Following our previous article on the final methodology for the 2019 Price Review (“PR19”), this week we examine progress to date in light of the previous review (“PR14”).
Since privatisation, the life of the water industry has been split into “asset management periods” (AMPs): the current period (2015-2020) is known as “AMP 6”, and the following period (2020-2025) “AMP 7”. In the run up to each AMP, Ofwat publishes a price review methodology; water and wastewater undertakings are required to submit business plans that respond to the methodology; Ofwat then assesses the business plans to determine the price controls for the AMP for each undertaking. In the course of the AMP, undertakings produce Annual Performance Reports showing progress against their business plan commitments; Ofwat administers financial “outcome delivery incentives” where commitments are exceeded/missed. This model shares some characteristics with the RIIO approaches that apply to operators of electricity and gas transmission and distribution networks, though the targeted outcomes are more circumscribed for the latter.
In this article, to understand how effectively Ofwat’s price review model incentivises improvement and provide context for the AMP 7 business plans that undertakings will currently be drafting, we look at the progress that the industry has made in AMP 6.
AMP6: progress against PR14
The total of the investment commitments made by undertakings for AMP 6 is £44 billion, and more than £8 billion is expected to be spent in 2018-19 towards this total. At the same time, average bills are falling in real terms. While each undertaking’s business plan is unique, a number of performance metrics are broadly comparable across the board. Information published on Discover Water (a resource maintained by organisations including Ofwat, Water UK and the government) on reported progress against the key comparable commitments includes:
- Customer satisfaction – Overall customer satisfaction remained fairly stable for water and sewerage services in 2016-17 at 93% and 88% respectively – this compares favourably against the largest electricity and gas suppliers, for which average customer satisfaction is around 70%, and electricity transmission operators, which score around 75-80%. As with energy suppliers, complaints about water and wastewater undertakings’ services are falling: the number of formal complaints fell by 10% compared with 2015-16. Average scores for Ofwat’s Service Incentive Mechanism increased slightly. However, the proportion of customers that are satisfied that their water services provide value for money was 73%, and 12% say they are struggling to pay their water bills.
- Leakage and loss of supply – Average daily leakage in 2016-17 was 3.1 billion litres, similar to 2015-16. The average number of minutes of supply interruption per property per year was 11, down from 14 in 2015-16. Most leakage targets were met.
- Sewer flooding – The number of UK properties internally flooded by sewage in 2016-17 was 5,690, an increase of around 30% on the figure for 2015-16. However, most sewer flooding targets were met.
- Environmental performance – the average number of instances of escape of contaminants per 10,000km of sewers was 34 in 2016, compared to 52 in 2015. Average performance in the Environment Agency’s Environmental Performance Assessment declined slightly, though this may be due to tougher test parameters.
Overall, it appears that PR14 has been effective in incentivising undertakings to make, and meet, achievable commitments.
Next steps: AMP 7
Ofwat is implementing the decisions in its Water 2020 programme through its price review process for AMP 7. The PR19 methodology contains more onerous requirements for undertakings, especially the new “common” performance commitments (see our previous article for further details) and the broader range of sources and techniques required for engaging customers and gauging customer satisfaction.