of Ofwat’s other big themes for PR19 – innovation. In the light of that, can any company facing an operational gap choose to do things the same way it always has? They need to recognise that a step change in performance will also need a step change in approach and that means embracing new ideas.

The operational gap is eminently bridgeable, but only with a healthy dose of honesty about current performance backed up by open-minded and strong leadership.