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Pr19 Draft Determination Representation

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Pr19 Draft Determination Representation PR19 DRAFT DETERMINATION REPRESENTATION EXECUTIVE SUMMARY 1 INTRODUCTION AND OVERVIEW 8 CUSTOMER VIEWS 11 KEY METHODOLOGICAL POINTS 14 OUTCOMES 40 COST ASSESSMENT - OVERVIEW 88 COST ASSESSMENT - BOTEX PLUS 102 COST ASSESSMENT - ENHANCEMENT 117 RISK AND RETURN 150 FOCUS AREA - GROWTH 168 FOCUS AREA - WRMP 191 FOCUS AREA - LEAKAGE 220 FOCUS AREA - DPC 230 1 EXECUTIVE SUMMARY Our Representation on Ofwat’s Draft Determination centres around the following key points: • In line with Ofwat's methodology, we give primacy to the views of our customers, derived from the sector-leading customer engagement we have undertaken to inform and support our Plan • We seek to ensure that the Plan holds true to the long term ambitions set out in our Strategic Direction Statement (SDS) • The challenges that our already water-scarce region faces from exposure to the impacts of climate change, along with the scale and pace of growth that is expected, warrant a very different approach to that proposed by Ofwat • Consistent with the objectives for PR19 set out by Government in its Strategic Policy Statement, our proposals seek to preserve the step change in investment to enhance the resilience of our region to the increasing risks of drought and flood. We also propose a means by which we can facilitate our region’s sustainable growth ambitions whilst protecting customers should growth prove slower than expected • At all times, our views are informed by an analysis of what is in the long term interests of our region, our customers and the environment. This includes securing adequate capital maintenance expenditure to meet drinking water and environmental standards and improve service quality • With these points in mind, our Representation: • highlights areas where Ofwat, as it acknowledges in the Draft Determination, has not fully considered previously submitted information that will close the gap between Ofwat’s view of the necessary level of Totex and our own; • points out where Ofwat's assessment of efficient costs ignores important drivers, particularly in relation to growth, and; • proposes changes to the overall balance of outcomes, ODIs and PCLs in the context of the clear views expressed by our customers. • In our revised plan, the increase in botex between AMP6 and AMP7 is just 1.3% (£47m), despite the increased challenge of maintaining our assets in the face of demands from growth and climate change, and inflation in wages and other base costs • The introduction of a strong downside-skew towards penalties in the outcomes approach set out in the Draft Determination creates an almost impossible task for ambitious companies wishing to improve performance, as even steady improvements from a strong base will result in penalties. This risks creating a spiral of decline as penalties incurred will reduce the funding available to improve service in future • At the level of WACC that Ofwat sets out in the Draft Determination, in the context of the overall balance of risk and return represented by the Draft Determination, we find that neither the notional nor the actual company is financeable 1.1 The right plan for our customers and our region Our September 2018 Plan resulted from the most extensive customer engagement we have ever undertaken. The high quality of this engagement, and the extent to which it was reflected in the Plan we submitted, was recognised by Ofwat through the sector-leading ‘A’ rating it awarded us in its Initial Assessment of Plans (IAP). Our translation of this into our proposed suite of Performance Commitments (PCs) and Outcome Delivery Incentives (ODIs) was also recognised as strong and built on this customer engagement in Ofwat’s IAP. Both of these areas of strength were recognised by the Customer Engagement Forum (CEF) in its independent report to Ofwat on our September 2018 Plan, as was our innovative approach working with the CEF to frame new ODIs in areas like natural and social capital. Our Plan responds to the specific challenges facing our region, its environment and communities as set out in our refreshed SDS. It also addresses the priorities for PR19 set out in Ofwat's Final Methodology and in the Government's Strategic Policy Statement. 