the ISSN 2517-2697 April 2020 Water Report POLICY|REGULATION|COMPETITION

competition watch Staying afloat ❙ The UK Water Retailer Council's Phill Mills on serious underlying Coping with the pandemic – and problems in the market. rescuing a retail market in crisis ❙ Business market told to pull its weight on water efficiency as part of a national effort. ❙ Priority changes made to w incentivise meter reads. Glas Cymru's Chris Jones|National Framework| ❙ Castle subsumes Affinity INSIDE RAPID progress|Net zero| CMA cases|Innovation Fund for Business the Expert analysis Water for a changing water industry Report |report POLICY|REGULATION|COMPETITION Pandemic

ty-critical and essential work continuing ing where possible, with many dispersed at the present time. report|Pandemic Lab capacity as the pandemic progress- offices closed. Where sites have to be Revenue hit es is a concern. The DWI remains engaged manned or visited – control rooms, treat- While companies are rightly pulling out on this and has already said that should ment works and the like – steps have been h cri- all the stops to respond to the healt the level of resourcing in labs become an taken to restrict access and keep staff safe. sis, another crisis is brewing, hidden fromare issue, microbiological analysis should be The biggest challenge on the staff side the public eye, but also very real. We prioritised over chemical analysis. Purcelle- is, however, contact centres. Those whose only in the foothills of understanding the flagged a particular concern regarding 31 sof technology is up to it have switched to a ramifications of the economic fallout of aying curing approvals under Regulation u- virtual model with agents working from T Covid-19 for the water sector. The busi- S home. That’s not possible for all, so again,rt. The Water Supply (Water Quality) Regls ness retail market is the immediate casu- lations 2016, which very strictly contro steps have been taken to keep staffmers apa are alty. As businesses shut up shop, virtually all chemicals and construction productsrce Reduced capacity mean custo een overnight retailers saw the prospect of re- SUBSCRIBE NOW for aT used by water undertakers, from sou experiencing busy lines and have emerb - couping the money they owe to wholesal- aFLO to tap. There is, he pointed out, very lim- asked only to contact companies in t ers evaporate. And with the next settle- ited lab capacity for approvals on that and gencies or if they need financial suppor The water sector is ment run scheduled for 30 March, there the DWI is pressing to build that up.ll Onesaid (see box, p7). was the imminent prospect of another coping with covid-19 participant on the British Water ca r” One source warned this wholeutsourced situa- month of debt accruing, much of which Reg 31 lab capacity was a “critical blocke tion will worsen as call centres o – and has just thrown a retailers stand little prospect of repaying. to new products and innovations comings overseas are hit by Covid-19. Businessual cen- The government has made it clear busi- lifeline to the retail market through. He noted: “A simple item ha continuity plans cater for individ nesses shouldn’t be cut off or chased for to stop it going under. taken over 20 months and counting to go tres going offline but not for simultane- detailed analysis and ous worldwide pressure. This warning payment as they themselves struggle to- through the process.” The DWI supported the government’s also applies for other outsourced business survive. Customers are cancelling their di rect debits and the effect is already biting decision not only on the designation of processes, such as accounting and payroll. and real. Retailers find themselves blind- water company staff as key workers, but Another not entirely resolved issues. This is al production sided by an existential threat, particularly also those involved in chemic what happens with capital project those with weaker financial structures, and delivery. It remains engaged to ensureter mirrors the wider discussion in the coun- and particularly as this comes on top seriof a- priority is given to the production of wa try about construction workers: should sues in this environment; the right thing whole set of pre-existing and already treatment chemicals on UK sites. Purcell they down tools or carry on? A source to do one day may not be the right thing ous market problems (see interview, p32). insight on UK water dry-run for firms as they have respond- was clear that maintaining the supply of said water projects are being considered to do another. We’ll return to retailers in a moment, but t’s not quite a week into the lockdowng- ed to the Coronavirus pandemic. The chemicals was “an absolute priority”. on a case by case basis but are “by andof and we are already in an unreco industry has come together, using well- Finally, Purcell said he was “very sym- large carrying on”. The biggest project what it means for water companies – whole- Safe, secure supplies - salers in retail market parlance – is the nisable world. Water companies are practised structures for operational coor pathetic” to water companies’ difficulties all, Thames Tideway, has opted to reduce There is currently no concern for water pro playing a crucial, if largely unsung, dination. As one commentator observed: right now in bringing staff from contrac- activities across the project with only safe- duction or security of supply. From water irole in the battle against Covid-19 by “Companies are quite good at doing this tors or alliance partners on site for op- T them abreast companies’ perspective, nothing of concern ac keeping people on supply while keeping sort of thing. Most have experienced one erations and maintenance work. A water- SuPPLy chain imP sort of incident or another. It’s all been es- is coming through from the supply chain yet staff safe. Contingency planning and op- company representative reported a par British Water has been hosting weekly covid-19 calls for members since 20 march to keep calated very quickly.” either (see box). Again Brexit exercises have erational flexibility is being tested to the ticular difficulty is accommodating work- of developments and to help them share information. policy, regulation and Welsh Water’s Peter Perry and Thames been valuable in establishing good lines of limit, and on top of that, companies are ers as hotels are not available, and that his chief executive Lila Thompson reported: “early indications are that water companies are engaging communication with suppliers, particularly doing what they can to help customers Water’s Steve Spencer lead the top-tier company is starting to see serious delays well with the supply chain, especially at the tier 1 and tier 2 level, though some of the smaller compa- of water treatment chemicals. through their economically devastated Platinum Incident Management Group in work as a result. Purcell emphasised nies reported that information is not necessarily filtering down…We ask that they have early sight of World Health Organisation and Drink- lives by providing relief on bills. thewhich, with Water UK, liaises with Defra that “routine maintenance should con- requirements, wherever possible, to ensure timely manufacture and shipping.” and regulators on critical issues. Beneath ing Water Inspectorate (DWI) adviceetition con- The sector has risen admirably to the MP tinue as far as possible,” to ensure busi- British Water has picked up two issues emerging from the first call to work on. First, seeking clarity on firms water remains safe and healthy to challenge so. But beneath the surface, this group sit work streams, each co with a whether the government’s key worker designation for the utilities sector also applies to workers in its sup- ness as usual water delivery. Separately, he ATER drink. Speaking on a briefing call hosted by and second, working with water companies to standardise the requests for help and informa- Wchair and company leads, on crucial sub- ply chain. the business retail market is facing an observed: “A major incident at a time like British Water, deputy chief inspector Milo existential threat, which has potentially jects including chemical supplies, non this is almost unthinkable.” tion that are going out to supply chain firms. One member reported each water company has asked Purcell explained the actions the DWI has competition huge knock-on effects for wholesalers RchemicalEPORT supplies, regulatory interven- for slightly different information, which is ineffcient and slows down responses. taken in response to the situation in the Other than coping themselves with the changed situation, the following were among other issues too. There are unanswered questions tion, communications/reputation man- Protecting human resources key areas of sampling, laboratory capacity arising from supply chain companies on the British Water calls: about how the PR19 financial mecha- agement and vulnerable customers. Par Human resources and operational challeng - and supply chain functioning. t of Covid-19 ❙ delays and penalties – the lockdown has hit right at the end of amP6, with some hefty projects yet nisms coming into play only this week ticipants speak multiple times a week and es are many and various. The water compa- It issued an information letter veryWe report on the impai to be completed, as well as anything from a three to nine month delay on the start to amP7. While the (1 April) will be implemented. And long flag up emerging issues and risks prompt- ny workforce is already depleted through ill- watchpromptly in early March on samplingon the retail market as part of our health and wellbeing of customers and staff need to be prioritised now, supply chain companies need term questions too about whether we’ve ly to the Platinum group. wider ioverageness and of self-isolation the virus andoutbreak. social distancing The lines of communication between public water supplies and followed that clarity on the position on forbearance and penalties. had our priorities and market structures policy has limited routine operations. ❙ up with another on private water supSee- the article starting p4. Site closures – this would hit contractors hard and could lead to lay-offs. One tier 1 contractor said the right all along. Covid-19:stakeholders are open; the secretary impa of it on The sector has sensibly prioritised the plies – important, Purcell explained, as pressure now was to keep sites open in a safe way, but that his company was planning for both eventu- state has spoken directly with company provision of core water and wastewater alities as the pandemic evolves. some food manufacturers have their own the risks and impact of any sup- incident management chief executives among others, including service provision; only emergency or es- ❙ manufacturing adaptation – companies have been keeping plant open longer and introducing split the retail marketsources. The DWI has signed off revisions ply restrictions. For example, we The sector’s contingency planning for a to confirm the sector has key worker sta- sential work is being carried out, and staff shifts to keep production going during social distancing. Single subscription to the normal sampling regime, such as to expect wholesalers to gauge if and no-deal Brexit has proved a really useful tus and can keep its staff at work to keep are only entering customers’ homes when ❙ Payment terms – will water companies relax payment terms to help suppliers cope? 5 hold back on sampling at customers’ taps; where restrictions on use may April 2020 interview the country supplied. absolutely necessary. |Chris JoN set out its expectation that consumer or need to be prioritised, and to work es, Welsh WaBusinessDespite this slick response, market the situa- must pull its Office staff have moved to home work- A major incident at a Ttioner is unprecedented and fast moving, contractor contacts must be acted on; and with retailers to ensure this data is shared with customers in a timely and hasn’t peaked yet. One commentator is in daily contact with all companies. THE WATER REPORT be set up this year as part of a new manner.” time like this is almost weightconfided that it’s hard toon keep ahead water of is- effiTHE WATERieni REPORT cy unthinkable. water efficiency sub group would monitoring and reporting frame- Fletcher and Bradshaw also wel- The Environment Agency and be “ideally placed” to coordinate work to report on progress on de- comed suggestions on what more Chris JoN Ofwat have told wholesalers and production of the plan. mand management, as part of the could be done from industry and es, Welsh Wa (1 print copy per month, 4 April 2020 retailers to take a series of actions Ofwat and the Agency clarified National Framework. other stakeholders. The idea of a Ter|interview “as a priority” to boost water ef- their position on wholesaler con- joint letter was a recommendation – Trading parties ficiency in the business market cerns that they cannot act in the ❙ Meter reads from a Waterwise workshop on and therefore the contribution the business market because of their were told to support work to ad- raising the bar on water efficiency table 1 – dress the lack of complete, accu- for business customers last year. return of value to w business sector makes to the na- Competition Act 1998 obligations, customers since 2001 elsh tional water resource position. saying: “Provided wholesalers, re- rate and timely meter reads in the Waterwise head of policy and strat- water Period r In a joint letter to trading party tailers and other stakeholders act in market, and to come forward with egy Nathan Richardson described type aisechief executives froma Ofwat’s Ra- compliance with competition law, we their own suggestions on going the letter, and in particular the re- 2001-2005 value Customer rebates see no reason why they should not further. “Wholesalers and retail- quirement for an action plan within for one year): £735 chel Fletcher and the Environ- 2006-2010 £23m ment Agency’s executive director work together towards identifying ers can pursue amendments to six months, as “a huge step forward”. Customer rebates 2011-2015 £129m for the environment and business and delivering ways for business cus- market codes. This includes those The regulators pointed out the social tariffs Harvey Bradshaw, the regulators tomers to use water more efficiently relating to metering and meter business retail market accounts for £22m additional investment cited companies’ statutory duty and reduce leakage. This means reading, or where amendments nearly a third of all water delivered 2015-2020 £114m under the Water Industry Act among other things that a wholesaler may facilitate better or more cost to customers in England and there- social tariffs £37m 1991 to promote efficient use of may work with retailers on a non- effective provision of water effi- fore that improved business water additional investment water by their customers. They set discriminatory basis to offer water ciency services.” efficiency could contribute signifi- total to date £116m out three required actions: efficiency advice and services to end cantly to meeting national needs, as £441m Chris Jones is bidding farewell to Glas Cymru, 20 years after businesscr customers, and in ways ❙ Supply restrictions and other set out in the Environment Agency’s table 2 – then and now: key Glas❙ wRMP24 – Within six months, which preserve retailers’ and other incidents – The regulators noted new National Framework for Water imProvements over 20 yearsPerformance specifically to acquire and run Welsh Waterwholesalers as anda not-for-profitretailers need to stakeholders’ scope to do the same.” work to encourage good practice Resources (see p12). However to Performance measure produce a joint plan of action set- They cited as an example Thames on communicating with custom- date, water efficiency service up- 2000/01 Corporate subscription The model has more than proved itself – but Glas’ ambition serious pollutions 2018/19 eating it ting out how they intend to work Water’s scheme to reward in-region ers when wholesalers need to in- take has been small, “which means 9 together to develop and deliver retailers with a one-off payment of troduce restrictions during supply the business sector is not currently leakage 2 company. 260Ml/d ot for profit Glas Cymru was a purposeful company 2024 Water Resource Manage- continues.5p per litre per day of water saved for shortages, but want to see more. playing its part in meeting national distribution input 169Ml/d 20 years before ‘purpose’ became popular for busi- ment Plans that deliver “signifi- each of their customers. “This is a good starting point but needs for delivering water on a long 899Ml/d a company limited by guarantee and operates with commercial written complaints 810Ml/d ness. Two decades on, and with its only remaining cantly improved levels of water Fletcher and Bradshaw told we think more could be done to term, sustainable basis”. discipline, but has no shareholders and is not-for-profit. Its sin- health and safety (riddors) 13,000 founder – Welsh Water chief executive Chris Jones efficiency in the business sector”. trading parties the action plans proactively reduce and manage 3,500 –N moving on, Glas has taken the opportunity to take stock of gle Thefocus regulators is to act in suggested the best intereststhe Re- ofwould its customers, be presented with to any a group to “We’ve just done a successful half a billion [pound] bond issue 42 9 its achievements, reassert its purpose, and look ahead to what financialtailer surplusesWholesaler retained Group’s for thenew benefit of those customers. A a couple of weeks ago. One of thevices banks by Castle.involved in that said it (5 print copies per comes next. board performs the usual corporate governance functions, sup- was the lowest interest rate ever achievedBlairgowrie for a 10+ yearheadquartered bond by and colleague engagement…It’s striking how strongly that social ported by around 70 volunteer ‘members’ appointed to promote a mainstream corporate in the UKCastle – not governmentwill add Affinity backed.” for Busi-purpose and environmental ethos act as a motivation for people The Glas model the good running of the company in customers’ interests. ■ Customer benefits – “We hopedness’ we could Welwyn plough Garden profits City backbase toto want to come to work for us and to do a great job for our cus- The history, for those who are unfamiliar, is that Glas Cymru was TheCastle model also specifically to 'merge' set out to reduce assetwith financing Aff nitcyservedin to for the by Castlebusiness BusinessWater” for the – abenefit prod- ofits customers regional officethat would portfolio, other whichtomers and the environment.” created in 2000 by Jones and Nigel Annett (subsequently manag- costs – the water industry’s single biggest 350,000expense, in with the Welshmergedissn 2517-2697 portfolio. uctwise of have geography been distributed forApril many, out…we since 2020 alreadyare running includes at about London, £450m Leeds, ing director) as a single purpose companythe to own, finance and Water aloneThe raisingmarket saw a further further £2bn consolida since- 2001Castle to financesaid the investdeal -would “allow ofCastle value acquired that has Thamesbeen returned Water’s to customersAyr and Portsmouth. so far” (see table- Changing with the times manage Welsh Water. It achieved that goal 18 months later, in ment. Thetion thissingle month, focus whenstrategy Castle – devoidWa- ofmore any efficient diversification billing, reduced ad- 1).business Initially customer this was base. through Many reductions Af- Affinity in all bills, for but Business more staffre- willThe be Glas model has evolved over time, of course, as the context May 2001, when it acquired Welsh Water from Western Power risk or dividendter subsumed pressure Affinity – offers for secure,Business long-termministration credit and qual improved- cus- centlyfinity bill for supportWater’s haswater been customers targeted- transferred at those most over. in need of it operates in has changed and as it has learned lessons along the 31 Distribution, financed by a £1.9bn bond issue. At the time, that ity to investorson 1 April. such as pension funds and insurancetomer service companies, for the many Affin- helpare tosupplied pay. Jones with comments: sewerage “We ser have [social tariff] HelpUApril 2020and way. Jones highlights two examples. month plus an electronic Affinity for Business’ 50,000 ity for Business customers already was the largest ever non government backed sterling corporate enabling Glas to raise finance at the cheapest possible cost. In a so on; we run at a much higher rate of support than the other First, that from being the highest geared company in the sec- bond issue. virtuous circlecustomers effect, financingwill join efficiencyCastle’s savings have been used companies because we can put millions of pounds of our own tor back in 2001 (93%), Welsh Water now has amongst the lowest to further improve credit quality and keep financing costs low. money into that.” On top, the company has been able to reinvest gearing Jones says: “The company was very much built to deliver a spe- THE WATER REPORT (59%). “Our gearing was very high at the start because cific purpose. The purpose came first,Water then the company came more in infrastructure, resilience and long term improvements we had no money – that was fairly straightforward,” he admits. afterwards. At the time, we called that purpose a better way to Value proved than funded through the price review. “Two individuals going to buy the business using borrowed finance and run a water company, better for its customers. That’s This was a new model for water when it was created, and a bold ■ Performance improvements – Jones describes the “huge tan- money had to find a way that would sustain that.” However: “The what the whole idea was. move by Jones and Annett. Jones recalls the 85-odd investor gible achievements” Welsh Water has made since 2001 (see table fundamentals of the idea worked over time, so naturally as well “At the time that was a bit unusual. Certainly it was driven by roadshows they held “to explain what this was all about” back in 2). “Because you don’t often look back over 20 years, you don’t as providing more value to customers, by retaining money in copy for unlimited the idea that it would be better for customersr and communities,eport 2001. But, 20 years on and in what is a huge personal and profes- usually see just how far we’ve come. Year by year progress may be the business and not paying it out as dividends, we’ve been able but also that it would be very effective frompoli a financingCy |pointre of Gsionalul achievementAtion for| theC founders,ompetition the model has stood the test unexciting, but 20 years adds up to an awful lot.” to move our gearing position from what was the highest in the view because that single minded purpose of the company would of time and more than demonstrated its advantages. On top of these predicted gains, Jones explains unanticipated sector to what is now around the lowest. That’s absolutely right actually be very attractive to long-term investors and enable us First, Jones says, the model has delivered what was anticipated benefits have also materialised from the model. These include because as a non-shareholder company, ultimately, we’ve got to to finance the transaction in the first place.” of it: being the most trusted water company in England and Wales have a very strong balance sheet and strong liquidity position.” ■ To look more at the detail, there are a few things that make Financing – “We thought this would be very successful from for the past couple of years according to CCW research, and a He adds: “Also if you think how the return on capital has come Glas special within the UK water sector, and more widely. It is the point of view of financing long-term investment in infra- more stable political environment. “The fact that we are owned down over that period – regulation has quite rightly followed the structure and it definitely has been. We’ve generally had the on behalf of our community has given us stronger support from markets down – to maintain the same sort of credit metrics and distribution within The purpose came first, then the highest credit rating in the UK utilities sector. We’ve had a recent our customers, our stakeholders, the communities we serve and credit quality in the world of a sub 2% cost of capital, is different company came afterwards. downgrade on the back of PR19 but that wasn’t entirely unex- so on, and that has been reflected in, for example, the lack of po- from one of a 6% cost of capital in 2000. Hence our gearing has pected or indeed entirely isolated. I think it’s still the best [credit litical controversy around the water sector in Wales. Whereas in had to come down.” rating] in the water sector; I think it’s still as good as any of the England ahead of the general election it was highly contentious. 6 April 2020 gas and electricity companies as well.” He illustrates further: So there’s been that whole side of public support and customer We are running at about £450m of support that’s really come through. “The other thing is how it comes through in our recruitment THE WATER REPORT value that has been returned to subscribing company, THE WATER REPORT customers so far

