20190121 iow se area pr19 in 2019 event slides v1...2019/01/21 · 14:20 ofwat perspective of pr19...

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Inspiring members to reach their potential.PR19 in 2019


Welcome to PA Consulting offices


Agenda13:50 Welcome address

Jason Ryall, Chair of the South East Area Institute of Water

14:00 Introduction and consultancy perspective of PR19

Richard Khaldi, Director of PR19 at PA Consulting

14:20 Ofwat perspective of PR19

Prof. Trevor Bishop, Former Director of Strategy and Policy at Ofwat

14:40 Customer perspective of PR19

Steve Hobbs, Senior Policy Manager at Consumer Council for Water

15:00 Networking & refreshments

15:25 Water Company perspective of PR19

Craig Lonie, Director of Strategy & Regulation at Southern Water

15:45 Q&A panel discussion – Chaired by Paul Holton, Investment Strategy Manger at Southern Water

16:15 Close & Networking Drinks

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Bringing Ingenuity to Lifepaconsulting.com

Richard Khaldi

Director, PA Consulting

Consultancy perspective on PR19

9© PA Knowledge Limited

WHERE HAVE WE COME FROM AND WHERE ARE WE NOW?

“Although PR14 was a

more forward-looking

regime, and has

stimulated some

efficiency gains, the

scale of change

required to position

the companies for the

demands of PR19 is

that much greater…”


• Lower WACC – less money

• Operational focus – more scrutiny

• Agile transformation – quickest wins

WHAT IS PR19 REALLY ABOUT?


• Lower WACC – less money

What can we do to increase efficiency?

What technology can we embrace?

• Operational focus – more scrutiny

Operations no longer the ‘poor cousins’ of head office?

How will you respond to the challenge?

• Agile transformation – quickest wins

How quickly can companies embrace real

change?

Does your culture block change?

HOW WILL PR19 IMPACT COMPANIES DAY TO DAY?


AN EXAMPLE OF DIFFERENT: EFFICIENCY FRONTIERS FOR PERFORMANCE COMMITMENTS

Delivery efficiency

ratio greater than 1:1

Delivery efficiency

ratio less than 1:1

Internal Sewer Flooding

Blockages

External Sewer Flooding

LeakageEnvironmental

CollapsesSupply Interruptions

PCC PollutionsSiz

e o

f penalty a

void

ed b

ased o

n h

itting A

MP

7 p

lans

Investment amount in AMP7 plans

Y-axis: AMP7 penalties avoided

by achieving stated levels of performance compared to doing nothing and allowing the assets

to further deteriorate

X-axis: Level of investment in AMP7 by performance

commitment

Colour – Where effort should be

focused in AMP6 vs AMP7 based on the ratio of the annual level of performance

improvement required

• Red – Rate of performance

improvement is set to increase in AMP7 indicating

more ambition than AMP6• Amber – AMP7 performance

improvement broadly similar to that delivered in AMP6

• Green – Rate of performance

improvement is higher in AMP6 indicating less

ambition in AMP7

Bringing Ingenuity to Lifepaconsulting.com

Richard Khaldi

Director, PA Consulting

THANK YOU FOR LISTENING!

Trevor Bishop

Director, Water Resources South East

21st January 2019

Institute of Water

PR19 in 2019

Perspective

What might PR19 look like

Addressing the challenges:

• Resilience of systems and services

• Affordability

• Customer service

With ambitious, innovative and high quality plans

PR19 will not be business as usual:

Customer

driven

businesses -

This is not just

about writing

a business

plan

Stretching

outcomes -

Going further

and faster for

customers

Frontier shift

in cost

efficiency

If you’re not

ahead, you’re

behind

“Lower for

longer” -

impact on

WACC

cus

Key themes of PR19

Customer

service

Long-term

resilience

InnovationAffordable

bills

PR19

Context is everything?

