Are water firms delivering?

Ofwat has published its service delivery report for 2016-17, which measures how far companies have kept commitments they made in PR14. Katey Pigden looks at the winners and losers.

Water companies are delivering on several of the commitments they made to customers and are responding to the challenges laid down by Ofwat at PR14, but the regulator insists there is still room for improvement.

In its latest service delivery report (2016-17), which looks at the performance of the 17 largest companies against specific commitments made to customers, Ofwat highlights an increase in customer satisfaction with how companies are handling billing and operational contacts, for the third year running. Supply interruptions also show an improvement, with average minutes lost per customer falling by approximately one-third over the past couple of years.

However, the report also identifies areas for improvement such as leakage and burst mains, both of which saw a small increase over the period. Aileen Armstrong, senior director at Ofwat, says: “This report shows companies stepping up to deliver improvements in services in some areas, but also highlights where they need to do more for customers and have been penalised when they have failed to deliver against their promises.”

Leakage

Leakage is something Ofwat is challenging all water companies to stretch themselves further on, having set a reduction target of at least 15 per cent by 2025. The regulator says the industry could save up to 170 billion litres of water a year by targeting leaks.

Overall, the amount of water lost through leakage has reduced by around one-third since 1994. However, more recently progress has stalled, with leakage levels remaining relatively static since 2000. In its report, Ofwat names six companies that missed their leakage commitment targets for 2016-17: Bristol Water, Northumbrian, Portsmouth, SES Water, South Staffs Water; and Thames Water. In 2015-16, no companies missed their commitments for leakage.

Thames Water, in particular, has been struggling with leakage, and the report shows it missed its target by the largest margin. The company was hit by the regulator last year with an immediate penalty of £8.55 million after it missed its 2016-17 leakage reduction target by 47 million litres a day, representing about 1.8 per cent of its average daily production.

Ofwat says it has also opened an investigation into Thames Water to consider whether the company has contravened any of its statutory obligations or licence obligations by missing its leakage target. This could result in enforcement action over and above the automatic penalty.

While Thames Water aims to achieve its leakage performance commitment by the end of the current price control period, it is forecasting a large underperformance penalty for the period overall.

A spokesperson for the company tells Utility Week: “Reducing leakage is a top priority for Thames Water and our customers and we have significantly increased investment this year. We are working harder and smarter to create a more resilient network while minimising costs and disruption to our customers, given some of our major pipes are buried under London’s busiest roads.”

The company claims it is being “much more innovative to detect and prevent leaks”. Up until 2016, it says, it reduced leakage by a third from its peak in 2004. It aims to have its leakage levels back on track by 2020 and is investing an additional £133 million to improve how it organises and manages its water networks business.

Meeting commitments

Bournemouth Water came top of the class meeting 100 per cent of its commitments for the second year running. A spokesperson for Bournemouth Water says it is “delighted”: “Our focus is on delivering improvements in areas customers have identified as priority, and as such we remain one of the best performers in the industry for providing an uninterrupted water supply, reducing leakage and delivering great customer service.”

Not faring so well was South East Water, which met less than 40 per cent of its ­commitments, down from last year.

The company believes its position in the overall performance commitment graph Ofwat presents in its report (see Performance commitments table, right), does not provide a fair reflection of the service its customers receive. It says the use of a count calculation “does not take into account whether companies have stretching targets or the nature of the performance commitment, which is varied between companies”. A spokesperson says: “At PR14 we took an innovative approach to our commitments, which carried with it risk, but we believe this was the right approach for our customers. We took the brave move of having more outcome incentives than any other company – 28 commitments.

“Introducing seven innovative customer satisfaction measures has led to a culture change within our team and this is the best outcome for our customers as they really have become the focus. We chose to include these performance commitments in both our wholesale and retail price controls because we wanted to ensure the full service customers receive is reflected across all price controls. This has effectively meant we have 14 customer satisfaction performance commitments, which is 50 per cent of our total.

“The targets we set ourselves were challenging, the satisfaction measures see us striving for an average score of 4.4 out 5.0, although each of the seven measures has its own individual target. Last year we increased our average score from 4.2 to 4.3.”

The company says that, while it is “disappointed” not to meet them last year, it has seen a consistent year-on-year improvement towards these stretching targets and expects to improve again this year. “It’s important to remember these are surveys of all our customers, not just the ones who contact us, so it was a new approach and we are pleased to see that the introduction of C-MeX [customer measure of experience] will see a similar approach incorporated across the industry as it allows the silent majority to have their voice in their water service.”

South East Water says it has made a “significant improvement” with customer satisfaction, as measured by the service incentive mechanism (SIM) compared with 2014-15 when it was in the lower quartile. It is now listed as ninth in the industry with an overall SIM score of 84.6.

“We will keep challenging ourselves for PR19 and have been working closely with our customers to develop our plans to ensure we continue to improve and always look for the next opportunity and innovations that will raise our performance across our service,” the spokesperson says.

Ofwat acknowledges that at PR14 companies set their own performance commitments, which led to a number of similar, but not identical, definitions. “As a result, it is not always possible to directly compare companies’ performance in the current control period,” it concedes.

For the price control period 2020-25, Ofwat will use C-MeX and the developer services measure of experience (D-MeX), which it says will provide “stronger incentives to improve and include greater emphasis on customer satisfaction with their overall experience of their water company”.

The service delivery report, together with the company monitoring framework and the financial monitoring report, forms part of its suite of tools to monitor performance and enhance water company transparency.

With the regulator expecting water companies to set even more ambitious commitments to customers as part of PR19, the sector needs to step up and deliver in all areas, not just some.

PR14 commitments

At PR14, Ofwat required companies to talk and listen to customers about: the services they wanted their water provider to deliver over the long term (outcomes); the specific levels of service or outcomes they expected companies to deliver (performance commitments); and the level of any outperformance and underperformance penalties (outcome delivery incentives, or ODIs).

The information companies provide in their annual performance reports helps hold them to account, and the latest service delivery report draws on information published by companies for the year to 31 March 2017. The overall performance against commitments each company agreed to when Ofwat set price controls for the period 2015 to 2020 shows most met more than 60 per cent of their performance commitments for 2016-17.

So far, companies report outperformance payments for meeting or exceeding performance commitments of £167 million. Ofwat says these payments will only be made where customers receive a higher level of service than promised. Meanwhile, companies also report underperformance penalties of £76 million, whereby money will be returned to customers because commitments are not being met.

Ofwat says its expects companies to set stretching performance commitments for PR19, with a greater ­proportion linked to financial incentives for PR19.