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Northumbrian Water – Delivering Outcomes for Customers Final Decisions December 2019 Northumbrian Water ‒ Delivering outcomes for customers final decisions www.ofwat.gov.uk PR19 final determinations: Northumbrian Water – Delivering outcomes for customers final decisions PR19 final determinations: Northumbrian Water – Delivering outcomes for customers final decisions In our draft determinations we published the ‘40TDelivering outcomes for customers actions and interventions40T’ document for each company. This document set out the actions from our initial assessment of plans, a summary of the company’s response to the action, our assessment of the company’s response, and the interventions we made as part of the draft determination. It also set out any interventions that did not result from an initial assessment of plans action, which we made as part of the draft determination. This final determination document sets out the decisions we make for the final determination in response to representations received on our draft determinations and any other changes for the final determination. Table 1 below sets out the draft determination decisions on performance commitments that were the subject of representations from the company, a summary of the company representation, our assessment and rationale for the final determination decision and our decisions for the final determination. Table 2 sets out the draft determination decisions on performance commitments that were the subject of representations from other stakeholders, a summary of the other stakeholder representations, our assessment and rationale for the final determination decision and our decisions for the final determination. Table 3 sets out any changes for the final determinations that are not resulting from representations received relating to the company. Each performance commitment has a unique reference. The prefix ‘PR19NES’ denotes Northumbrian Water. For all other documents related to the Northumbrian Water’s final determination, please see the 40Tfinal determinations webpage40T49T. Our ‘Outcomes performance commitment appendix’ for the company is published alongside this document. These documents are intended to be fully consistent. In the event of any inconsistency, then the ‘Outcomes performance commitment appendix’ takes precedence in all instances. Table 1: Northumbrian Water - Representations in response to the draft determination 49TPerformance 49TType Our intervention for the draft 49TSummary of company representation 49TOur assessment and rationale for the final Decisions for the final commitment determination determination decision determination Company level Enhanced ODIs At draft determination, we took a The company states that it disagrees with our draft Change for final determination. We change the company’s single industry view of the decision to tighten the thresholds at which enhanced outperformance and enhanced outperformance enhanced ODI payments apply. The company The company does not provide any additional evidence in its underperformance thresholds threshold for each performance states that it believes its proposed thresholds in its representation explaining why its proposed thresholds are more across a number of performance commitment, to ensure that it April 2019 business plan are consistent with our appropriate than those in its draft determination. commitments. represents a level that improves guidance and with the thresholds set in the draft the industry frontier as a whole determinations for fast track companies. The company set its April 2019 business plan outperformance and does not reward companies thresholds in line with the industry frontier performance level, as simply for catching up. The company notes that we have further tightened set out in the ‘Technical appendix 1 – delivering outcomes for its view of the forecast frontier level in 2020-21, customers’ published at the initial assessment of plans. For which it notes may be partially a result of more leakage, the company is proposing sector-leading performance recent improvements in performance. The company commitment levels (Essex and Suffolk Water) and so it is states that the continued ratcheting of thresholds proposing that, for this measure, its enhanced outperformance and performance commitment levels compared to threshold is set equal to its performance commitment level. business plans incentivises companies to game the regulatory settlement by reducing planned Our PR19 methodology states that companies should propose thresholds that are higher than the current leading company’s 1 PR19 final determinations: Northumbrian Water – Delivering outcomes for customers final decisions 49TPerformance 49TType Our intervention for the draft 49TSummary of company representation 49TOur assessment and rationale for the final Decisions for the final commitment determination determination decision determination improvements at the end of the current period so performance. In line with both our final methodology and draft these can be delivered in the next period. determination methodology, we consider it is appropriate to have enhanced thresholds that are higher than the current The company states that its enhanced frontier company. outperformance thresholds should revert to those proposed in its April 2019 business plan, but does The company states that our intervention to set enhanced not state which performance commitments it is outperformance thresholds higher than its April 2019 business representing on, therefore we have assumed it is plan proposals incentivises companies to game the price review referring to all 3 performance commitments that it process. However, if a company were to attempt to manipulate has enhanced ODIs on (leakage, pollution incidents the regulatory settlement, by withholding improvements to the and supply interruptions). end of the period, it would forgo the outperformance payments it would have received in 2015-20 if it had performed well. We make amendments to our methodology for calculating enhanced outperformance thresholds for the final determination, details of which can be found in the ‘Delivering outcomes for customers policy appendix’. We also change outperformance thresholds if we have found errors in our draft determination calculations. We therefore update the enhanced outperformance thresholds for relevant performance commitments. We retain the same methodology used at draft determination to set enhanced underperformance thresholds, however we update enhanced underperformance thresholds to align with the lower quartile of the latest year of actual performance (2018/19). This is in line with our approach detailed in the ‘40T PR19 draft determinations: Delivering outcomes for customers policy appendix40T’. Further details can be found in the ‘Delivering outcomes for customers policy appendix’. N/A Aggregate cap and We put in place a mechanism for The company highlights that its proposed lower Change for the final determination. We put in place a mechanism for collar outperformance sharing, at 3% threshold for the sharing mechanism is based on outperformance sharing, at 3% gross return on regulated equity. net rather than gross. As a net sharing mechanism at a lower threshold may not lead gross return on regulated equity. This applies separately to the to greater protection for customers, at the final determination, water and wastewater regulated we apply the same gross sharing mechanism for all companies equities. Where companies had at 3% return on regulatory equity as we set out in ‘Delivering proposed a lower threshold this outcomes for customers policy appendix’. applied instead. Leakage (NW) Performance We intervened at draft The company disagrees with the draft determination No change for the final determination. N/A commitment levels determination. We set the adjustment to the way in which the baseline is PR19NES_COM05 performance commitment levels calculated. The company states we have changed We use three-year average actual performance as the baseline to: the baseline from which 2020-25 performance and percentage reduction from this baseline because we commitment levels are calculated from the end of consider that this ensures that the performance commitment 2020-21 = 0.9 the 2015-20 period performance commitment level 2021-22 = 1.9 to end of 2015-20 period actual performance. The 2 PR19 final determinations: Northumbrian Water – Delivering outcomes for customers final decisions 49TPerformance 49TType Our intervention for the draft 49TSummary of company representation 49TOur assessment and rationale for the final Decisions for the final commitment determination determination decision determination 2022-23 = 5.0 company presents a view that this is not appropriate relates to actual performance achieved in the 2020-25 period 2023-24 = 8.0 as it disincentivises companies who, through good and not to any data or methodology changes. 2024-25 = 11.0 management, attempt to make an early start on progressing towards very stretching 2020-25 Companies’ 2015-20 performance is incentivised through the Unit = Percentage reduction from performance commitment levels. The company 2015-2020 ODIs. If we used forecast performance to set the 2019-20 baseline using 3 year considers we should revert to using the end of the baseline, then companies who improved performance before average (%) 2015-20 period (2019-20) performance commitment the 2020-25 period begins would be rewarded twice for this level as the baseline. activity. We consider that the company does not provide convincing evidence to change the 2019-20 baseline
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