Hafren Dyfrdwy ‒ Delivering Outcomes for Customers Final Decisions
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December 2019 Hafren Dyfrdwy ‒ Delivering outcomes for customers final decisions www.ofwat.gov.uk PR19 final determinations: Hafren Dyfrdwy – Delivering outcomes for customers final decisions PR19 final determinations: Hafren Dyfrdwy – 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 ‘PR19HDD’ denotes Hafren Dyfrdwy. For all other documents related to the Hafren Dyfrdwy’s final determination, please see the 49Tfinal determinations webpage. 49TOur ‘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: Hafren Dyfrdwy - 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 Overarching Outcome delivery N/A The company notes that as it is a smaller company No change for the final determination. N/A representation incentive rates our approach to normalisation disproportionately affects it with much higher underperformance At draft determination, we said that we normalise both per payments. It states that its actual downside financial household and by units because, all else equal, ‘a household risk is now significantly beyond our initial range. It should attach a similar value to an equivalent increment in sets out that our calculated range is incorrect as it performance.’ Absolute performance levels represent different does not take into account the removal of collars degrees of improvement in performance across companies – and increased underperformance payments. ‘for example a reduction in external sewer flooding by one property affected represents a much smaller reduction in risk for The company urges that we do a final check on the a customer of a company that serves a larger number of impacts of the interventions on final bills. The properties (such as Severn Trent) than a company that serves company sets out evidence and analysis from relatively fewer (such as Hafren Dyfrdwy).’ For these reasons Frontier Economics on the appropriateness of the we rejected Hafren Dyfrdwy’s argument, otherwise it would normalisation used by Ofwat and recommends we result in ODI rates materially below the industry average. normalise incentives on a per-customer basis. 1 PR19 final determinations: Hafren Dyfrdwy – 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 We review the information that has been provided to us, and do not find evidence sufficient to change our draft determination approach to normalisation. For further details please refer to the ‘Delivering outcomes for customers policy appendix’. N/A Aggregate cap and In the draft determination we In its draft determination response the company Change for the final determination. We apply an aggregate 50% collar made various interventions on states that it decides to accept the majority of our sharing mechanism for all proposals that the company interventions on caps and collars in the interests of For the final determinations we are introducing collars on companies that have a gross considers were required to pragmatism. However it is making representations performance commitments that are subject to low probability outperformance greater than 3% achieve a fair balance of risk. regarding two interventions – supply interruptions very high consequence events: supply interruptions; CRI, and, for Hafren Dyfrdwy, an and voids collars. internal and external sewer flooding. This, alongside other aggregate 50% sharing changes, will materially reduce the risk compared to the draft mechanism if the net The company also considers that there is a determination for the company. underperformance has more compelling case to apply an aggregate cap and downside than 3%. collar. In the 2020-25 period the uncertainty about estimates of performance for most companies will be reduced due to the The company states that one of the key drivers for availability of four years of historical data for nearly every an aggregate cap and collar in the 2015-20 period measure. Where companies have new measures then these was the uncertainty about estimates of company typically have caps and collars to provide additional customer performance. protection. The company considers that it does not have the However, one of the reasons that the company is a significant same understanding of its data as other companies scrutiny company is due to a lack of understanding of its data. as it has only 9 months of historic data and has Therefore there is a reason to be cautious for this company and made assumptions to derive P10 and P90 consider if this uncertainty around downside exposure due to estimates. It considers that the uncertainty for it is the lack of long-term historical data and the small size of the similar to other companies at PR14 and an company should be mitigated. aggregate cap and collar is appropriate. It has suggested this should be at 2.6% of return on There are significant issues with collars as they lead to a loss of regulated equity, but its main point is that there incentive once the collar is reached. Considering the other should be a limit to the risk it is exposed to. mitigations put in place we consider that the loss of incentive would be undue to the remaining possible risk. However, a sharing rate would maintain some incentive, whilst helping to mitigate downside risk. We consider it unlikely that underperformance will exceed 3% of return on regulated equity, but a sharing rate beyond this would mitigate the risk that downside is a result of poor understanding of past performance as opposed to genuine poor performance. Water Supply Performance The intervention we made at draft The company rejects the draft determination Change for the final determination. The following is a sector wide Interruptions commitment levels determination was to set performance commitment levels and instead change for the final performance commitment levels proposes a new profile at: 49TWhilst we recognise that 2018-19 performance was in general determination. PR19HDD_B1 that are consistent with the rest of worse than expected across the sector, we do not consider this 2 PR19 final determinations: Hafren Dyfrdwy – 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 the industry for supply 2020-21 = 00:06:46 sufficient or convincing evidence of ‘optimism bias’ such that the We set performance commitment interruptions. These levels are: 2021-22 = 00:06:10 upper quartile forecasts of companies for supply interruptions levels that are consistent with the 2022-23 = 00:05:34 are unreasonable. The claim of optimism bias is based on a rest of the industry for supply 2020-21 = 00:05:24 2023-24 = 00:04:58 single year of data, in which performance was impacted by the interruptions. These levels are: 2021-22 = 00:04:48 2024-25 = 00:04:22 after-effects of the freeze/thaw event followed by the dry 2022-23 = 00:04:12 summer, both of which could be considered atypical events. 2020-21 = 00:06:30 2023-24 = 00:03:36 Units: Hours:minutes:seconds (HH:MM:SS) per 2021-22 = 00:06:08 2024-25 = 00:03:00 property per year 49THowever, we have also considered the levels we have derived 2022-23 = 00:05:45 from company forecasts, the forward looking upper quartile, to 2023-24 = 00:05:23 Units: Hours:minutes:seconds While the company supports the concept of the take into account wider evidence such as historical (HH:MM:SS) per property per upper quartile ambition and the need for the sector improvement. 49TBased on the assessment of evidence from all 2024-25 = 00:05:00 year to continuously push forward the standards of companies, we adjust the water supply interruptions 2024-25 service that it delivers to customers, it states that level to five minutes, with an amended glidepath in the first four Units: Hours:minutes:seconds our approach of setting the upper quartile results in years, taking account of wider evidence to calibrate stretch of (HH:MM:SS) per property per an unachievable level. The company states that the performance commitment for an efficient company.