April 2020 7 for one year): £2,099

compEtItIoN watch SUBSCRIBE AT: ❙ staying afloat the uk water retailer Council's phill mills on serious underlying Coping with the pandemic – and problems in the market. rescuing a retail market in crisis ❙ Business market told to pull its weight on water efficiency as [email protected] part of a national effort. ❙ priority changes made to w incentivise meter reads. GlAs Cymru's Chris Jones|nAtionAl FrAmework| ❙ Castle subsumes Affinity INSIDE rApiD proGress|net zero| CmA CAses|innovAtion FunD for Business www.thewaterreport.co.uk now available Weekly toe-newsletter subscribers |contents

4 report Coping with a pandemic and a retail market in crisis. editor’s 8 interview Chris Jones bids farewell to Glas comment Cymru after 20 years. Salvaging 13 report PR19 appeals head to the CMA. something good 14 report National Framework for Water It’s hard to think about anything other than the Covid-19 pandemic Resources published. at the moment. Water companies’ immediate focus is rightly on 20 interview RAPID’s MD Paul Hickey on the health and wellbeing of customers and staff, as well of course getting strategic water schemes shovel as on continuing to provide precious essential services. The situa- ready. tion is fast moving, but the sector deserves credit for the way it has immediately risen to this unprecedented challenge (p4). 22 report Sector maps path to net zero by The retail market is a different story. It has been knocked 2030. for six and through no fault of their own, many retailers find themselves facing imminent collapse as closed businesses 23 FEATURE Progress on the Innovation Fund cease to pay their bills. Should a large supplier actually fail, and driving innovation strategy. we could be into a domino effect with the whole market 24 inDUSTRY COMMENT Wessex’s David Elliott tumbling. The cruelty is intensified as this falls on the market’s on AMP7: a missed opportunity or transition third birthday. It was never going to be a wild party, but now point? it’s about survival. The truth is, as UKWRC chair Phill Mills sets out on p32, the 27 FEATURE What can water companies learn retail market was ailing before the Coronavirus crisis hit. It is from single interest groups? inefficient and complex. Few retailers are profitable, most cus- tomers are disengaged and even among those who have got 28 report WaterAid’s Water and Climate involved, few are really benefiting as was envisaged pre 2017. Summit sets COP26 ambition. Ofwat has acted to save the market, by introducing a 30 news REVIEW DPC licence changes wholesaler-financed temporary bailout. We should be ask- mooted for six firms. ing not only whether the market will survive, but also should it survive as currently constructed? Virtue should be made the competition of a necessity and a market that actually works designed at Water pace. A High Level Group has been scrambled to deal with Report Covid-19 impacts; once the immediate threat has passed, watch this group would be ideally placed to do that, with extensive customer input. 31 news REVIEW Business market must pull its weight on water efficiency ›Note: some of the content in this issue was produced before the height of the pandemic. It feels strange to be talking 32 interview UKWRC chair Phill Mills says the about, say, water resources in 2050 (p14) or reviewing two market was ailing and in need of urgent decades of the not-for-profit water model (p8) when we all attention before the coronavirus. face an immediate threat. But ongoing issues do matter, and 35 news REVIEW Priority changes made to I hope ‘business as usual’ information remains of interest, incentivise meter reads. even though we are living in the most unusual of times.

Please stay in touch Editor: Karma Loveday e:[email protected] t:07880 550945 Feedback, comments and Art Editor: Numa Randell e:[email protected] t:07754269168 through the lockdown and Managing editor: Trevor Loveday e:[email protected] suggestions very welcome. t:07949 579641 stay safe. Subscriptions: [email protected] Contact me on Website: www.thewaterreport.co.uk Karma Loveday, editor, [email protected] Address: The Water Report, 68 Church Street, Brighton BN1 1RL The Water Report or 07880 550945. Publisher: Kew Place Limited now available THE WATER REPORT April 2020 3 Weekly toe-newsletter subscribers report|Pandemic

Staying afloat The water sector is coping with Covid-19 – and has just thrown a lifeline to the retail market to stop it going under.

t’s not quite a week into the lockdown dry-run for firms as they have respond- sues in this environment; the right thing and we are already in an unrecog- ed to the Coronavirus pandemic. The to do one day may not be the right thing nisable world. Water companies are industry has come together, using well to do another. playing a crucial, if largely unsung, practised structures for operational coor- roleI in the battle against Covid-19 by dination. As one commentator observed: Safe, secure supplies keeping people on supply while keeping “Companies are quite good at doing this There is currently no concern for water pro- staff safe. Contingency planning and op- sort of thing. Most have experienced one duction or security of supply. From water erational flexibility is being tested to the sort of incident or another. It’s all been es- companies’ perspective, nothing of concern limit, and on top of that, companies are calated very quickly.” is coming through from the supply chain yet doing what they can to help customers Welsh Water’s Peter Perry and Thames either (see box). Again Brexit exercises have through their economically devastated Water’s Steve Spencer lead the top-tier been valuable in establishing good lines of lives by providing relief on bills. Platinum Incident Management Group communication with suppliers, particularly The sector has risen admirably to the which, with Water UK, liaises with Defra of water treatment chemicals. challenge. But beneath the surface, the and regulators on critical issues. Beneath World Health Organisation and Drink- business retail market is facing an exis- this group sit work streams, each with a ing Water Inspectorate (DWI) advice con- tential threat, which has potentially huge chair and company leads, on crucial sub- firms water remains safe and healthy to knock-on effects for wholesalers too. jects including chemical supplies, non drink. Speaking on a briefing call hosted by There are unanswered questions about chemical supplies, regulatory interven- British Water, deputy chief inspector Milo how the PR19 financial mechanisms tion, communications/reputation man- Purcell explained the actions the DWI has coming into play only this week (1 April) agement and vulnerable customers. Par- taken in response to the situation in the will be implemented. And long term ticipants speak multiple times a week and key areas of sampling, laboratory capacity questions too about whether we’ve had flag up emerging issues and risks prompt- and supply chain functioning. our priorities and market structures right ly to the Platinum group. It issued an information letter very all along. The lines of communication between promptly in early March on sampling stakeholders are open; the secretary of public water supplies and followed that Incident management state has spoken directly with company up with another on private water sup- The sector’s contingency planning for a chief executives among others, including plies – important, Purcell explained, as no-deal Brexit has proved a really useful to confirm the sector has key worker sta- some food manufacturers have their own tus and can keep its staff at work to keep sources. The DWI has signed off revisions A major incident at a the country supplied. to the normal sampling regime, such as to Despite this slick response, the situa- hold back on sampling at customers’ taps; time like this is almost tion is unprecedented and fast moving, set out its expectation that consumer or and hasn’t peaked yet. One commentator contractor contacts must be acted on; and unthinkable. confided that it’s hard to keep ahead of is- is in daily contact with all companies.

4 April 2020 THE WATER REPORT Pandemic|report

Lab capacity as the pandemic progress- Office staff have moved to home work- ty-critical and essential work continuing es is a concern. The DWI remains engaged ing where possible, with many dispersed at the present time. on this and has already said that should offices closed. Where sites have to be the level of resourcing in labs become an manned or visited – control rooms, treat- Revenue hit issue, microbiological analysis should be ment works and the like – steps have been While companies are rightly pulling out prioritised over chemical analysis. Purcell taken to restrict access and keep staff safe. all the stops to respond to the health cri- flagged a particular concern regarding se- The biggest challenge on the staff side sis, another crisis is brewing, hidden from curing approvals under Regulation 31 of is, however, contact centres. Those whose the public eye, but also very real. We are The Water Supply (Water Quality)R egu- technology is up to it have switched to a vir- only in the foothills of understanding the lations 2016, which very strictly controls tual model with agents working from home. ramifications of the economic fallout of all chemicals and construction products That’s not possible for all, so again, steps Covid-19 for the water sector. The busi- used by water undertakers, from source have been taken to keep staff apart. Reduced ness retail market is the immediate casu- to tap. There is, he pointed out, very lim- capacity means customers are experiencing alty. As businesses shut up shop, virtually ited lab capacity for approvals on that and busy lines and have been asked only to con- overnight retailers saw the prospect of re- the DWI is pressing to build that up. One tact companies in emergencies or if they couping the money they owe to wholesal- participant on the British Water call said need financial support (see box, p7). ers evaporate. And with the next settle- Reg 31 lab capacity was a “critical blocker” One source warned this whole situa- ment run scheduled for 30 March, there to new products and innovations coming tion will worsen as call centres outsourced was the imminent prospect of another through. He noted: “A simple item has overseas are hit by Covid-19. Business month of debt accruing, much of which taken over 20 months and counting to go continuity plans cater for individual cen- retailers stand little prospect of repaying. through the process.” tres going offline but not for simultane- The government has made it clear busi- The DWI supported the government’s ous worldwide pressure. This warning nesses shouldn’t be cut off or chased for decision not only on the designation of also applies for other outsourced business payment as they themselves struggle to water company staff as key workers, but processes, such as accounting and payroll. survive. Customers are cancelling their di- also those involved in chemical produc- Another not entirely resolved issue is rect debits and the effect is already biting tion and delivery. It remains engaged to what happens with capital projects. This and real. Retailers find themselves blind- ensure priority is given to the produc- mirrors the wider discussion in the coun- sided by an existential threat, particularly tion of water treatment chemicals on UK try about construction workers: should those with weaker financial structures, sites. Purcell was clear that maintaining they down tools or carry on? A source and particularly as this comes on top of a the supply of chemicals was “an absolute said water projects are being considered whole set of pre-existing and already seri- priority”. on a case by case basis but are “by and ous market problems (see interview, p32). Finally, Purcell said he was “very sym- large carrying on”. The biggest project of We’ll return to retailers in a moment, but pathetic” to water companies’ difficulties all, Thames Tideway, has opted to reduce what it means for water companies – whole- right now in bringing staff from contrac- activities across the project with only safe- salers in retail market parlance – is the tors or alliance partners on site for op- erations and maintenance work. A water Supply chain impact company representative reported a par- British Water has been hosting weekly Covid-19 calls for members since 20 March to keep them abreast ticular difficulty is accommodating work- of developments and to help them share information. ers as hotels are not available, and that his Chief executive Lila Thompson reported: “Early indications are that water companies are engaging company is starting to see serious delays well with the supply chain, especially at the tier 1 and tier 2 level, though some of the smaller compa- in work as a result. Purcell emphasised nies reported that information is not necessarily filtering down…We ask that they have early sight of that “routine maintenance should con- requirements, wherever possible, to ensure timely manufacture and shipping.” tinue as far as possible,” to ensure busi- British Water has picked up two issues emerging from the first call to work on. First, seeking clarity on ness as usual water delivery. Separately, he whether the government’s key worker designation for the utilities sector also applies to workers in its sup- observed: “A major incident at a time like ply chain. And second, working with water companies to standardise the requests for help and informa- this is almost unthinkable.” tion that are going out to supply chain firms. One member reported each water company has asked for slightly different information, which is ineffiin ad sos dw responses Protecting human resources Other than coping themselves with the changed situation, the following were among other issues Human resources and operational challeng- arising from supply chain companies on the British Water calls: es are many and various. The water compa- ❙ Delays and penalties – the lockdown has hit right at the end of AMP6, with some hefty projects yet ny workforce is already depleted through ill- to be completed, as well as anything from a three to nine month delay on the start to AMP7. While the ness and self-isolation and social distancing health and wellbeing of customers and staff need to be prioritised now, supply chain companies need clarity on the position on forbearance and penalties. policy has limited routine operations. ❙ Site closures – this would hit contractors hard and could lead to lay-offs. One tier 1 contractor said the The sector has sensibly prioritised the pressure now was to keep sites open in a safe way, but that his company was planning for both eventu- provision of core water and wastewater alities as the pandemic evolves. service provision; only emergency or es- ❙ Manufacturing adaptation – companies have been keeping plant open longer and introducing split sential work is being carried out, and staff shifts to keep production going during social distancing. are only entering customers’ homes when ❙ Payment terms – will water companies relax payment terms to help suppliers cope? absolutely necessary.

