ICS in collaboration with Bristol Water have published a think-piece looking at the role of incentives in the water industry, through recent developments and the course Ofwat has set.  The article Will it all be upper futile in the end? considers both sector wide evidence and insight provided through Bristol Water’s customer research. It asks some basic questions of the incentives framework;

 

• What have they actually done?

• Do they appear to be working?

• Are they working for some companies but not others?

• Do they relate to the things that customers think are important?

 

The evidence of the five years 2015-20 reveals some notable insights such as the variation in customer experience of incentives. The range around the water underperformance bill impacts is more notable with some customers seeing compensation measured in shillings while the larger impacts exceed £10 per customer bill.

 

Ofwat’s Draft Determinations for PR19 are set to increase the financial stakes relating to ODIs with implications for both customers and investors. No longer is the range around the base equity return allowed for companies simply shaped by how efficiently water companies spend money (totex). Water companies, or more specifically, investors in water companies have now entered the world where how much their money generates is fundamentally linked to how well their managers deliver on performance.  

 

Combined with a low cost of capital, Ofwat is replacing to a degree the idea of water as an investor safe haven with the idea of water as a good bet.

 

Both the wider industry evidence and Bristol Water insight suggest customers are interested in a small increase in incentives to improve performance but stability of bills is also very important. Ofwat’s appetite for change however far exceeds this, particularly in the case of Bristol Water where the Draft Determination equates to bill range variability of about -11% to +3% against a base average bill of £155 (which is a 15% reduction in the 2019-20 bill).

 

Throughout PR19 Ofwat has stuck proudly to its strapline: “#deliveringmoreofwhatmatters”. But we worry that in endeavouring to fly toward this objective, the water sector like Woody from Toy Story is left wondering how it can avoid, as Buzz puts it, falling with style.

 

You can read about these issues in more detail in Will it all be upper futile in the end? here.