1 Executive Summary Anglian Water Draft Determination Representation August 1 2019 We do not repeat all of the detail of this here. However the four long-term ambitions of the SDS, which themselves emerged from detailed engagement with our customers and stakeholders, are worth restating, given how important they are to our consideration of our Plan for PR19: • Make the east of England resilient to the risks of drought and flooding • Enable sustainable economic and housing growth in the UK's fastest growing region • Be a carbon-neutral business by 2030 • Work with others to achieve significant improvement in ecological quality across our catchments Before submitting our September Plan, and before concluding our approach to our Water Resource Management Plan, we explicitly tested customers’ views on strategic choices. We asked whether to defer expenditure to address climate change impacts to keep bills lower and what the balance between keeping bills low and increasing investment should be. We tested the relative importance customers placed on key aspects of service, the level of performance improvement we should target, and how these should be incentivised through ODIs. Customers want us to invest now to address climate change risks and improve resilience rather than defer and are prepared to see bills increase by up to 5% in return for investment to address these risks. They want us to prioritise improvements in leakage, water quality and pollutions over other areas like interruptions to supply. They feel that incentives should align with these priorities and support enhanced rewards for stretching performance, such as moving the leakage frontier. This evidence informed our September 2018 Plan, which proposed a 30% increase in totex for less than a 1% increase in bills. Ofwat instead proposes a c.£40 decrease in bills, which will make it impossible to deliver the service improvements and resilience enhancements our customers desire. In this Representation, we propose to make some changes to our totex plan, and to accept Ofwat’s proposal to test Direct Procurement for Customers for the Elsham treatment works and transfer schemes. These changes mean that bills will reduce compared to our September 2018 Plan, and compared to our IAP response. Bills will reduce by around 1.1% during AMP7, whilst preserving critical investments to address the challenges above. Bills therefore remain well below the average bill changes customers stated are acceptable to deal with the challenges facing the region, and are lower than proposed in our September Business Plan and our IAP response. We would also note that our bill reductions at PR14 were the largest in the sector, so a comparison over the last decade would show a greater level of reduction in absolute and comparative terms. Figure 1 Anglian Water Future average bills 2017/18 price base 2 Anglian Water Draft Determination Representation August 1 Executive Summary 2019 1.2 Public Interest at the heart of our business Since the initial submission of our Plan, we have further developed our approach to ensuring long-term resilience, addressing affordability and delivering wider public interest outcomes. This has been reflected in the Public Interest Commitment that we worked with Water UK and other companies to shape. This sets out five ambitious goals: to triple the rate of leakage reduction by 2030; to make water bills affordable for those for whom this represents more than 5% of disposable income by 2030; to achieve net zero carbon emissions by 2030; to prevent the equivalent of 4 billion plastic bottles ending up as waste by 2030; and to be the first sector to achieve 100% commitment to the Social Mobility Pledge. Our Board has also taken a significant step in changing the company’s Articles of Association, creating a legally binding commitment to take account of the impacts of our decisions on society and the environment, alongside the financial implications. This is consistent with the commitments we have made in our SDS and Business Plan, builds on our responsible business credentials, including being named BITC's Responsible Business of the Year in 2017, and locks in this “triple bottom line” approach for the long term. 1.3 The right plan for now and for the long term With those commitments firmly in mind, we believe it is critical that the outcome of PR19 sets the right platform for the long term. This is particularly important given that all the evidence suggests we will face ever growing pressures from climate change and population growth, areas where we are more exposed than other companies given our region is already water-scarce. To ensure we remain resilient to these pressures, we will need to deliver significant increases in investment in new infrastructure, deploy sufficient capital maintenance expenditure to safeguard existing assets, and deliver ongoing investment in our people. Taking short-term decisions now to defer necessary new investment, or to risk insufficient levels of capital maintenance for existing assets in order to deliver bigger bill reductions would jeopardise the long-term future of our region. It would be inconsistent with our public interest commitments, out of kilter with the clear views of customers emerging from our wide-ranging engagement programmes, at odds with the Government’s priorities for PR19 as set out in the Strategic Policy Statement, and would leave future generations of customers facing higher costs as a result of the wrong balance being struck at PR19. However, Ofwat's proposed changes to our plan lead precisely to this deferral of problems to the future. This is an outcome that our customers have clearly rejected.
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