THE WATER REPORT April 2020 5 report|Pandemic

prospect of a massive shortfall in revenue taken account “mandated wholesal- recovery from business customers. Month- of alternative ers to provide up to ly settlement through CMOS is around proposals put £630m of liquidity to £210m, and wholesalers’ biggest fear must forward by non household retailers be multiple retailer insolvency. And down Water UK and without any equivalent the line, significant cash shortfalls from the UK Water adjustment to wholesale businesses will very likely be compound- Retailer Council price controls”. And con- ed by more domestic customer defaults. (UKWRC) in com- tinued: “This could exacerbate Wholesalers, left with little financial flex- ing to its preferred solution. substantial liquidity challenges al- ibility under the PR19 final determinations Water UK had offered extended credit ready faced by some wholesalers as a re- (FDs) and already under credit ratings pres- terms to improve short term liquidity for sult of a tough PR19 settlement and late sure, are themselves in a very difficult place. retailers, provided Ofwat gave a “clear and payment of domestic bills, and so make One company source confides whole- unambiguous commitment” that liquidity it harder – not easier – for companies to salers are “scratching their heads” in the provided to the market would be recover- respond to the crisis.” immediate term about the business retail able. It said without a clear route to long There was also speculation about situation. Income from businesses via re- term recovery, some wholesalers’ ratings why Ofwat might be reluctant to pro- tailers that was “virtually guaranteed” has and banking covenants would be at risk. vide wholesalers with the indemnity suddenly been pulled away at a time when It sought for Covid-19 debt to be spread they sought. One industry insider said: many were already “at the absolute edge of across the rest of the business customer “Whilst these are unusual times, by for- their financial capability” because of the base over time. It saw the alternatives as: mally sanctioning a support package of FDs. Cash conservation strategies were market failure and wholesalers taking this scale, Ofwat would be making a bet already in play because “we already didn’t business customers back as a last resort; or that the non-household retail market is have enough money to do what we need to the need for direct government support to worth saving. Since the market has deliver do”. Coming on top of that, Covid-19 relat- prop up retailers. limited benefits so far – with high set up ed non payment is financially very serious. UKWRC proposed a phased pro- costs, limited savings, and a substantial gramme of relief, with immediate defer- increase in complaints – that is not obvi- Liquidity bailout ral of 100% of 30 March payments from ously a sensible public policy decision.” In an initial letter to wholesaler bosses, retailers, supported by government loads On top of all that, some have raised Ofwat chief executive Rachel Fletcher said to help with retailer and wholesaler oper- questions about governance over the she expected them to adopt “a reasonable ating costs. This would move in phase 2 to episode. Reportedly, Ofwat changed its and pragmatic approach to the collection a “pay when paid” position. modification in three key ways in the 24 of wholesale charges from retailers who Ofwat is understood to have factored hours before it was presented – deferring may be facing difficulties in obtaining in the financial distress of some whole- three months of charges rather than one, payment from their customers”. salers as well as the dire circumstances of giving itself a power to require up to 100% On 27 March, action was taken to stem retailers into its 50% plan. Nonetheless, its of charges to be deferred, and dropping the immediate threat posed by the 30 stance has left both sides worried. assurance to wholesalers that they would March settlement run. Ofwat timetabled be indemnified from bad debt risk. and the panel recommended code change Material exposure Ofwat is understood to have subse- CPW093 for immediate implementation. From retailers’ perspective, the 50% de- quently offered an olive branch to the in- This will defer retailers’ obligations to pay a ferral may not seem enough given the dustry, pointing to its need to act imme- percentage of their charges – initially 50% situation on the ground. One described diately ahead of the 30 March settlement but with the “or otherwise determined by Ofwat as “in its own world” and overly run to prevent the imminent collapse of Ofwat” caveat – for March, April, and May concerned with wholesalers’ position the market, and committing to engage settlement. Retailers will not be regarded when the risk facing retailers is immedi- constructively on an enduring solution as defaulting trading parties as a result. ate and clear. Payment terms from whole- and provide more assurance. The proposal also obliges retailers, “to salers are retailers’ top priority. Meanwhile in the Scottish market, the the extent that they are in receipt of pay- Wholesalers however do not support Scottish Government, Scottish Water, ment from their own customers, and can the modification. It does not reflect their WICS and the Central Market Author- finance their own costs, to pay as much input to the RFI and, while they are will- ity have agreed that from 1 April, Scottish of the deferred charge as they are able, ing to support the retail market rescue Water will relax pre-payment arrange- notwithstanding the amount actually in- effort, feel the change leaves them ma- ments for wholesale water charges on voiced”. It is as yet unclear how ability to terially exposed without the strength of licensed providers. Worth about £60m, pay will be assessed. commitment from Ofwat they needed this is designed to give retailers flexibility Prior to this, Ofwat had issued a Call on compensation for the transfer of risk. to support their customers. In a letter to for inputs on late payment and said it had One source commented that Ofwat has all licensed providers, environment sec- retary Roseanna Cunningham said: “The Customers are cancelling their direct debits interests of customers in Scotland are of paramount importance and in respond- and the effect is already biting and real. ing to these measures the Scottish Gov-

6 April 2020 THE WATER REPORT Pandemic|report

ernment look to all licensed providers to Serving customers give that the absolute priority.” ❙ Household customers: water companies have acted to reassure, advise and help customers in the Damage limitation face of Covid 19 adversity. Those with diffiut pyn bill hv bee ugd t cnat ter supplie Beyond the obvious problem of non pay- to seek help from existing support schemes. Companies are proactively offering payment holidays and adjusting payment plans too, as well as offering alternate payment methods to those confined to their ment and the resulting financial peril, re- homes. All collections visits and enforcement actions have been stopped. tailers like wholesalers also face operational Water UK has produced a set of customer FAQs, and each company website also has advice includ- challenges from staff shortages and social ing on service prioritisation and operation during the outbreak, water safety and quality, online services, distancing. Their call centres are in a similar billing, security of supply, making contact, staff protection, unflushables and meter reads. position to those of wholesalers, and getting meter reads when premises are shut or not ❙ Business customers: Ofwat’s Fletcher also advised wholesalers to suspend business disconnection dur- admitting third parties is another major ing the crisis, even if this is requested by retailers: “We would not expect to see customers disconnected headache. Most have asked customers who for non-payment where the delay in payment is caused by factors relating to coronavirus”. Ofwat said can to submit their own reads. it was considering changes to the Customer Protection Code of Practice to require retailers to treat non The absence of meter reads creates payment during these times as force majeure events, thereby not qualifying for disconnection. Defra extra problems for retailers. There are told retailers it does not expect them to chase customers for non-payment during this time. Market Performance Standard penalties under business as usual conditions for performance charges, with effect from Fletcher endorsed water companies’ falling short of meter reading expecta- April. This benefit was not extended to choices to prioritise meeting their core tions. Moreover, an additional challenge wholesalers “to protect MOSL’s cash flow”. service obligations over wider PCs while for the March and subsequent runs is that The Panel meeting on 27 March that they are short staffed and restricted by so- CMOS will generate a read if one isn’t recommended payment deferral also cial distancing advice. Fletcher said: “For presented based on past usage, binding passed code change CPW091, which al- the avoidance of doubt, incentives and the retailer to pay the associated primary lows retailers to change the occupancy penalties in our regulatory regime should settlement charge to the wholesaler. Not status of a premises that has shut or not get in the way of effective prioritisa- only is that a liquidity problem for all the retrenched significantly to ‘vacant’ in tion in the interests of customers.” She reasons cited above, but for businesses CMOS, for the period up to 30 June (but confirmed there would be consideration which have scaled back or closed opera- extendable at Ofwat’s discretion). CMOS of ex post adjustments to the regulatory tions, these charges will be a huge overes- does not calculate any estimated volumes settlement as part of the normal reconcili- timation on actual use. or estimated charges against vacant sites, ation process. “This will require that com- MOSL along with Ofwat and Defra has preventing charges becoming payable be- panies can demonstrate how their opera- acted quickly to mitigate these easier-to- tween the wholesalers and retailers. tions have been impacted by Covid-19 manage impacts. MOSL chief executive and how they made their decisions.” Sarah McMath said: “We’re listening, we’re Penalties and priorities While health must take priority, detail not following the usual processes.” A High Beyond its immediate efforts to rescue on the regulator’s position is needed too. Level Group comprising senior represen- retail and set customer protection and One source said there is “lots of angst in tatives from Ofwat, Defra, MOSL, CCW, service expectations of companies, how companies” about penalties; will Ofwat be Water UK, UKWRC and wholesalers and Ofwat responds on medium and long term understanding and wave through exemp- retailers has been convened and had con- issues arising from the Coronavirus crisis tions or changes promptly, or will it take a versations to consider necessary actions. will be vital. harder line once the dust has settled? An urgent panel meeting was held on In retail, alongside immediate concerns Looking further down the line, there 20 March to implement the following relating to payment terms, vacancy flag- will undoubtedly also be scrutiny of code changes immediately, which Mc- ging, and MPS charges, the UKWRC whether resilience and sustainability have Math described as “no brainers, to give called for a fundamental review of how had sufficient regulatory attention com- immediate relief”: insolvency risk is allocated. “It seems in- pared to efficiency – topics that are on the ❙ Waive performance charges with effect evitable that under the current circum- agenda already for PR19 appeals at the from 1 March, for a limited period, given stances there will be a material increase, CMA (see p13). TWR the difficulty reading meters resulting from and we ask that Ofwat consider how this social distancing advice and premises ac- risk could be more equitably shared be- Ofwat has mandated cess issues. Retailers were told to keep tween wholesaler and retailer.” This is part reading meters where safe to do so and to of a much wider debate on the balance wholesalers to provide up encourage customers to provide reads. of risk between wholesalers and retailers to £630m of liquidity to ❙ Suspend a January code change, which and the structure of the market. allowed 2019/20 performance charges to In the wholesale and domestic retail non household retailers be put into a market improvement pot; space, companies will need clarification of these will now be recycled back to trading how slippage on Performance Commit- without any equivalent parties, with effect from April. ments and the associated penalties at the adjustment to wholesale ❙ Enable retailers to offset 2020/21 Mar- tail end of AMP6 and start of AMP7 will ket Operator charges against prior year be treated. In her initial letter to CEOs, price controls

THE WATER REPORT April 2020 7 interview|Chris Jones, Welsh Water Raise a

Chris Jones is bidding farewellGl to Glas Cymru, 20 yearsa after creatings it specifically to acquire and run Welsh Water as a not-for-profit company. The model has more than proved itself – but Glas’ ambition continues.

ot for profit Glas Cymru was a purposeful company a company limited by guarantee and operates with commercial 20 years before ‘purpose’ became popular for busi- discipline, but has no shareholders and is not-for-profit. Its sin- ness. Two decades on, and with its only remaining gle focus is to act in the best interests of its customers, with any founder – Welsh Water chief executive Chris Jones financial surpluses retained for the benefit of those customers. A –N moving on, Glas has taken the opportunity to take stock of board performs the usual corporate governance functions, sup- its achievements, reassert its purpose, and look ahead to what ported by around 70 volunteer ‘members’ appointed to promote comes next. the good running of the company in customers’ interests. The model also specifically set out to reduce asset financing The Glas model costs – the water industry’s single biggest expense, with Welsh The history, for those who are unfamiliar, is that Glas Cymru was Water alone raising a further £2bn since 2001 to finance invest- created in 2000 by Jones and Nigel Annett (subsequently manag- ment. The single focus strategy – devoid of any diversification ing director) as a single purpose company to own, finance and risk or dividend pressure – offers secure, long-term credit qual- manage Welsh Water. It achieved that goal 18 months later, in ity to investors such as pension funds and insurance companies, May 2001, when it acquired Welsh Water from Western Power enabling Glas to raise finance at the cheapest possible cost. In a Distribution, financed by a £1.9bn bond issue. At the time, that virtuous circle effect, financing efficiency savings have been used was the largest ever non government backed sterling corporate to further improve credit quality and keep financing costs low. bond issue. Jones says: “The company was very much built to deliver a spe- Value proved cific purpose. The purpose came first, then the company came This was a new model for water when it was created, and a bold afterwards. At the time, we called that purpose a better way to move by Jones and Annett. Jones recalls the 85-odd investor finance and run a water company, better for its customers. That’s roadshows they held “to explain what this was all about” back in what the whole idea was. 2001. But, 20 years on and in what is a huge personal and profes- “At the time that was a bit unusual. Certainly it was driven by sional achievement for the founders, the model has stood the test the idea that it would be better for customers and communities, of time and more than demonstrated its advantages. but also that it would be very effective from a financing point of First, Jones says, the model has delivered what was anticipated view because that single minded purpose of the company would of it: actually be very attractive to long-term investors and enable us ■ Financing – “We thought this would be very successful from to finance the transaction in the first place.” the point of view of financing long-term investment in infra- To look more at the detail, there are a few things that make structure and it definitely has been. We’ve generally had the Glas special within the UK water sector, and more widely. It is highest credit rating in the UK utilities sector. We’ve had a recent downgrade on the back of PR19 but that wasn’t entirely unex- The purpose came first, then the pected or indeed entirely isolated. I think it’s still the best [credit rating] in the water sector; I think it’s still as good as any of the company came afterwards. gas and electricity companies as well.” He illustrates further:

8 April 2020 THE WATER REPORT Chris Jones, Welsh Water|interview

Table 1 – Return of value to Welsh Water customers since 2001 Period Type Value 2001-2005 Customer rebates £23m 2006-2010 Customer rebates £129m 2011-2015 Social tariffs £22m Additional investment £114m 2015-2020 Social tariffs £37m Additional investment £116m Total to date £441m

Table 2 – Then and now: key performance improvements over 20 years Performance measure 2000/01 2018/19 Serious pollutions 9 2 Leakage 260Ml/d 169Ml/d Distribution input 899Ml/d 810Ml/d Written complaints 13,000 3,500 Health and safety (RIDDORs) 42 9

“We’ve just done a successful half a billion [pound] bond issue and colleague engagement…It’s striking how strongly that social a couple of weeks ago. One of the banks involved in that said it purpose and environmental ethos act as a motivation for people was the lowest interest rate ever achieved for a 10+ year bond by to want to come to work for us and to do a great job for our cus- a mainstream corporate in the UK – not government backed.” tomers and the environment.” ■ Customer benefits – “We hoped we could plough profits back in to the business for the benefit of customers that would other- Changing with the times wise have been distributed out…we are running at about £450m The Glas model has evolved over time, of course, as the context of value that has been returned to customers so far” (see table it operates in has changed and as it has learned lessons along the 1). Initially this was through reductions in all bills, but more re- way. Jones highlights two examples. cently bill support has been targeted at those most in need of First, that from being the highest geared company in the sec- help to pay. Jones comments: “We have [social tariff] HelpU and tor back in 2001 (93%), Welsh Water now has amongst the lowest so on; we run at a much higher rate of support than the other gearing (59%). “Our gearing was very high at the start because companies because we can put millions of pounds of our own we had no money – that was fairly straightforward,” he admits. money into that.” On top, the company has been able to reinvest “Two individuals going to buy the business using borrowed more in infrastructure, resilience and long term improvements money had to find a way that would sustain that.” However: “The than funded through the price review. fundamentals of the idea worked over time, so naturally as well ■ Performance improvements – Jones describes the “huge tan- as providing more value to customers, by retaining money in gible achievements” Welsh Water has made since 2001 (see table the business and not paying it out as dividends, we’ve been able 2). “Because you don’t often look back over 20 years, you don’t to move our gearing position from what was the highest in the usually see just how far we’ve come. Year by year progress may be sector to what is now around the lowest. That’s absolutely right unexciting, but 20 years adds up to an awful lot.” because as a non-shareholder company, ultimately, we’ve got to On top of these predicted gains, Jones explains unanticipated have a very strong balance sheet and strong liquidity position.” benefits have also materialised from the model. These include He adds: “Also if you think how the return on capital has come being the most trusted water company in England and Wales down over that period – regulation has quite rightly followed the for the past couple of years according to CCW research, and a markets down – to maintain the same sort of credit metrics and more stable political environment. “The fact that we are owned credit quality in the world of a sub 2% cost of capital, is different on behalf of our community has given us stronger support from from one of a 6% cost of capital in 2000. Hence our gearing has our customers, our stakeholders, the communities we serve and had to come down.” so on, and that has been reflected in, for example, the lack of po- litical controversy around the water sector in Wales. Whereas in We are running at about £450m of England ahead of the general election it was highly contentious. So there’s been that whole side of public support and customer value that has been returned to support that’s really come through. “The other thing is how it comes through in our recruitment customers so far

THE WATER REPORT April 2020 9 interview|Chris Jones, Welsh Water

How Welsh Water's activities map onto the Welsh Government's wellbeing goals ales ales ales elsh language ales ales ales of more cohesive cohesive ales of more culture ales of vibrant A prosperous W A prosperous W A resilient A healthier W equal W A more A W communities A W and thriving W W A globally responsible 1. Safeguarding clean drinking water through catchment management 2. Enough water for all 3. Improving the reality of drinking water supply systems 4. Protecting our critical water supply assets

