Water company readiness for PR19 resilience a ‘mixed bag’

The readiness of water companies to meet Ofwat’s requirements for resilience in the round in their PR19 business plans, is a “mixed bag” the chief executive of Energy and Utility Skills has warned.

Speaking specifically about the regulator’s expectations for proof of corporate resilience in the upcoming price review, Nick Ellins told Utility Week that while some companies “fully understand” what is required, others are allowing more traditional business plan priorities to dominate.

Ellins’ words of caution come alongside the publication of a briefing paper from EU Skills, clarifying the significance of workforce resilience within the Ofwat’s definition of resilience in the round.

This includes requirements for companies to prove they are corporately, operationally and financially resilient. And in the detail of the regulator’s final methodology, EU Skills points out that the former two elements of resilience in the round ask for explicit evidence that companies have considered the resilience of their workforce.

For instance, on corporate resilience, the final methodology states: “To be corporately resilient, companies must ensure that they have the capability within their workforce to provide the services their customers expect not only today but over the long term, in the face of potentially significant changes in how they do this and in the wider employment landscape.”

It continues: “A focus on long-term resilience should therefore also include companies identifying and addressing possible skills gaps in the future….Companies therefore need to ensure that they have plans in place to secure access to the workforce they need, including transferring knowledge and increasing diversity.”

Driving home the implications of such messages in the price review methodology, Ellins said: “Demonstrating workforce resilience is now a formal part of the final methodology and something that will be assessed when business plans are submitted.

“Ofwat will actively assess how well companies have planned for their workforce requirements – and not only in relation to some of the internal factors that most companies have talked about for a long time, like the proportion of over 55s they employ and how to attract young talent.

“Ofwat will also expect companies to show they are prepared for extraneous factors like the impact of projects like Hinkley Point C and HS2 on their ability to attract and retain talent and deliver their investment plans.”

The chief executive added that robust consideration of such extraneous factors ought to include an appreciation of the pressures national infrastructure programmes will place on the water sector’s contractor base, since these companies are likely to find their resources stretched across multiple demanding projects.

Asked whether he thought water companies had taken the increased demands for workforce resilience planning in PR19 on board, Ellins said there is a “mixed bag” of company readiness.

“Price setting is all consuming and the scale of the implications behind some of the debates running during this price review – such as on regulatory capital value – will definitely overshadow this [workforce resilience],” he commented.

“But a number of companies have shown us that they fully understand what the workforce resilience requirement means and see it as an opportunity to put forward a really robust long-term resilience plan within their submission to Ofwat.”

Last year, EU Skills called on Ofwat and Ofgem to be “explicit” about their expectations for companies to display robust workforce resilience strategies in their business plans for the next regulatory periods.

Ellins said he was gratified to see this manifest so strongly in PR19, and added he expects the final methodology for RIIO2 to follow suit.

While the draft plan for the RIIO2 framework included no mention of workforce resilience, Ellins said he is confident the regulator will include it in the final methodology.

“Ofgem is very much in listening mode,” said Ellins, “and the reception we’ve received when we’ve spoken to Ofgem about the need for human capital to be incorporated has been very warm.

“The next stage is to move from this implicit understanding of the importance of workforce resilience within a wider resilience duty, to an explicit understanding.”

EU Skills campaign for recognition of workforce challenges in the utilities sector’s regulatory price controls follows the publication of the first “Workforce renewal and skills strategy” for the sector last year, a document which highlighted the need to attract over 220,000 new recruits to replace outgoing utilities sector talent before 2027.

It also highlighted labour market trends which will make this requirement hard for sector employers to meet, especially in the shadow of Brexit. For instance, it points to falling numbers of EU nationals migrating to the UK to find work and rising numbers flowing away from the UK.

This trend is set in the context of a saturated UK labour market, experiencing its highest levels of employment for almost 50 years and rising weekly earnings.

EU Skills has warned that employers need to take these dynamics into account when considering their ability to meet customer expectations and fulfil investment plans, both today and in the long term.