BurstsFreeze thaw

Bursts

Off shore accounts

Leakage performance

Politics

Delivering Water 2020: Our final methodology for the 2019 price review

Some key points:

• Building on PR14

• Addressing future challenges

• Our strategy and the legal

framework for PR19

• PR19 and the environment

• Separate price controls

Retail controlsWholesale controls

Water

resources

Water network

plus

Wastewater

network plus

Bioresources Residential Business

(Wales*)

Direct procurement for customers

Customer engagement

Performance commitments and outcome delivery incentives

Resilience

Affordability and vulnerability

Return on

capitalRetail margins

Average revenue

control

Initial assessment of business plans

Average revenue

control

Average revenue

control

Total revenue

control

Total revenue

control

Total revenue

control

Wholesale form of control Retail form of control

* We will set an average revenue control for all business retail customers in Wales and business retail customers of non-exited retailers

in England.

** Cost-to-serve

Financeability

Efficient totex

allowance

Efficient totex

allowance

Efficient totex

allowance

Efficient totex

allowance

Efficient totex

allowance

Efficient CTS** per

customer group

Retail marginsReturn on

capital

Return on

capital

Return on

capital

Confidence and assurance

Accounting for past delivery

What will PR19 look like

PR19 - 2019 Timetable

2019

Late January Ofwat publishes

• Initial assessment of business plans; and

• 2018 company monitoring framework

March/April Ofwat publishes early draft determination (exceptional and fast track plans)

April Companies submit revisions to business plans (significant scrutiny and slow track)

July Ofwat publishes draft determinations (slow track and significant scrutiny)

December Ofwat publishes final determinations

Time table

Initial Assessment of Business Plans

Reputational Procedural incentives Financial Incentives

Exceptional

Fast track

Slow Track

Significant Scrutiny

IAP

Resilience: A journey from policy to deliveryResilience

Future Water Networks 2017 - Resilience

1. Systems thinking

2. The environmental foundation of a resilient sector

3. Customers at the heart of resilience

4. Resilience Planning

5. Smart Resilience

6. Monitoring and Measuring Resilience

7. Company Boards and resilience

Resilience Principles

Resilience: A journey from policy to deliveryChallenges

Drainage and Wastewater Management Plans

Drainage Strategy Framework (2013)

• Joint EA/Ofwat guidance ahead of PR14

• Water and sewerage companies to prepare Drainage Strategies

• Partnership

• Uncertainty

• Risk based

• Whole life cost and benefit

• Live process

• Innovation and sustainable

Drainage and Wastewater Management Plans

Drainage and Wastewater Management Plans – Vision

The vision of the 21st Century Drainage Programme is to enable the UK water industry, working in partnership

with others, to make plans for the future that will ensure the sustainability of our drainage infrastructure, and the

services it provides to customers and the environment.

• New challenges

• WaterUK 21st Century Drainage Programme (more than 40 organisations from across the UK – governments,

regulators, local authorities, environmental charities, academics and community groups).

• Consistency, sharing best practice and better cross sector coordination for the long-term

• Capacity Assessment Framework – a standard capacity approach for the foul and combined sewer networks, now

and into the future (possible extension to include surface water sewers)

.

• Storm Overflow Assessment Framework – valuing the benefits of improvements to storm overflows.

• Wastewater resilience metrics – standardised approach for the resilience of wastewater services

Summary

Tough

Shared ambition

Balancing ambition and risk

Keep a perspective

INSTITUTE OF WATER: PR19 in 2019

Consumer Perspective

Steve Hobbs

Senior Policy Manager

Consumer Council for Water

2020-25 BUSINESS PLANS

Evidence of customers views

& challenges raised with companies

Four companies propose static or

lower bills – when inflation is added

Significant increase in affordability assistance

Improvements in service areas

customers value

Increased spending to £50bn over

2020-25

Some commitments to share financial outperformance

ROOM FOR IMPROVEMENT?

More cost efficiencies?

Further ambition in Performance Commitments? What about

maintenance?

Customer reaction to Outcome Delivery Incentives?

More to do to help vulnerable consumers and those struggling to

pay?

More to do on making services resilient….and preparing for the

future?

Good outcome we want to see

Evidence

shows 80%+ of customers

approve the Draft

Determinations

PERFORMANCE COMMITMENTS

Plans show a ‘Mixed Bag’ across the common and bespoke PCs

Generally highertargets that reflect customer priorities.Stretching performance across many PCs.

Medium level targets and stretch.

Lower comparabletargets and stretch.Unclear connection to customer priorities.

Draft Determinations should set the bar for Upper Quartile Performance

OUTCOME DELIVERY INCENTIVES

• No universal customer support for incentives.