Drinking water 5. Achieving acceptable water quality for all customers 6. Towards a lead free Wales 7. Working with customers and communities 8. Ensuring affordability of services delivered to customers 9. Supporting customers in vulnerable circumstances 10. Addressing our 'worst served' customers 11. Employer of choice communities Customers and Customers 12. Leading edge customer service 14. Smart water systems management 15. Supporting ecosystems and biodiversity 16. Using nature to reduce flood risk and pollution 17. Cleaner rivers and beaches

E nvironment 18. Protecting our critical waste water assets 19. Promoting a circular economy and combating climate change

Second, Welsh Water has altered its operational model signifi- Looking across the two decades as a whole, Jones is pleased cantly over time. Operations were outsourced in 2001, to secure with Glas’ choices. “Some things we had to adapt, some things a predictable cost base and to drive efficiency. They were brought we didn’t anticipate. I got plenty wrong in the detail but overall I back in house in 2010. Jones explains: “After ten years it had sort don’t think I would change too much around the model.” of run out of steam and to deliver more efficiency and better value going forward it really required a longer term perspective, Modern purpose more enabling investment to deliver savings and improvements, Before co-founding Glas in 2000, Jones served as Welsh Water’s and actually that was much easier to do through an in-house regulation director from 1995. He subsequently took the role of model… We changed at that point because we thought that Welsh Water finance director in 2001 and became chief execu- would deliver an effective benefit for customers and that is how tive in 2013. Last July, he announced he would step down at the it has proved.” end of March 2020. The prospect of Glas’ 20 year anniversary, combined with Jones’ move, legislative developments in Wales, and the wider One of the ironies of this is, business community’s increasing focus on ‘purpose,’ prompted although our performance has, on the board to take stock. “It’s a good opportunity for us to do a bit of looking back at what have we learned, what do we need to most measures, never been better, I do better, and what could we tweak to take that forward over the next five, 20, 30 years,” says Jones. would say as an organisation we've Three key developments have followed. never been more ambitious to be First, in May 2018 and following extensive customer engage- ment, Welsh Water published a long term vision setting out better in the future and less satisfied both the challenges it faces over the next 30 years, and how it with our performance. plans to address them. Welsh Water 2050 identifies 18 strategic 10 April 2020 THE WATER REPORT Chris Jones, Welsh Water|interview

responses to “enable us to become a truly world class, resilient Welsh Water’s final determination and sustainable water service for the benefit of future genera- tions”. This is aligned with the Welsh Government’s Well-being Ofwat prescribed a 9.4% average bill cut, compared to the company’s pro- of Future Generations Act (Wales) 2015, which sets goals for a posed reduction of 5.5%. It increased Welsh Water’s draft determination totex prosperous, resilient, healthy, more equal, cohesive, globally re- allowance by £150m, but a 6% totex gap remained. The gap stood at £171m sponsible Wales with a thriving culture. The vision is also aligned (22.5%) on enhancement and £25m (10.9%) on household retail, offset by £10m more on base than Welsh Water’s business plan requested. with the Environment Act (Wales) 2015 and Natural Resources In common with all companies, Welsh Water faces tough performance com- Wales’ position. The document reckons all the required actions mitments, which include a 15% cut in leakage, a 6% cut in per capita consump- will have a net cost over 30 years of between £4.5bn and £9bn. tion, a 58% fall in supply interruptions, and a 55% fall in pollution and internal And: “To put this in context, we presently spend in the order sewer floods. Outcome Delivery Incentives offer a Return on Regulatory Equity of £0.5bn to £1bn in each five-yearly period on improving our range of -1.03% - +0.6%. Moody’s said it expected penalties of £30-40m during services and resilience.” the period. £83.5m of revenues were advanced to improve financeability. Second, the company has articulated a refreshed statement of On the back of Welsh Water’s acceptance of its FD, Moody’s downgraded purpose: ‘To provide high-quality and better value drinking wa- from A2 to A3 the corporate family rating of Welsh Water, as well as the senior ter and environmental services, so as to enhance the well-being secured debt ratings of Dwr Cymru (Financing) UK. of our customers and the communities we serve both now and for generations to come’. In early December at an Extraordinary PR19 General Meeting, the new purpose was embedded in the Articles The most immediate test for Welsh Water will of course be man- of Association of the company – “so that is now entrenched in aging under the PR19 final determination (FD) it has just ac- the company’s legal documentation. So it doesn’t matter whether cepted. “Things are much tighter,” Jones says. “We have some the founder generations or followers or those in years to come” advantages as a business in terms of our capital structure. But in are at the helm; purpose is locked in. our own plan, we put forward very challenging efficiency targets Third, just last month, Welsh Water published a series of which we’ve got to deliver; and the whole performance regime is Well-being Commitments, which map out how the company’s there with very significant penalties and rewards – but particu- activities over the coming five years will contribute to the seven larly penalties.” He says meeting the cost efficiency targets will goals set by the Well-being of Future Generations Act (see table be “a massive agenda for us” over the coming five years, and that 3). Jones comments: “I’m not sure any other organisation in the company will struggle to meet some performance commit- Wales has done this. There is something similar from Trans- ments, including supply interruptions. port for Wales, which is good to see, but we may be the first or- “So we’ve got to deliver our costs targets and we’ve got to do ganisation to set out ‘so ok, for prosperous Wales for example, everything we can to get as close as possible to performance what are we actually going to do over the next five years to help targets which we’re going to struggle with. And then we’ve got deliver that’?” He explains the clarity should help other service to work out were we can outperform on other measures, maybe bodies plan what they are doing, for collective advancement. customer service where we are doing well and can try to earn “We’ve seen from working in water catchments how much rewards to offset the penalties. Across the board, everybody in more you can achieve if you align what individual bodies are the company has to be focused on their impact on service; in trying to do,” he illustrates. everything we do, we have the vision of earning the trust of There is an accompanying Well-being Commitments scorecard, customers, of customer-led success. Everybody in the business which will enable stakeholders to chart Welsh Water’s delivery understands that ultimately what they do impacts on customer against each goal and hold it to account. Jones: “That’s obviously satisfaction.” the danger with long term planning and strategising, that it can The not-for-profit model does offer some advantages in ris- be great, but it’s 25, 30 years out so it can feel a little bit unreal. ing to PR19 challenges – including low gearing and no dividend This says, ‘great, Welsh Water 2050, you’ve got that long term ob- pressure from shareholders. Nonetheless, like all others the com- jective which should be driving things like future price reviews. pany is exposed to the drastic cut in allowed returns and, unique But in the meantime, how are we actually doing on those things to its model, faces being able to return less value to customers in we can do to contribute to cohesive communities or a globally AMP7 than in previous years (Moody’s – which has downgraded responsible Wales?’ That’s certainly a first for us, and hopefully Welsh Water since its FD acceptance – estimates £55m could be gives a real tangible meaning to it.” available for return to customers across the AMP, compared with The overriding message from Glas Cymru as it turns 20 is that £40m last year alone). “That is just financially inescapable,” Jones is it more ambitious than ever, despite its achievements to date. Jones expands: “One of the ironies of this is, although our per- formance has, on most measures, never been better, I would say You do have a different context here, as an organisation we’ve never been more ambitious to be better you have different actors, and also in the future and less satisfied with our performance. I think that is really good cultural thing… Far from resting on our laurels, frankly Wales is only one-twentieth the fact that we have made a lot of improvement, as the whole sector has, has made everybody more confident, more question- the size of England. It should be much ing. If we’ve managed to find better ways of doing things in the easier to get everyone around the table past, by definition there must be better ways than we are doing things now.” and come up with that common view.

THE WATER REPORT April 2020 11 interview|Chris Jones, Welsh Water

optimal level for service measures in those particular company circumstances? It would be mathematically very unusual if you did that work and found everybody should have the same target. We think that should be on the to do list for regulation going forward.”

A fully collaborative PR24 Also on Welsh Water’s to do list for future regulation is a fun- damental turnaround in how investment is planned. In his let- ter to Ofwat, Jones called for a “fully collaborative approach” for AMP8 and AMP9, based on a common understanding of the optimal investment programme for customers and the environ- ment, before PR24 gets underway. He explains: “What we would hope to do for AMP8 and be- yond is change the planning narrative around somewhat and be thinking much more, at an early stage before the price review, about what are the long term objectives we want to be work- ing to? That’s got to be a very cooperative process, so it’s going to need ourselves, regulators, government, other bodies like our customer challenge group and our environmental advisory pan- el and so on feeding in to that. “Five year planning horizons are not a problem if they are part of an agreed 30 year kind of approach. So where we’d like to get to for PR24 is, when we’re putting forward our plans it’s against an agreed set of objectives – like, we should be carbon neutral by whatever date and everybody buys in to that, or we should have agrees. “Our return comes ultimately from the cost of capital… a resilient water infrastructure to a certain level of service by a it’s straightforward maths: it’s bound to have to come down.” certain date. Each price review period then becomes a milestone The company was robust in its representation on its draft de- along the way to that ultimate objective.” termination (DD), but was one of the first non-fast tracked firms Does the Welsh context support such a move? There’s a dif- to accept its FD. Jones explains: “We have to look at the PR19 ferent government with different legislation in play, a different FD in terms of what is the best thing to do for the customer – to environmental regulator and – coming soon – a Welsh branch of appeal against it or not? We thought, given the helpful moves Of- Ofwat, all of which suggest the opportunity for a bespoke Welsh wat made between the DD and the FD, that wasn’t the right thing arrangement, perhaps something akin to the way the Scottish to do. But that doesn’t mean we were happy with everything in water sector is approaching climate challenges? the PR19 FD or indeed in some of the methodologies that led up Jones: “Personally I think there is. You do have a different con- to there. We wanted to put those points on record and discuss text here, you have different actors, and also frankly Wales is only them further with Ofwat going forward.” one-twentieth the size of England. It should be much easier to Jones’ letter to Ofwat formally accepting its FD therefore get everyone around the table and come up with that common flagged up its key issues. These included that its retail business view…The Senedd has declared a climate emergency, I’m sure will be loss making across the AMP; and that some of its Perfor- that means they might set views for policy objectives for carbon mance Commitments are not achievable. Its Welsh Water 2050 that are different for those in England. But even if the timescales consultation work also demonstrated customers preferred in- are the same, I find it hard to believe those actors won’t want vestment to bill cuts. to come together to have a much more common view of what Looking ahead, the company urged the regulator to set “ef- needs to be done to get there together across a whole range of ficientP erformance Commitments” which take into account sectors.” company specific costs and benefits; for common measurement Those discussions will be in the hands of Jones’ successor, Pe- of data across the sector given the impact of Outcome Delivery ter Perry, from 1 April. Perry has had a long career with Welsh Incentives; and for a more robust retail cost assessment model. Water, serving most recently as managing director. Jones reflects On the first point, Jones comments: “We always thought that in that it will, understandably, be a “personal wrench” for him to setting costs for companies, you need to …think very hard about leave but that he couldn’t be happier with the transition. “I’m re- what the right level of cost should be, given all the particular cir- ally pleased to be able to step down from a business that’s in a cumstances the company operates in… equally, then, what is the sound position financially and that’s got a great team ready to take over from me, champing at the bit…Twenty years on, it’s Five year planning horizons are like seeing this ‘baby’ finishing at university and heading off… “The organisation is whatever the opposite of resting on its not a problem if they are part of an laurels is; it’s so ambitious and so keen to take on these challenges and do an even better job going forwards. You couldn’t really ask agreed 30 year kind of approach. for more than that.” TWR

12 April 2020 THE WATER REPORT PR19|report

fwat came out guns blazing when it formally kicked off the process through which four companies will appeal Appeals process Otheir PR19 final determinations. Last month, the regulator made its sub- mission to the Competition and Markets gets underway Authority, stating its case on the determi- nations of Yorkshire Water, Anglian Water, Ofwat makes its CMA submission, saying Northumbrian Water and Bristol Water. It “four companies believe customers should said: “Despite our detailed analysis of op- pay more and receive less”. erational best practice and historic perfor- mance, our scrutiny of business plans and In Water. One of the most recent actions tunity to make further representations on evidence of returns in capital markets, it was Moody’s downgrade of Thames Wa- this in due course.” seems four companies believe customers ter from Baa1 to Baa2. Rachel Fletcher, Ofwat chief executive, should pay more and receive less. We do Ofwat also summarised for the CMA also confirmed: A“ s this review carries not think the evidence supports that.” the outcome of its decisions in the round on, we will press ahead with our work to Among the suite of documents Ofwat – featuring around £50bn of spending in- transform the sector: in its performance, submitted were an overview of the PR19 cluding investment to promote long term its preparedness for facing future chal- process and the price control framework; drought resilience (see p20) and a £200m lenges like climate change and population the companies’ determinations; details of innovation fund (see p23) – as well as in growth, and its work to rebuild trust by how decisions were reached; and further de- each individual company’s case (see box). showing the value it can create for society tails on the “cross cutting” issues of stretch, and the environment.” TWR returns and financeability. It emphasised it Timetable and process had been transparent, thorough and had The CMA provided details of the special ref- listened throughout the review and had erence group it expects to appoint to oversee We are considering how been “motivated by all our duties” including the appeals (see box) and said it will publish Covid-19 could bear on “looking to the long term and making sure an administrative timetable shortly, outlining companies can earn a reasonable return and the key milestones and proposed timeframe the CMA's decisions and can finance their functions”. for the completion of the redeterminations. Ratings agencies have been working The next step will be each company’s submis- would welcome the through each regulated company’s situ- sion of a statement of case. opportunity to make ation since the FDs were published. As Ofwat noted in its submissions: “We they forewarned, the overall direction recognise that we are making our submis- further representations. of travel is downwards but obviously the sion at a time of wider uncertainty related individual situation of each company dic- to Covid-19, which has arisen since our The special reference group tates its treatment. The Water Report has final determination. We are considering ❙ Kip Meek (chair) ❙ Roland Green been covering the ratings actions weekly how this could bear on the CMA’s deci- ❙ Robin Cohen ❙ Paul Muysert through our online newsletter The Week sions and we would welcome the oppor- ❙ Anne Fletcher For biographies, see: https://www.gov.uk/government/ Ofwat’s summary of its FDs for each appellant publications/cma-panel-member-biographies-and- ❙ “Our final determination givesAnglian Water £5.6bn over the next five years to improve disclosures-of-interest/panel-members-biographies services to customers and the environment, 17% more than it has spent historically. An- glian Water customers would see bills fall by 10%, they would see investment of £305m to help move water from other areas in the region, they would see pollution incidents PR19 reconciliation policy fall by a third, and carbon emissions down by 10%. Ofwat is consulting until 29 April on its proposed ap- ❙ Our final determination providesBristol Water with £462m over the next five years. Their proach to the reconciliations that will be required customers would see bills fall by 15%, they would see over £8m invested to improve wa- during, and at the end of, the 2020-25 price control ter mains resilience, they would see 48,000 water meters installed, and they would see period, to adjust the amount of money water compa- plans for 85% of vulnerable customers to be left satisfied with the help they receive. nies receive. ❙ Our final determination providesNorthumbrian Water with £2.9bn over the next five The regulator said the approach is “a significant years, 5% more than it has spent historically. Their customers would see bills fall by £26, evolution of our approach at the 2014 price review they would see greenhouse gas emissions fall by 28%, they would see an increase in reflecting a further development in how we undertake bathing spots rated good or excellent, and they would see more than 450,000 smart reconciliations”. It features more in-period reconcilia- meters be installed. tions and additional reconciliations “to ensure compa- ❙ Our final determination gives Yorkshire Water £4.4bn over the next five years, 10% more nies’ allowed revenues are appropriate”. than it has spent historically. Their customers would see bills fall by 9%, they would see The reconciliation rulebook will be finalised Autumn. almost a third more land enhanced in the region, they would see 50% more customers In the 2019 price review, reconciliations resulted in a net on social tariffs and WaterSure, and they would see pollution incidents fall by 41%.” revenue adjustment of more than £1.8bn.

THE WATER REPORT April 2020 13 report|Water resources Number crunching on capacity needs The first National Framework for Water Resources shows England needs 4,700Ml/d extra capacity by 2050 for all water users, including to boost drought resilience and green ambition.

repare to be impressed: the Capacity crunch sures. It said regional groups should: team working on creating a The National Framework found that if no ❙ Contribute to a national ambition National Framework for Wa- action is taken between 2025 and 2050, on average per capita consumption ter Resources has succeeded around 3,435 million litres per day (Ml/d) (PCC) of 110 litres per person per day inP identifying England’s national and extra capacity is likely to be needed in Eng- (l/p/d) by 2050, to be reviewed every regional strategic water needs, across all land by 2050 to meet future pressures on five years. (Other scenarios considered sectors, through to 2050. Among other PWS (household and businesses supplied were 119l/p/d and 127l/p/d).This came things, this has involved accumulating a by water companies). The report added: in advance of the government’s response common data set for all regions, to pro- “This need is likely to grow further by the to its 2019 consultation on measures to vide a consistent national picture; mod- end of the century. Projections beyond 2050 reduce personal water use and its 2018 elling a wide range of scenarios, includ- carry increasing uncertainty. However our commitment to set a personal water use ing forecasting the demand of sectors analysis suggests something in the region of target. The report explained: “In advance outside of public water supply (PWS); 5,500 to 6,000 Ml/d additional water may be of the government’s response to the con- and looking at the long term needs of needed between 2025 and 2100.” sultation, the national framework se- the environment. Meanwhile non PWS needs by 2050 – nior steering group has agreed the case Detail of the content is set out below, those of direct abstractors in agriculture, for making ambitious demand savings. but in short, the messages are stark. Many power generation and industry not sup- Based on the best available evidence, the areas of England will be short of water by plied by water companies – are estimated group agreed to work to an initial plan- 2050 if no action is taken. So we need a to require an additional 1,287Ml/d. ning assumption of reducing average twin track approach of managing demand So without investment in additional PCC to 110 litres per person per day by and, regardless how ambitious that is, in- capacity, there will be shortfalls in water 2050 nationally. This is the lowest PCC creasing supply. Demand side actions can supply across England. This means, in a that can realistically be achieved with- be delivered quickly, are scalable and rela- nutshell, that households and businesses out government action in addition to tively cheap, but uncertain. Supply side would experience more frequent inter- water company action. However it can actions are pretty much the opposite. ruptions to supply and the environment be achieved more cost effectively and at It falls now to the five regional water be put under greater pressure from water lower risk with action from government resource groups – Water Resources South abstraction. and the water industry.” East, Water Resources East, Water Re- Each region faces challenges, but these ❙ Reduce leakage by 50% by 2050 from a sources West, Water Resources North and are not spread evenly. Around half of the baseline of 2017-18. West Country Water Resources – to plan national PWS need is in the south east. ❙ Pursue ambitious reductions in non- exactly which actions are right for each Beyond PWS, consumptive water use is household demand and contribute to the region (see p14 for details on the South most significant in the east, where agri- evidence available on the potential sav- East plan). For that reason and despite cultural use of spray irrigation dominates. ings. the enormous achievement, the National The map shows England’s water needs ❙ Identify ways to reduce water use out- Framework report is very much the start by 2050, incorporating for PWS increas- side of PWS. of something rather than the end. ing resilience to a 1 in 500 year drought ❙ Explore how to coordinate the use of (see below), high population growth, the temporary use bans among the water most ambitious abstraction reductions and companies operating in the region. The group agreed to work water company analysis of climate change On top of these actions, the Framework to an initial planning impacts; and best estimates for non PWS. said government and regulators should The accompanying commentary on each support the management of uncertainty assumption of reducing region gives an overview of the position of around demand side savings by intro- each regional water resource group. ducing a new framework to monitor and average PCC to 110 litres report on progress on demand manage- per person per day by Demand and PCC ment. To be scoped this year, this will To tackle the shortfall, the report first put track “decision points” in regional plans. 2050 nationally. forward a package of demand side mea- “If there is under-achievement against

14 April 2020 THE WATER REPORT Water resources|report

Understanding England’s future Water Resources North Additional public water supply needs between water needs at 2050 2025 and 2050: 233 Ml/d The National Framework provides a picture of England’s future water needs across • drought resilience: 41 Ml/d each of the regional groups by 2050. • population change: 60 Ml/d For public water supply the estimated additional water need between 2025 and 2050 • climate change: 132 Ml/d is based on: • increasing resilience to a 1 in 500-year drought Estimated total demand from other users: • high population growth 192 Ml/d • high environmental improvement through the delivery of the most ambitious • 38% power generation abstraction reductions identified in current company plans • 33% industry (extracting minerals and materials, • individual water company analysis of climate change impacts*. navigation, food and drink, paper and pulp) We also show our best estimate of how much water will be used in total by the other • 23% agriculture (spray irrigation) sectors in each region and the proportion of water used by the different sectors. We have shortened million litres per day to Ml/d. North

Water Resources East Agriculture Water Resources West Additional public water supply needs between Industry Additional public water supply needs between 2025 and 2050: 570 Ml/d 2025 and 2050: 639 Ml/d Power • drought resilience: 226 Ml/d • drought resilience: 167 Ml/d • population change: 193 Ml/d • population change: 237 Ml/d • environmental improvement: 75 Ml/d • environmental improvement: 167 Ml/d • climate change: 76 Ml/d • climate change: 68 Ml/d Estimated total demand from other users: Estimated total demand from other users: 444 Ml/d 283 Ml/d West • 64% agriculture (spray irrigation) • 59% industry (chemicals, paper and pulp) • 17% power generation • 27% agriculture (spray irrigation) East • 14% industry (food and drink, paper and pulp) • 12% power generation

Water Resources South East West Country Water Resources Additional public water supply needs between Additional public water supply needs between 2025 and 2050: 1765 Ml/d 2025 and 2050: 227 Ml/d • drought resilience: 640 Ml/d • drought resilience: 71 Ml/d • population change: 459 Ml/d • population change: 86 Ml/d • environmental improvement: 431 Ml/d • environmental improvement: 47 Ml/d South East • climate change: 111 Ml/d • climate change: 11 Ml/d • other: 124 Ml/d • other: 12 Ml/d

West Country Estimated total demand from other users: Estimated total demand from other users: 175 Ml/d 193 Ml/d • 32% industry (paper and pulp, golf courses) • 63% industry (manufacturing mineral products) • 30% agriculture (spray irrigation) • 23% agriculture (livestock and spray irrigation) • 20% power generation

*Water companies have included additional impacts from climate change of around 640 Ml/d in their plans up to 2025 which is before the start date for this analysis. Adding this to the changes between 2025 and 2050 makes the total impacts from climate change comparable to the two biggest drivers, drought resilience and population growth. 08 09

these triggers the group would recom- be brought forward if demand is not re- Each region faces pressures on water resources. We expand on this graph to set out the relationship between the pressures faced in each region, the options they have available and highlight key areas for mend steps to turn this around, for exam- duced as expected. This should include each of the regional groups. ple, policy change or behavioural change exploring the strategic options funded Water Resources North The North has a significant surplus of water which, if it could be made available, could help offset the future water resource and environmental challenges we face and potentially be made available to other regions. The campaigns.” Government and regulators as part of Ofwat’s gated PR19 process options identified in the relevant water company WRMPs – in this case Northumbrian Water, Yorkshire Water and Hartlepool Water – are enough to meet the higher need estimate but if water users in the region can become more were also advised to use the recent con- (see interview p18) and identify new op- efficient, through reducing how much they use, more water could be available to transfer elsewhere. sultation on reducing personal water use tions that are not included in the current Water Resources West The West will face pressures in the future; however, it has a significant surplus, the potential to make savings by reducing demand further, and options to supply more water. The options identified in the company WRMPs – in this to inform national policy on interven- plans. This should include engaging in case United Utilities, Severn Trent Water, Dŵr Cymru Welsh Water and South Staffs Water – are enough to meet the higher need estimate explored in the modelling and again, if greater reductions in water use can be achieved or tions that will support consumption re- the catchment based approach, particu- further options brought forward, there is potential for more water to be transferred to other regions. ductions. larly in priority catchments, to develop Water Resources East The East faces significant pressure and has little surplus water available. Our modelling shows that the amount of water needed is equivalent to all the new supply options selected in the company WRMPs – in this case Anglian cross-sector options that provide broad Water, Essex and Suffolk Water, Affinity Water, Severn Trent Water and Cambridge Water – but more ambitious reductions in water use and potentially additional capacity is necessary to meet the higher need estimate. Water Resources East’s focus will be on reducing the demand for water by all users and increasing the amount of water Supply lines benefits to society. available through new water resource options and transfers. Exploring the potential for schemes that benefit other water users is also a priority given the high level of demand from other sectors in this region, particularly agriculture. Supply side infrastructure is required On transfers, the National Framework Water Resources South East even with the most ambitious demand team endorsed increasing connectivity The South East faces the greatest pressures on public water supplies. If surplus water can be made available, the region will still need to develop options to supply more water, equivalent to all the new water resource options and transfers selected in company WRMPs – in this case Thames Water, Southern Water, South East Water, Affinity savings. The report pointed out infra- within and between regions. It supported Water, SES Water and Portsmouth Water. This is as well as achieving ambitious efficiency reductions. If it can’t access the surplus water, then demand in the region will need to be reduced further or further resources developed. Water Resources South East needs to track progress on demand management particularly closely because, if structure is also important in managing both short distance transfers that increase savings are less than expected, it could develop a large shortfall which may reduce resilience, limit progress on environmental improvements or lead to more frequent use of drought measures. the uncertainty associated with demand resilience to supply interruptions, and West Country Water Resources reduction and in reducing reliance on longer distance transfers of over 100km The West Country sees relatively modest pressures. However, these are more significant when viewed as a proportion of the water supplied in the region. It has a significant surplus in parts of the region and if this can be used to meet the pressures faced by the region, the options in the company WRMPs – in this case South West drought measures (see box, p17) that that also include water storage to in- Water, Wessex Water and Bristol Water – will deliver the extra water needed. West Country Water Resources’ priority is to make the region more efficient by achieving the ambitious reductions in water use and leakage; and to carry environmental risks. It said region- crease drought resilience. National mod- explore the potential to transfer water to other regions – particularly the neighbouring South East.

al groups should scope a wide range of elling showed when reservoir storage in Progressing strategic options Work is already underway to explore a number of the strategic options that will be needed to meet the supply options, such as reservoirs, water a catchment is stressed, there is a 40% nation’s future needs, including new water resource infrastructure and transfers already identified in company Water Resources Management Plans. reuse and desalination, with a clear un- chance that the neighbouring catchment Up to £469 million of funding is available between 2020 and 2025 for water companies to progress this work with the support of RAPID – the Regulators’ Alliance for Progressing Infrastructure Development – a team made up of experts from the Environment Agency, Ofwat and the Drinking Water Inspectorate. RAPID’s work derstanding of how long each would take will also be stressed. This increased to a will be co-ordinated with that of regional groups and the National Framework. to be implemented, to allow options to 70% chance when looking at a system 11 THE WATER REPORT April 2020 15 report|Water resources

without reservoir storage, such as direct Timeline of next steps river abstractions. “In other words, longer transfers have a greater chance of match- Date Activity ing locations where water is available with National Framework published, and regional groups set out their initial March 2020 locations where water is needed in a given statement of regional water needs drought situation.” Regional groups publish the approach they will take to developing July 2020 When exploring transfers regional their plans. groups should: consider the potential to February 2021 Regional groups update their statement of regional water needs make them reversible so that they can August 2021 Regional groups share their draft plans to ensure alignment. increase the resilience of both parties; be clear on how transfers would be used January 2022 Informal consultation on draft regional plans during droughts, including when one or August 2022 Regional groups publish final draft regional plans both supplier or receiver is implement- September 2023 Regional groups publish final regional plans ing drought management tools; and work with regulators’ alliance RAPID changes such as that population will grow, improve the environment by reducing the (see p18) to make sure planned transfers policy choices have been built in – includ- impact of water abstraction. are feasible and that any issues are care- ing on what level of resilience to drought Jean Spencer, who independently fully managed. is acceptable and to reflect the govern- chairs the framework’s senior steering ment’s commitments to the economy and group, summarised: “The framework Transformative change the environment. This means the aim is provides a strategic direction to long term The National Framework is not a plan not just to meet the pressures and keep a water resource planning built on a shared for business as usual. Alongside known steady state, but to meet the pressures and vision to leave the environment in a bet-

WRSE: Future water requirements for South East England

Table 1: Future public water supply projections 2025 to 2100 According to Water Re- sources South East (WRSE), Category Time period 2025 2030 2040 2050 2070 2100 the total additional water Public Water Supply - Distribution Input Annual 4637.4 4686.6 4838.5 5015.2 5262.8 5537.1 needed by all water users Baseline amount of water available Annual 315 -86.6 -321.0 -519.1 -806.7 -1143.2 in the South East region is projected to be just over 1 Environmental protection Annual -273.7 -273.7 -273.7 -273.7 billion litres per day at 2050 Drought resilience Annual -210.0 -210.0 -210.0 -210.0 and almost 1.7 billion litres Net resources available Annual 315 -86.6 -804.7 -1002.8 -1290.4 -1626.9 per day at 2100. The regional water Public Water Supply - Distribution Input Summer 5246.5 5308.9 5498.2 5714.6 6038.4 6413.4 resources planning group, Baseline amount of water available Summer 515 50.2 -221.5 -458.0 -818.0 -1247.5 funded by Affiiy Ports Environmental protection Summer -273.7 -273.7 -273.7 -273.7 mouth, SES, Thames, South East and Southern Water, Drought resilience Summer -210.0 -210.0 -210.0 -210.0 published current pro- Net resources available Summer 515 50.2 -705.2 -941.7 -1301.7 -1731.2 jections of Future Water Please note the figures in the table are in million litres per day (Ml/d) Requirements for South East England last month. Table 2: Future non-public water supply projections 2020 to 2100 This sets out the chal- Category Time period 2025 2030 2040 2050 2070 2100 lenges facing the region; Spray irrigation 26.81 28.64 32.30 35.964 43.29 54.28 its forecast of how much Other agriculture 16.61 16.73 16.98 17.22 17.72 18.45 additional water will be needed between 2025 and Power 29.18 30.21 32.27 34.34 38.47 44.66 2100 to secure supplies for Paper and Pulp 33.84 34.51 35.83 37.16 39.82 43.80 the public water supply Chemicals 1.81 1.87 2.00 2.13 2.39 2.77 and other major users; and Food and Drink 1.23 1.28 1.38 1.48 1.68 1.97 options identified so far to meet these needs. Other Industry 15.67 15.60 15.46 15.32 15.03 14.60 The report found 5bn Private Water Supply 6.46 6.38 6.22 6.06 5.73 5.25 litres of water a day is pro- "Other" non-PWS sectors 25.27 25.27 25.27 25.28 25.29 25.30 vided for PWS at present; Total Non-PWS input Annual 156.88 160.49 167.72 174.95 189.40 211.08 the amount of surplus water Net resources required Annual -3.61 -7.23 -14.45 -21.68 -36.13 -57.82 available in the region for PWS will drop to 315m litres Please note the figures in the table are in million litres per day (Ml/d)

16 April 2020 THE WATER REPORT Water resources|report

ter state than we found it, improve the ❙ Multi-sector – WRMPs cater for supplies that can deliver the resilience and nation’s resilience to drought, minimise households and businesses supplied by environmental enhancement we all want interruptions to water supplies for all us- water companies through PWS. The t o s e e”. ers of water and support growth while un- Framework envisages more collabora- derpinning a thriving economy.” tion between water wholesalers, retailers ❙ Collaboration – While conducted Consequently, there are various ele- and New Appointments and Variations, under the auspices of the Environment ments of what amount to transformative to better align the approaches taken to Agency, the work has been a huge col- change about the National Framework: household and non household PWS. But laborative feat. The senior steering group it goes beyond this, to factor in water di- brings together leads from each of the five ❙ Regional planning – Regional plans, rectly abstracted by agriculture and in- regional water resource planning hubs; rather than water company specific Water dustry as well. Such abstractors face many direct representatives of the larger water Resource Management Plans (WRMPs), of the same challenges as water compa- are very much the focus of the work. nies, and it is believed that considering Longer transfers have a WRMPs are considered alone to be “un- PWS and non PWS needs together will likely to deliver the right strategic solu- be more efficient and unlock new solu- greater chance of matching tions for the nation as a whole. By putting tions. Understanding how water demand aside company boundaries and consider- is likely to change outside the water in- locations where water is ing the needs of the whole region – in- dustry is low and needs priority attention. available with locations cluding other water users – and how these EA chair Emma Howard Boyd described needs fit with the national picture, we can considering the needs of all users together where water is needed in a deliver the step-change in resilience and as “an opportunity to rethink water and environmental protection required.” help everyone make decisions on water given drought situation.