• Bill impact uncertainty for customers & varied incentive rates.

• Enhanced rewards for leading performance?

• Outperformance payments – will

customers accept and value what they get in return?

C-MEX

Positives Issues

Incentivises customer service performance.

Complaints measure weaker?

Measuring customer satisfaction of contacts and non-contacts

Access to rewards if complaint performance not improving?

Considers other sector comparisons.

Wide complaint sources

Should the incentive be stronger?

CONSUMER

AFFORDABILITY/VULNERABILITY

AFFORDABILITY• Improving range of options to assist customers with

affordability issues.

• More focused measure of performance based on number of customers in water poverty.

• Opportunities for companies to contribute to funding of social tariffs.

VULNERABILITY

• Bespoke Performance Commitments to raise awareness of assistance and satisfaction of those who receive it.

• Addressing transient/temporary vulnerability.

DRAFT DETERMINATIONS

Why?• Customers should accept the price, investment and service

package. • Consistently applied measure across all Draft Determinations

When?• First stage – ‘Exceptional’ and ‘Fast Track’ in April.

• Second stage – ‘Slow Track’ and ‘Significant Scrutiny’ in July.

How?• Informed and uninformed customer views.

• Sample of 200 customers per company.

CCWater to test Draft Determinations for customer acceptability

IDEAL OUTCOME

Greater customer trust and satisfaction

• Bills acceptable and affordable – high level of customer acceptability of the package.

• Efficient delivery of ambitious performance improvements and investment in customer priorities.

• Effective assistance for those who need it.

• Milestone in long term strategy – current and future customer needs addressed.


Networking and Refreshments

January 2019

Price review process…

� This process takes place every five years for water companies in England and

Wales

� Ofwat sets out a methodology for how it will determine new revenue and price

controls, based on:

� Defined and agreed outcomes

� Estimated costs

� An agreed “risk balance contract”

� Key financial metrics (WACC, gearing)

38

The brief from Ofwat had notable changes from PR14…

39

Great customer service

Affordable bills for all

Long term resilience in the

round

Innovation and new ways of

working

High Quality InnovativeAmbitious

Our plan must address Ofwat’s four themes for PR19

Ofwat will assess plans in nine key test areas against three plan characteristics

Increased reliance on comparators, and change to customer performance metrics (CMEX, DMEX)

Direct Procurement

Requirement for specific improvements in key outcomes e.g. leakage.

…and was subject to some in flight adjustments

40

• Gearing• Dividend policy• Executive pay

• Independence and culture

Board leadership transparency &

governance

Putting the sector back in balance

The regulatory & political landscape is evolving…

41

� Resilience an increasing focus – Out in the Cold consultation, prolonged 2018 dry spell

� Push for greater collaboration

� Continued focus on financials

� WACC

� Outperformance

� Increasing profile of sector

� Efra Select Committee report on water regulation

� New environment bill

� Brexit implications uncertain

� Nationalisation and ownership question prominent in media

� Social contract in the water sector

� National infrastructure commission

� National infrastructure identified significant needs

� Review of sectoral regulation

…Our response

42

43

What's next…

2019

J F M A M J J A S O N D

31 Jan –confirmed IAP

results

Draft Determination for Slow Track &

Significant Scrutiny

Final Determination

Draft Determination for Exceptional & Fast

Track

Plans will be categorised as:• Exceptional• Fast Track • Slow Track, or• Significant Scrutiny

Each category has reputational, financial and certainty impacts.


Q&A panel discussion


South East Area

We are one of eight regional Areas of the Institute of Water.

We organise a series of unique industry learning, development and networking opportunities.

Becoming a member of our Area Committee is a great way to develop new skills.

We also know how to have fun and organise enjoyable social events.

Some Dates For Your Diary

14 March 2019 – Innovation Awards, East London

6 April 2019 – Presidents Day (family event), Hop Farm, Paddock Wood, Kent

10 to 12 October 2019 - "Confident communication for future leaders” Weekend School, Cookham, Maidenhead


Inspiring members to reach their potential.

Post event networking drinks

Thank you for coming – safe journey home

20190121 iow se area pr19 in 2019 event slides v1...2019/01/21 · 14:20 ofwat perspective of pr19...

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