WRSE: Future water requirements for South East England

a day by 2025 and by 2050 Table 3: Total future water supply projection for South East the deficit could reach 1bn England from 2025 to 2100 litres a day, rising to 1.6bn litres a day by 2100. Table Category Time period 2025 2030 2040 2050 2070 2100 1 shows this is more detail, Total demand Annual 4794.3 4847.1 5006.3 5190.2 5452.2 5748.2 including the impacts of Net resources available Annual 311.4 -93.8 -819.2 -1024.5 -1326.5 -1684.7 increasing drought resil- ience and environmental Total demand Summer 5403.8 5469.4 5666.0 5889.5 6227.8 6624.5 protection. WRSE explained Net resources available Summer 511.4 43.0 -719.7 -963.4 -1337.8 -1789.0 the differences with the

National Framework PWS show future water require- Options for meeting the supply/demand gap need by 2050 (1,765m ments. WRSE said: “What Figure 3: litres a day) saying the this shows is that we have Framework uses different a number of options in the (more ambitious) planning South East to meet the an- assumptions. ticipated future challenges, Non PWS uses 153m litres including the needs of other a day at present in the water users, increased en- south east; this is estimated vironmental ambition and to rise only slightly to 175m the extra water needed litres by 2050 and 211m litres to achieve 1 in 500-year by 2100. Table 2 shows this resilience to drought.” is more detail. Table 3 sets WRSE said the publication out the overall anticipated was the first step in the de- resource requirement for the velopment of a multi-sector, south east, taking both PWS regional resilience plan and and non PWS into account, invited others to put forward under one scenario. options for consideration The chart shows the in that plan by 17 July. This amount of water that could included third party options, be saved, imported or where others may have wa- generated within the region ter available or be able to using different options. The make demand reductions dotted and dashed lines to include in the plan.

However, we would still like to hear about your ideas for future options, so please THE WATER REPORT April 2020 17 contact us or the water companies, see the contact details at the end of the document for more information.

The section of the graph labelled ‘Imports’ corresponds to the water available through the strategic transfers from other regions that are currently being investigated by the water companies and RAPID.

As we develop the regional plan and consider the needs outside public water supply, we will also look at whether there are opportunities for the options that we develop in the future to benefit other users in the region.

? We have set out the feasible options for managing water resources in the region. What are your suggestions on further options we could consider?

22 report|Water resources

companies and those with resource chal- no more often than once in 500 years els of abstraction to freshwater and wet- lenges; Water UK; Defra and the Welsh on average – with an annual chance of land habitats of principal importance, Government; the EA and Natural Re- no more than 0.2%, or a 5% chance of particularly chalk rivers and other sites sources Wales; the DWI; Ofwat; experts these restrictions being used over a 25 identified as priority habitats for restora- from the Universities of Oxford and Man- year period. The report cautioned: “In- tion; restoring river flows to support the chester; Blueprint for Water; Energy UK; creased resilience should not rely on the recovery of fish populations; and embed- the National Farmers Union; the Canals increased use of drought measures to ding the principle that new development and Rivers Trust; and the Association of boost supplies by, for example, allowing should result in net environmental gain. Drainage Authorities. additional abstraction during drought, The framework pointed out regional where this is environmentally damag- groups will need to work closely with ❙ Drought resilience – The National ing. Drought permits and orders should the environmental regulators and green Framework considered different levels be used less frequently in future, par- groups to meet needs in each area, and of drought risk: the 1:200 baseline and ticularly in sensitive areas.” Moreover: ensure plans are in line with water sector the 1:500 level the National Infrastruc- “Water companies in regional groups net zero commitments (see p20). It said ture Commission discussed. Although should revisit their planned frequencies the work should consider specifically: it will need to be formally locked in by of use for non-essential use bans in the where the largest abstraction recovery the government when it publishes its light of the planned increase to drought might be required; how the greatest envi- National Infrastructure Strategy (this resilience, recognising the benefits to ronmental benefits can be realised; what was expected last month but has been customers if frequencies reduce. The the opportunities are to access more wa- pushed back to later in Spring), the planned implementation of non-essen- ter without compromising ecology; and framework plans for increased drought tial use bans should not become more the potential to reduce reliance on direct resilience by the 2030s so Level 4 restric- frequent to achieve the reduction in the river abstraction at low flows by work- tions are expected to be implemented use of more extreme restrictions such as ing across sectors to make better use standpipes and rota cuts.” of stored water. The assessment of wa- An overall reduction in ter needs from current water company ❙ Environmental enhancement – Re- plans assumes that around 700 million abstraction of between gional plans should seek to pro-actively litres per day of water that comes from enhance the environment and increase unsustainable abstractions will need 1,200 million and 2,200 ambition, under the framework. This in- to be replaced by other means between million litres per day may cludes meeting the water requirements 2025 and 2050. However, the National of sites specially protected for nature Framework indicated more will need to be needed by 2050. conservation; restoring sustainable lev- be done; modelling suggested an over- all reduction in abstraction of between A `best value’ framework for water resources planning 1,200 million and 2,200 million litres per UKWIR, the organisation which manages and deliv- ❙ will deliver net-gain for the environment day may be needed by 2050. More work ers a strategic programme of research projects to ❙ will increase resilience needs to be done to refine this. drive transformational change in the water industry, ❙ has benefits that outweigh the costs will produce a new framework for the sector to ❙ meets the environmental assessments required. ❙ Adaptive planning – The framework develop ‘best value’ water resources plans. In es- Merchant explained: “If we don’t develop a cautioned that uncertainty risk must be sence, this means plans that deliver wider benefits best value framework there will be inconsisten- carefully managed. In particular, plan- to customers, society and the environment over the cies across the regional plans, and indeed water ning for ambitious reductions in PCC long-term. This is a marked shift away from the `least company-specific plans, which could result in and leakage introduces a risk that those cost’ approach that has been required in the past. them being misaligned and delaying the delivery reductions are not realised as planned. In collaboration with water companies, of important strategic schemes, particularly those It advocated close monitoring and the regional groups and RAPID, UKWIR will develop a that cross different regions in England. This could identification of “clear decision points legally robust decision-making framework which reduce the resilience of our water supplies and will then be incorporated into the guidance for increase the risk of restrictions during a drought where alternative approaches need to water companies and regional groups to use as which will impact on society, the economy and be brought in”. It added: “This adaptive they develop their plans. the environment.” planning approach should not be lim- South West Water’s Paul Merchant is the UKWIR said the development of a common ited to demand. Regional groups should programme lead for UKWIR. He said: “What this framework will also benefit companies outside also track other sensitive drivers of wa- means in practice is that the regional plans must England by enhancing their decision-making ter need including population, climate be developed in a consistent way to assess the process and supporting the development of change and the need for environmental value delivered by the different options they have schemes that may cross national borders. It will improvements to make sure that their available to them, beyond cost alone.” publish the framework in July 2020 so it can be plans remain up to date.” This will include considering if the option: used to help develop the draft regional plans ❙ could become redundant if things change in which will be published in August 2022, and will Next steps the future be used to directly inform the water companies’ ❙ plays a role in a range of future scenarios that statutory draft Water Resources Management Each of the five regional groups will now we might face Plans which will be published later that year. produce a plan providing a more detailed picture of the future water resource needs

18 April 2020 THE WATER REPORT Water resources|report

Average national PWS Breakdown of water Drought response levels water usage 2018-19 use nationally, ❙ excluding PWS and non Level 1 responses include increased communications consumptive sectors with customers and low risk winter drought permits (eg hydropower) that allow additional water to be taken6% from rivers or 399 reservoirs. 3% 136 21% 721 6% ❙ Level 2 responses include temporary16% use bans, formerly 3% 40% 399 known as hosepipe bans, and low impact drought per- 136 21% 721 55% mits to allow increased abstraction in summer. 16% 1143 21% 40% 1037 ❙ Level 3 actions include restrictions on non-essential 35% 55% water use for businesses and drought permits that carry 1143 3% higher environmental risk to allow additional abstrac- 21% 1037 tion. 35%

3% ■ Household consumption ■ Climate change ❙ Level 4 restrictions include standpipes■ Industry and rota cuts – ■ Other ■ Environmental protection impractical and the last resort. ■ Agriculture ■ Non household consumption ■ Population change ■ Power ■ Household consumption ■ Climate change ■ Industry ■ Leakage ■ Drought resilience frequently in future, particularly■ inPrivate sensi water- supply ■ Other ■ Environmental protection ■ Agriculture ■ Other tive areas.” ■ Other ■ Non household consumption ■ Population change ■ Power ❙ Developing technical methodologies ■ Leakage ■ DroughtContribution resilience of each ■ Private water supply that improve risk management and deci- ■ Othepressurer on PWS to 2050 ■ Other sion making. additional needs ❙ Improving the links between abstrac- tion management locally and strategic ❙ Supporting the development6% of a clear planning regionally through the catch- 3% 399 long term destination for environmen- ment based approach. 136 21% 721 tal improvement and an agreed ap- ❙ Addressing the remaining barriers to 16% proach to getting there. The team will40% collaboration identified through its work. work with Natural England in particu- ❙ Longer term work around reviewing 55% lar in this regard as well as develop with regulatory frameworks and the roles of 1143 21% 1037 the regional groups an agreed timetable different organisations in planning. O“ ne 136 for sustainability changes 35%that will allow of the alternatives we will work with RAP- 3% longer term planning and flow through ID to scope is one that sees a deeper role WINEP into the plans. As part of this, for the national framework. This would 136 399 the Environment Agency will also work see it scoping the detailed needs of the ■ Household consumption ■ Climate change with Defra on a two-year■ Industry research proj- water industry, removing some of the 399 ■ Other ■ Environmental protection ect aimed at improving■ Agriculture understanding planning function from the water compa- of environmental water needs. In par- nies themselves. We will also consider the ■ Non household consumption ■ Population change ■ Power allel, the National Framework team is case for broadening the scope of regional 1143 ■ Leakage ■ Drought resilience ■ Private water supply 721 developing a methodology for includ- plans beyond water resources. This could ■ Other ■ Other ing natural capital valuations in deci- improve links with the new wastewa- 1143 721 sion making as part of water resources ter and drainage plans and, for example, of its region, setting out the type and planning. closer links with flood management.” TWR scale of the challenge under a range of ❙ Improving the sophistication of its future scenarios. Over the coming years models and evidence, particularly to sup- 1037 (see timetable, p14), each will devise a port decision making around the right One of the alternatives is a preferred plan for the region – delivered mix of options from a national perspec- through a set of options that present the tive. deeper role for the national 1037 best value to customers, society and the ❙ Drought measures – The report said environment, rather than simply least regions must not increase their drought framework. This would cost (see box). These will inform WRMPs resilience at the cost of the environ- see it scoping the detailed and business plans. Together, the five re- ment. “However, we recognise that un- gional plans must add up to meet the col- derstanding the environmental risk of needs of the water industry, 136 lective national need. each drought measure is complex. We The National Framework team appre- therefore want to work with the regional removing some of the groups and water companies to improve 399 ciated the scale of the task for regional planning function from the groups, and said it would support them this understanding. Our intention is that water companies themselves. with priority work as follows: drought permits and orders are used less THE WATER REPORT April 2020 19 1143 721

1037 interview|Paul Hickey, RAPID RAPID progress Paul Hickey has moved across from working on the National Framework to head up RAPID, to ensure strategic water resource schemes get shovel-ready by PR24. n his former role as deputy director of water resources at the Environment Agency, Paul Hickey played a key part in developing the National Framework – building on work led by Jean Spencer for Water UK and more recently the NationalI Infrastructure Commission. The National Frame- work team has just mapped out England’s strategic water needs across all sectors through to 2050, and will work with regional Strategic schemes identified at PR19 water resources groups on solutions tailored to the needs of each region (see article, p12). advanced,” Hickey offers. One of the schemes regional group Hickey is perfectly positioned, then, to serve as managing di- Water Resources East is developing and RAPID will be working rector of the Regulators’ Alliance for Progressing Infrastructure on is a potential new reservoir in Lincolnshire, the Future Fen- Development (RAPID), which will help facilitate strategic sup- land Adaption Strategy. As well as water resource benefits, this is ply side water infrastructure schemes – a role he has just been being crafted with a host of other benefits in mind – from flood seconded to for two years. It is right, he confirms, to see RAPID alleviation and navigation, to regional regeneration. as a partner to the National Framework; the Framework and the So Hickey’s stance is, in contrast to the often “gloomy” mood regional groups will identify infrastructure schemes that have music about the scale of the challenge ahead: “Let’s look to the the potential to help meet future water needs, and RAPID will future.” At present of course, everyone is heads down trying to identify how to do “practical stuff” like coordinate, facilitate and cope with the Coronavirus situation. But once we are through regulate the largest and strategically most important of them. He this, he urges everyone involved to seize the rare opportunity adds a caveat that “it’s important we don’t lose sight of demand where “the planets are lined up” to support development, and management,” pointing out there is activity outside of RAPID there is a “coalition of the willing” featuring government, regu- afoot to push that agenda too. lators, water companies and many other stakeholders eager to rise to the challenge. Look to the future While Hickey fully appreciates the scale of the challenge ahead – Shovels at the ready the National Framework identified a need for 4,700Ml/d extra ca- RAPID is set to play its part. A collaboration between three part- pacity by 2050 for public water supply and other users – he is excit- ner regulators – Ofwat, the Environment Agency and the Drink- ed by the ambition on environmental enhancement and drought ing Water Inspectorate – the structure is innovative and has been resilience the Framework has built in, and the opportunities for formed with the express intention of speeding up the regulatory new ways of working it facilitates. “This is a period of transfor- side of, and addressing barriers to, strategic infrastructure devel- mation,” he enthuses, referencing the new regional opment to provide a more resilient future (see box). rather than water company specific approach, and Under Ofwat’s PR19 final determinations, £469m of custom- collaborative, cross sector working. “It’s multiple ers’ money has been set aside for the planning and pre-construc- sector and multiple benefit,” he continues, and he tion delivery of a number of strategic water supply schemes, to believes it is set to deliver more for society than the get them so-called “shovel ready” for PR24. old ways of working. This chimes with social con- Hickey accepts the timetable is tight, but argues large compli- tract conversations in the sector and Ofwat’s new cated projects such as those being considered take a long time to strategy which elevates public value and the envi- actually deliver, so they need to be ready to fund and get going ronment as regulatory priorities. on at the next price review. There’s a balance to be struck, he “All regional groups are working towards de- says, between pushing ahead with implementation because of livering this new integrated agenda. WRE is most the clear need to act, but also “taking people with us”.

20 April 2020 THE WATER REPORT Paul Hickey, RAPID|interview

Immediate priorities Regulatory trailblazing One of RAPID’s primary roles is to create or adopt a regula- tory and commercial framework for joint (multi-company and RAPID-style formal regulatory cooperation is new. Hickey calls it a “regulatory or multi-sector) infrastructure projects. There’s an awful lot we experiment” that is “really culturally exciting” to be a part of. If it proves success- could unpack there, including: how to finance multi-stakeholder ful, it could in fact be a “trailblazer,” he says, given there are other challenges assets; commercial arrangements for water trades; how competi- that collaborative, joined up regulation could help address. Around 15 will staff join Hickey on the RAPID team, most seconded from the tion could be used to increase cost efficiency and how collabo- three sponsor regulators, though he points out it would be “wrong if this was ration squares with that; legal and licensing requirements; and a little bubble floating around” – so there is regular engagement with govern- managing water quality issues. Hickey says RAPID will publish ments, regional groups, and other stakeholders. in the coming few weeks a Forward Programme setting out its Terms of reference approved in December envisaged RAPID will exist as a priorities, but gives a sneak peak at what the team will be focus- programme for four years. The 2019-20 budget was £2.93m. There is a board, ing on: chaired by Ofwat’s chief executive and formed of senior representatives from ❙ Work to coordinate the various strands of activity including the sponsor regulators. between the National Framework, regional groups and RAPID’s process for progressing strategic schemes. The 17 would provide over 1,500Ml of capacity, which is above ❙ Tackling priority policy issues, which will include biosecurity, the 1,300Ml recommended by the NIC. no deterioration, and finding “an equitable framework to finance Addressing concerns about Ofwat ‘picking winners’ (and pos- and enable these schemes” – RAPID has recently let a piece of sibly getting it wrong), there is a gated process to ensure mul- work to look at potential commercial frameworks. tiple projects can be scrutinised and reassessed as they progress. ❙ “Taking the opportunity to do really good things for the en- Some of the current schemes are therefore unlikely to come to vironment”. This includes building in a “paradigm shift” in how fruition. Hickey is clear that rather than a capacity shortfall nec- projects are evaluated, moving from least cost to best value (see essarily resulting, there is a mechanism to build new schemes in p16). This is a “once in a generation opportunity,” he enthuses, of- to RAPID’s schedule. He characterises RAPID as “curious and fering the example of taking the opportunity to help chalk streams open minded” and explains it had let a piece of work to model or re-plumb parts of the network when evaluating options to build the best approach from here – “what schemes, what sequence”. a new reservoir. Looking beyond individual projects, Hickey says The team will “look at this as a programme rather than as indi- he will also have an eye to “how to hardwire that [best value] into vidual projects” and is seeking a balance between “a sense of pace” the statutory water resources policy framework”. to get to construction ready for PR24, but also “not to close doors ❙ Making time “to listen; to ask, ‘what do you think the issues to options”. “So we need energy around exploring the 17 schemes are’?” RAPID has committed to ‘responsive regulation’ – to listen and a mechanism for additional schemes to be included.” A wider to and work with other stakeholders in the space. Hickey com- point is that the whole system needs to be “much more adaptive ments that there are, for example, “sometimes perceived barri- going forward” so, for instance, more supply side capacity could be ers as well as real ones” that have the potential to really impact developed if demand management ambitions fall short in practice. progress. He offers the examples of perceived tension between There are five gates (see table). There is also an accelerated collaboration and competition rules; and whether commercial schedule, which Hickey explains is solely for the Southern Water water transfer arrangements would actually hold up in a drought Hampshire Zone, where the Environment Agency has imposed situation. “Would a company actually share? Could a recipient a licence change to prevent damaging abstraction on the River company depend on a transfer?” RAPID will seek to mitigate Itchen related to the Habitats Directive. There is a legal agree- such concerns. ment to have an alternative strategy in place by 2026, so time is of the essence. Options include desalination, water reuse or a new Gates and a golden window reservoir and transfer from the West Country. RAPID’s task will be the opposite of easy given the scale, cost Time is of the essence more widely, too. Hickey believes the and controversial nature of some of the strategic schemes it will next six to 12 months are crucial because they come at a good be working to facilitate. Just taking a single example – that the time in both the price review and WRMP schedules; there is, he National Framework modelling has recommended there will suggests, a “golden window in each cycle” when the time is right be a need for 100km+ long transfers as well as more local ones to act, and that is pretty much now. TWR to provide resilience to drought – there are, Hickey volunteers, “clear tensions with that”. Among them will be concerns about Rapid gates carbon emissions given the water sector’s net zero ambition, and Gate Gate start (submission) dates Accelerated gate start water quality issues. He anticipates “healthy challenge” between (submission) dates the RAPID partners as well as from third parties, given “each regulator has different duties and priorities”. Gate 1 July 2021 September 2020 Meanwhile RAPID will also oversee (question and monitor Gate 2 October 2022 (aligned with draft September 2021 rather than project manage) project progress over time, and in- WRMP24 consultation period) terface with the industry through the gated process Ofwat set out Gate 3 Summer 2023 (aligned with final June 2022 at PR19 for firms to access the £469m funds. WRMP24 publication) In the running for that are 17 schemes currently, chosen from Gate 4 Summer 2024 April 2023 WRMPs. Hickey explains some are preferred options, other still Gate 5 (if required) Winter 2025 Autumn 2024 either/or options, and some dependent on others progressing. Agency Environment

THE WATER REPORT April 2020 21 report|Environment

importantly excludes capital emissions, Ricardo’s Ian Behling said other emis- Starting down the sions may be brought into the portfolio as progress is made. Moreover, individ- ual companies are free to go beyond op- path to net zero erations, but this scope is acceptable sec- tor wide so is a good place to start. The Water UK hosted Ricardo and Mott Macdonald framework will seek to put the sector’s 2030 operational emissions in balance to present the first phase of their work to get with mitigation measures. water to net zero emissions by 2030. Ricardo and Mott Macdonald’s initial analysis suggests emissions could fall bout a year ago, the water ity generation by 43% (333GWh increase, from 2.4MtCO2e in the baseline 2018-19 sector collectively took the from 770 to 1100 GWh per year). year to 1.1MtCO2e by 2030, with upward bold decision to commit to ❙ Increased exports of renewable energy pressures from population growth com- a net zero carbon by 2030 to the national grid - 260% increase in re- pensated for principally by 100% green goal,A as part of the Public Interest Com- newable electricity exports (~280GWh). tariff purchases and decarbonisation of mitment. Water was the first whole ❙ Implemented new technologies to cre- the grid (see chart). The bulk of the sec- sector to make the pledge, and conse- ate biomethane from sewerage wastes and tor’s carbon emissions in the baseline year quently it is in the vanguard of working injected this into the national gas network are associated with grid electricity emis- out how to apply such a commitment to for use in homes and businesses. Over the sions for pumping and the like; for meth- a whole industry. past four years the industry has injected ane and nitrous oxide, process emissions approximately 35,000m3 of biomethane are significant and need further work to Baseline emissions into the grid mitigating 68,000 tonnes understand. In its favour is the fact that unlike many (CO2e) of emissions. other industries, it has been compiling ❙ Purchased green electricity from wind Decarbonisation options detailed operational emissions data from farms and other renewable schemes A Water UK event last month, to present all companies for about ten years. This (>2000 GWh – equivalent to powering the work done so far, marked the end of provides confidence around the ambition all the households in the UK for around phase 1 of this monumental project. Phase and shows the sector has already made a week. 2 has just begun, at the end of which the great strides. consultants plan to publish a report con- There was a 47% reduction in green- Sector-wide framework taining a route map and decarbonisation house gas net operational emissions be- Water UK commisioned consultants plan. Mott Macdonald’s Priyesh Depala tween 2011/12 and 2018/19, despite up- Ricardo and Mott Macdonald to create explained there is a hierarchy of options: ward pressures from population growth a framework to chart a sector wide net ❙ Tier 1, emissions reduction – energy ef- and regulations. In 2018/19 operational zero trajectory to 2030. They started ficiency and emissions avoidance emissions were 2.6MtCO2e. by defining the boundaries, and settled ❙ Tier 2, netting off – from renewable en- To support the reduction over the de- on the operating emissions from ap- ergy purchase and production cade, water companies have: pointed water businesses. This is in line ❙ Tier 3, offsetting – carbon insets and ❙ Increased their own renewable electric- with reporting to date and, while that offsets. Depala was clear tier three should be trajectory to 2030 considered the final option. “This is not an offsetting challenge – we can’t plant our way out of this,” he said. Phase 3 (around July) will involve shar- ing tools and guidelines for individual companies to use in developing their own corporate strategies. There is clearly a lot yet to be worked out, but one clear message from the day was that “acting early has huge benefits,” Behling emphasised. Some things simply take time to deliver; more time also allows for technology gaps to be identified and research conducted; and for water com- panies to get in early before competition for green tariffs and offsets ramps up. Crucially, it is also cheaper to act earlier. The whole project has not been costed yet. TWR

22 April 2020 THE WATER REPORT

Innovation|feature

ublished in December as part of the final determina- tions package, Ofwat’s plan for Driving transforma- tional innovation in the sector was initially engulfed in the wider PR19 conversation. But four months on and seniorP director of strategy and planning John Russell says he Brewing is very encouraged by the response from the sector. He recaps that Ofwat’s message is innovation is “an essential thing for the sector, not a nice to have” and that while there are already pockets of inspiring activity, “we don’t see an overarching sense new ideas of striving for innovation in everything we do” and “we want to drive transformational change”. December’s decisions confirmed an Innovation Fund will be created, funded by customers to the tune of £200m, with each company’s contribution proportionate to its revenue. Ofwat settled on an annual competition running for four years, rather than the other option consulted on – rewards at PR24 for the successful rollout of new ideas. It said the competition would give more certainty and be more effective and less complex. Be- yond the Fund, the other strands of the July consultation were also confirmed, namely that the sector is expected to establish an innovation strategy including a Centre of Excellence to advance An update on Ofwat’s progress to the cause. So what’s happened since? develop an Innovation Fund and Innovation Fund galvanise strategic thinking on Clothilde Cantegreil, principal and innovation lead, says Ofwat remains on track to pilot a competition at the end of this year. innovation in the sector. This will be open to the 17 statutory water companies and New sure whoever administers it has breadth and is able to grasp what Appointments and Variations, with explicit encouragement of we’ve been talking about: transformational innovation.” collaborative bids (with each other, supply chain partners, inter- ests from outside the sector and so on). Innovation strategy As noted, the funded innovation must be “transformative” and While the Innovation Fund has understandably attracted the the regulator said “focused on addressing long-term strategic chal- most attention – the concept is new for water and it is a sizeable lenges”. It came up at Water UK’s net zero carbon event that the fund pot of money – Russell’s view is that the wider innovation strat- could, for example, be used to further that mission (see p22). Can- egy Ofwat has called on the sector to produce is “almost more tegreil clarifies that while Ofwat expects to fund a number of large important than the fund itself”. He explains: “The fund is a cata- projects, that doesn’t mean smaller ones, or quick wins, will be left lyst, not the be all and end all.” It is also time limited, whereas a out in the cold. “We are looking to be quite flexible,” she comments. strategy for innovation should be both embedded and enduring. Since December, the team has been working on outstanding “The sector owning this and where it goes is the most crucial policy matters. It plans to consult on these early this financial part,” he continues. “We’re bringing our bit [stimulus funding year. Key issues include developing further customer safeguards, and faciliation] to the table, but it is for the sector to pick up.” match funding (one point being smaller organisations do not Ofwat has, however, specified that a Centre of Excellence of some have the financial clout of larger ones), clawback arrangements kind should be part of the picture. Other, often more competitive, if funds are misspent, managing Intellectual Property rights, and sectors have equivalent bodies, such as the Energy Systems Cata- the process for reviewing the competition. pult. Ofwat is keen for water to create what Russell calls an “archi- On funding, Russell stresses that while Ofwat has been clear tecture of innovation” including through open data protocols and that it expects companies to fund a portion of project costs, there an academic framework to support joined up action on shared chal- is “quite a lot of money out there” from other sources such as gov- lenges, like the AMP7 15% leak reduction target. It could also sup- ernment and corporates and part of the picture might be that the port practical action so, for instance, supply chain companies can “sector needs to get smarter on how to access this extra money”. test their products and services centrally rather than one water com- The second strand of work has concerned setting up a process pany at a time. Cantegreil says Ofwat is “willing to consider funding for appointing an organisation to help design and run the com- architecture through the innovation competition”. petitions. Ofwat intends to run a tender in summer. Russell says The December paper also confirmed Ofwat would trial a ‘one there has been “a lot of interest”. Among those understood to stop shop’ service for companies and their partners to seek ad- have pitched in are the Energy Innovation Centre, which would vice or clarification on innovation matters. Russell says it is talk- obviously bring a cross sector dimension. The Ofwat team won’t ing to fellow regulators the EA, NRW, DWI and strategic water be drawn on the merits of any particular organisations, but resource alliance RAPID (see p20) about this, which suggests it Cantegreil cites independence and expertise as desirable char- may end up more of a regulatory one stop shop than an Ofwat acteristics. “Otherwise, we are open minded.” Russell adds that one stop shop. This would be in keeping with moves for more TWR given Ofwat is defining innovation broadly “we have to make regulatory joint working. TWR

THE WATER REPORT April 2020 23 industry comment|Strategy

industry COMMENT AMP7 – A missed opportunity or the transition point? How can water companies square an incredibly tight price settlement with the need to rise to environmental and social challenges? David Elliott shares his ideas.

We have entered a new era – or modernise water and public health to fall back on when times get through an open and transpar- in water terms a new AMP – and assets to comply with European tough –this was most evident dur- ent B2B market. This is intended to apart from some discussions regulation. It is broadly a consumer ing the run up to the last election optimise outcomes for the money pending with the Competition supplier model, with water (pota- when support for renationalisation available. and Markets Authority, company ble and waste) as the commodity of water services was high. We The early signs are encouraging plans are mapped out for the next to be transacted. The utility ‘piece’ shouldn’t delude ourselves that this and a marked improvement on five years. This will be a challeng- of water has been separated from sentiment has gone away. the traditional water utility model. ing time. Less cash and tough the rest of the natural system and ❙ The commodity status of water Wessex’s independent trading performance commitments could customers asked how much they is reinforced by language and platform, EnTrade, has allowed for result in companies pulling up the were willing to pay companies to behaviour. ‘Supplier’, ‘consumer’, system scale collaboration. What drawbridge and hunkering down make problems go away. ‘water bills’, ‘retail competition’ started as a collaboration on water to try to reduce costs. However Apart from a shift over the has been the language that the quality outcomes with farmers is companies can’t afford to ignore last few years to address broad customer has been most exposed evolving rapidly to include other rising concern over social and customer sentiment, the holy grail to. I doubt many customers would major (and increasing tradable) environmental challenges, or the in terms of customers has been to know what WINEP (Water Industry benefits, such as less soil erosion, backlog in asset maintenance of achieve zero contacts; for water National Environment Plan, if you improved biodiversity, and less both built and natural assets. Five services to be accessible and need reminding) stands for – yet carbon – even sequestration. years is half a decade, and any affordable enough, and resilient this is a major component of the However, more is to be done to loss of impetus on dealing with enough, that customers never had bill as mandated investment to involve the other bodies who utilise these cross cutting issues could stall to contact their company. There improve the environment. and invest in the water environment progress for nearly a decade. are a number of serious flaws in this In AMP7, Wessex Water will be (more than 50 of them). In AMP7, So what is to be done? Below model in the context of the chal- the single largest private investor in Wessex is shifting to an Open System I outline seven key strategic shifts lenges today: the environment in its region. For a model, which brings those excluded for AMP7 that the water commu- ❙ Customers have no discernible number of years it has pursued an communities, and the knowledge nity needs to consider if we are contract with water companies. A alternative approach: a catch- and resources they have, into play to make progress on challenging contract implies a two way rela- ment based water model, that to collaborate on challenges. Wes- outcomes. tionship where both parties have a seeks to make trade offs between sex has created a ‘Marketplace part to play. asset solutions and land based for water’ starting in its four major 1. Whole system ❙ There is no resilient relationship solutions delivered by others, catchments, and the collaborative collaboration partnerships formed will be key to The prevailing model in the water delivering the wider public health sector is 30 years old and concerns Five years is half a decade, and and resilient environment outcomes the water utility. It was devel- any loss of impetus on dealing crying out for attention. This will en- oped at a time when access to able transactions to move beyond capital was a concern, to deliver with these cross cutting issues could the B2B to include B2C communities. the major investment needed to stall progress for nearly a decade. It will also allow financial and other

24 April 2020 THE WATER REPORT Strategy|industry comment industry COMMENT

with communities to prevent events caused by flushed wipes and the like, if the context was one where communities invested openly in improving the environment through David Elliott is the outgoing their agent – the water company. group chief innovation office There could be a much more pro- at Wessex Water, and is joining ductive incentive-based relation- Indepen as a director in May. ship than the pass/fail regulation prevailing today. positive narrative that is effective at tackling challenges and seizing 3. Customer relationships opportunities across the system. The narrative we use about water is incredibly important to the nature 4. Regulatory of our relationship with customers relationships and the communities. The ‘supplier- This theme continues when we consumer’ narrative is becoming in- consider the future of regula- creasingly outdated and reinforces tion and regulators. Open and the ‘us and them’ nature of the transparent information (perfectly resources to be shared to make fast- Other than the very few custom- traditional relationship. Assessing achievable in the digital age) and er and more effiin pors o ers who have had to contact their what services we need to develop performance are critical to build- commitments than if Wessex acted water company (increasingly a through ‘willingness to pay’ exacer- ing a relationship where regulators alone. There are even opportunities positive experience), the prevailing bates that further – it implies “what feel confident enough to back off for cross company collaboration window into the sector is what is will you pay us to sort the problem to a point where they are primarily through the market place. reported in the press, which is pre- out so that you don’t have to?” architects, setting direction and The Open System model may also dominantly about bills and failures. The challenges we face are pace, and addressing intergenera- prove a catalyst for a shift in focus As noted above, Wessex Water is systemic and significant enough to tional challenges. away from regulators and towards the single largest private investor in make supply side solutions alone Regulators aren’t renowned communities; with the democratisa- the environment in its region. It op- too little too late, unless those for their innovation. That’s not tion of water, energy and environ- erates on a daily basis well within solutions are designed to support surprising given much regulation is mental outcomes creating the its consented or “contracted” customers’ increasing willingness designed to address what has hap- “movement” required to achieve performance. The company goes to act. We need a relationship that pened rather than what might be. key shifts in progress. But how? further by increasingly seeking encourages customers to work with Regulation likes certainty but the collaborative ways to maximise us by creating pathways for them ‘might be’ scenario likes permis- 2. Green investment environmental outcomes in the to act. We need to assess what sion to fail, provided failure is part and sentiment shift way it invests. assets and services could maximise of the learning process and not a The state of our climate, our nature Yes, things occasionally go demand side opportunities. symptom that the evidential bar is and our resilience in the face of wrong; sewers block or assets fail This will require the sector to give too high. the challenges is increasingly THE causing (hopefully) short term det- much more information to custom- In an open system, innovation biggest area of mutual concern riment. But the sector has a good ers about the part they can play, can thrive. The challenge for regu- that binds water companies and story to tell in the round, with daily and to build trust with customers by lators is how do they keep pace their communities, and it’s an outperformance ensuring ‘blips’ being open and transparent about with innovation and not throttle opportunity the sector must grasp. do not comprise overall outcomes company performance. It may it at birth because the demand in terms of stripping out nu- even be that companies can com- for certainty and the perfect is trients and pollutants municate better through organ- incompatible? The answer most from water. And isations that communities trust or likely lies with the regulators’ ability it would be far regularly transact with. Information to connect and adapt to informa- easier for com- and the way it is communicated tion as it presents, rather than save panies to work can build a continually reinforced interventions to a moment in time every five years. The ‘supplier-consumer’ narrative is becoming Which brings me to another odd outcome of regulation: the incen- increasingly outdated and reinforces the ‘us and tive that prevails is to build an asset and then to make it as ‘efficient them’ nature of the traditional relationship. Continued on p26 ›

THE WATER REPORT April 2020 25 industry comment|Strategy

industry COMMENT continued

as possible by operating it with as well. In fact it little headroom to the contract or New skills and is very unlikely; consent possible. In markets the retraining of services tend to get incentive would normally be to captured by scope sweat the assets you have to see the workforce creep and sometimes a what productive gain you can will also be mistaken belief that it’s better make before considering other inside because there’s less risk. interventions, and then chose the required, as data, Apple might be considered next best intervention which may information and to be a monopoly through their be another asset or a service. closed operating environment. We need a much wider adoption connections You can’t build your own PC or on environmental outcomes – the of outcome based approaches, become the phone and use the Apple operat- £0.4bn is the cost to administer such as catchment permitting ing environment. Yet Apple’s the investment, delivered largely currently being trialled by regula- means of growth value in the eyes of its customers through a series of siloed ap- tors and Wessex Water. AMP7 is the and productive is enhanced because its assets proaches. Broadly a third is deliv- second period of this pilot of smart allow a rich market of services to ered by the private sector (mainly regulation without any discernible efficiency develop to operate on them. Typi- water companies), while govern- progress on making this approach Digital tools will also empower cally you might only use a fraction ment farm payments, grants, business as usual. The use of pilots the workforce to make better deci- of Apple’s services compared to public services and subscriptions and trials is important in the process sions through better information, those provided by others. However make up the rest. of making failure an acceptable enhanced by AI (assuming the their strict application of design Behind these silos lies a raft of outcome of innovation, but only if data is good in the first place). guidelines protects the integrity European regulations that signal it then leads to faster adoption and However to make the most of the and experience of the service. where funds are to be allocated. operationalisation. There is a saying opportunities these models pres- Indeed it might be considered It is a hugely ineffiin wy o in the sector: “We have more pilots ent, water companies will need “risky” for Apple to develop its own investing. Our departure from than Heathrow Airport and more tri- to adapt their business models services if they are are compet- Europe, and a government signal- als than the Old Bailey.” I first heard and regulators will need to adapt ing against mature and popular ing a shift way from regulatory that saying two decades ago, to understand the markets that services developed by others. equivalence, is an opportunity to and it still very much applies today are exposed, rather than simply A similar approach can be deliver environmental equivalence which is a reflection of the size of rely on comparative competition. adopted in water. There is nothing (or preferably betterment) in a the challenge. New skills and retraining of the to stop water companies encour- much more effiin ad effectiv workforce will also be required, as aging the development of services way. To enable that, government 5) Digital business data, information and connections that enhance the outcomes they will need to find ways of blending models becomes the means of growth provide or the experience of their private and state funding. Digital business models are the key and productive effiiny Ti i customers. Consider how land- If system co-ordination is to be to enabling faster progress in an turn may also see new types of owners can help companies to optimised, the siloed approach open system, and faster exposure investment come into the sector improve water quality or decarbo- needs to be reduced and opportu- of opportunities. Consider the rapid depending on the appetite for risk nise, or how new entrants serving nity exposed by markets for invest- growth and evolution of businesses and return. new developments can introduce ment in natural and built infrastruc- built on this principle: Amazon, water recycling systems that opti- ture and services. We need trading AirBNB, Netflix to name a few. Even 6) Competitors mean mise peak capacity use. platforms (such as EnTrade) that some stalwarts of vertical inte- opportunity optimise the investment opportuni- grated production are finding their Water companies have a history 7. Blend the finance ties by allowing multiple buyers and future is more successful through of doing things themselves. We are These system issues are not the sole sellers to combine resources across digital channels, such as Apple not alone in this; it is increasingly an responsibility of water companies multiple nature and environmental and Microsoft. aspiration of the state ‘monopoly’ to invest in. Collectively the state outcomes. What better way is there These models are built on the abil- as well. But it is a very rare that and the private sector invest to demonstrate why leaving Europe ity to mobilise mass transactions in monopolies can do everything very £13.4bn/yr (not including carbon) had a purpose? TWR a very simplistic way, and the rapid prototyping and introduction of new We have more pilots than Heathrow Airport and services to fill opportunities exposed. As such you can influence activity more trials than the Old Bailey. I first heard that and behaviours by acting at a com- saying two decades ago, and it still very much applies munity level across the system, as EnTrade has done. today which is a reflection of the size of the challenge.

26 April 2020 THE WATER REPORT Communications|feature Open minded on the single minded second speaker noted that organisations should always consider What can water companies how they will respond to challenge where activist groups have learn from single interest groups? no interest in working with them. She told the cautionary tale The Indepen Forum explored. of underwear brand Victoria’s Secret. An activist group set up a fake Victoria’s Secret online site and pictured its underwear ingle interest groups have always been able to challenge ranges alongside anti-rape messages. The company chose to companies and hold them to account, but massively in- send a ‘cease and desist’ letter, and fell foul of public opinion in creased connectivity and social media now means what the process. Many people argued Victoria’s Secret should have may have stayed low key or small scale movements can embraced the activism and supported its anti-rape message, spreadS rapidly. Think #MeToo or Extinction Rebellion on the rather than prioritising corporate interests. global scale, or chalk stream activists closer to home. Turning that point on its head, the first speaker said she be- The last Indepen Forum before the Coronavirus stopped play, lieved interest groups should be willing to respond to those looked at what providers of essential services like water compa- whose activities they are challenging too. She herself (as an cam- nies might learn from single interest groups – on engaging the paigner against plastic waste) was practising what she preached public and inspiring activity – as well as at the merits or other- and a few days after the Forum was off to the “lion’s den” of a wise of working with them. packaging industry conference.

Together or alone? Listen and learn The chair kicked off the meeting by asking participants to con- The second speaker went on to say that while utilities used to sider how they would go about delivering change if they ran a deliberately seek to be ‘invisible’ services, increasingly, younger pressure group. Would they work with governments, regulators people “look to companies to speak out”. Utilities find them- and others to achieve change, or would that “trash your rebel selves front and centre of the climate change challenge in par- brand?” What if you ran a big utility whose operations were ticular, and have an opportunity to champion a response. drawing fire from an activist group. Do you cooperate with In doing so, there are lessons to learn from interest groups. them, ignore them, or pick groups whose causes align with the Campaign-style communications can be powerful, and utilities preferences of your customers, and work with them proactively could learn a lot from the methods used – for instance, on social to make a virtue out of a necessity? media, through effective storytelling and on making messages The first speaker led a group whose sole purpose is to stop relevant to what people are already talking about. plastic pollution at source. She reported collaboration is vital to The first speaker cited the following as among the reasons for its mission, both on a philosophical level (plastic is everyone’s her campaign’s success (particularly bearing in mind “no one problem) and a practical level. From partnering with a single had heard of us a few years ago”): water company back in 2015, it now collaborates with the entire ❙ It taps into people’s existing motivations, including to save water sector and others, and in the process has reached far more money and improve health as well as prevent plastic waste. people with its message than it could ever have alone. Moreover, ❙ It offers positive brand association for partner organisations. the group’s values are based on positive action – “a tickle is better ❙ It has strong brand recognition at 40% of households – a level than a punch,” the speaker explained. which competes with big consumer brands. The second speaker, from a regulator, endorsed the sentiment. There was also discussion of how companies might keep the mo- Citing the classic combos Ant & Dec, Simon & Garfunkel, and mentum up and conversations going once they are engaged with Thelma & Louise, she said people work best when they work to- customers on an issue. The first speaker suggested breaking issues gether – though with activists and ‘the establishment’, that’s not down into bite-sized chunks to engage people, particularly for huge straightforward. She advised organisations seeking to work with issues like climate change, where she said people can feel like “rab- interest groups firstly to be open to collaboration. This requires bits in the headlights” if big problems are treated as a block. TWR dialogue, “symmetry and equality” between the parties, and “listening to not talking at”. Secondly she advocated looking for shared purpose – for instance, water companies want to change Utilities find themselves front and people’s behaviour to stop them wasting water and flushing the centre of the climate change challenge wrong things down the loo. This can lead to shared concerns or “an overlapping sense of purpose” with certain interest groups. in particular, and have an opportunity One participant from the floor observed some campaign- ers – such as XR – are most effective without collaborating. The to champion a response.

THE WATER REPORT April 2020 27 report|Climate change

A war footing for water A new group to unlock climate finance for water Research published by the charity last month found the countries with the low- services was one strand of a battle plan to est levels of access to clean water get as emerge at WaterAid's Water and Climate Summit little as 17 cents (13p) per person per year from climate finance to help them adapt last month. Anastasia Maseychik reports. their water services. Just 5% of global cli- mate finance is currently spent on adapta- e have until 2030 to HRH told the roundtable: “We have tion – despite a global commitment that avoid catastrophe” no time to waste if we are to change our finance should be split equally between were some of the current trajectory to a sustainable future. mitigation and adaptation. first words spoken Water being so utterly essential to life, at“ WaterWAid’s Water and Climate summit it’s clearly vital that we recognise the link Heroes and advocates in London in a video showing how the cli- between water and climate change. With The plenaries at the summit reinforced mate crisis most severely affects the world’s the urgency that now exists around avoid- the core message that action is needed ur- poorest communities. The summit’s recur- ing irreversible damage to our planet, we gently. Broadcaster Rageh Omar pointed ring theme was that those who had con- must at all costs put ourselves on what can out: “The people who will struggle most tributed the least to climate change would only be described as a war footing. The will be those who already struggle to find suffer most from it. The summit’s message current battle against coronavirus at least water.” Short films then played of ‘water was clear, with “action” and “urgency” the demonstrates how quickly the world can heroes’ – people from around the world key words of the day. react when we identify a common threat.” who are fighting on the front line of the A specific action emerging from the Currently 3.6bn people live in an area water-climate crisis to push back against summit was the formation of a new group of water scarcity where they struggle to climate change and provide clean water to unlock more climate finance for water get water for at least one month of the and sanitation. services in vulnerable countries. A high year. That figure is predicted to rise to 5bn Some of these ‘water heroes’ were invit- level roundtable hosted by WaterAid presi- by 2050 – the equivalent of one person ed to the stage to speak about their expe- dent HRH The Prince of Wales and the per second being added to water scarce riences. Christopher Tumwine, an indus- charity at the event resulted in the launch areas between now and then. trial chemist from Uganda, emphasised of a high-level expert group to develop WaterAid said: “For the poorest people, the importance of ensuring leaders and proposals to unlock greater sums of cli- the most immediate and widespread im- governments deliver on their promises to mate finance to invest in vital water ser- pacts of climate change are felt through combat climate change and improve wa- vices in developing countries, to tackle the water – extreme droughts, sea level ter and sanitation conditions. twin water and climate crises. The group rises, vast floods and powerful storms. Yvonne Aki-Sawyerr OBE, mayor of aims to conclude its work ahead of the Access to clean water is uniquely vulnera- Freetown in Sierra Leone, spoke of how Glasgow Climate Summit in November. ble as climate change piles more pressure migration of rural people into her city on already overstretched water sources due to climate change was causing fast The people who will and services. Floods disrupt sanita- development and deforestation, leading tion services leading to diseases, longer to flooding as water catchment areas are struggle most will be droughts mean women have to walk laid bare. Whilst she and her team have those who already even further to collect water, and rising committed to planting a million new seas pollute water supplies making it too trees in 2020, she remarked: “I’m doing struggle to find water. salty to drink.” this with one hand tied behind my back” – stressing the importance of preventing development in hazard prone areas and preserving water catchment forests. Henry Dixon, member of the WaterAid committee at Yorkshire Water, highlighted that the need for climate-conscious water systems wasn’t just in the developing world but everywhere and that solutions “don’t need to be expensive, big or shiny” to work. Lord Callaghan, minister for Climate Change and Corporate Responsibility, returned to the theme of finance, men- tioning the UK government’s plans to en- Panel: we need hundreds of billions of pounds over the next 10-15 years courage commitments around the world

28 April 2020 THE WATER REPORT Climate change|report

Gibson stressed the urgency of these Above: Prince measures and told the summit “we are Charles: "We coming into the fastest and most radical need to act to create £11.6bn of climate finance over vestment, to invest more in human capital transformation of society and economy now" the next five years, as well as the devel- and to prioritise. through the climate crisis”. Addressing the opment of the UN’s Risk Informed Early present business leaders, Gibson warned Left: Rageh Access Partnership to create early action Businesses’ business them that “the cost of doing nothing in Omaar with financing systems, social protections and The second plenary focussed on the roles this space is not nothing” both financially a stark mes- insurance machinery for identified risks. and responsibilities of business leaders and environmentally. She highlighted the sage In the plenary, HRH Prince Charles and private companies and included a need to make the business case for water emphasised the need for a “thoroughly in- panel of Rebecca Marmot, chief sustain- and sanitation across supply and manufac- tegrated approach” to combating climate ability officer of Unilver, Kate Gibson, di- turing chains to reduce water footprints, a change, requiring not just the water sec- rector of Diageo in Society and Christine part of bringing wider recognition to the tor but everyone to come together to fight McGourty, CEO of Water UK. Discussion fact that water is a prized resource. Round- for sustainability and to decarbonise the focussed around the environmental stew- ing the discussions to a close, McGourty economy. “This is the biggest threat hu- ardship role of businesses and how finan- expressed happiness at the environmen- manity has ever faced and time is running cial and moral choices for businesses have tal commitments that had already taken out. We need to act now,” he urged. now merged. “The financial and the mor- place but reminded the audience that we’re The urgency of the climate crisis at- al are now completely intertwined – it’s still short of the list of plans and solutions tracted more royal attention as the follow- not a choice anymore” stressed Marmot. which are desperately needed. ing panel included HSH Prince Albert II “Building trust with customers is inextri- The final plenary revealed the outcomes of Monaco who also stressed the need for cably linked to growth and customers are from other roundtable discussions held a co-ordinated effort.A lso present was raising their expectations”. at the summit. Amongst the comments economist Lord Nicolas Stern from LSE; McGourty reinforced this message. shared were those from Tim Clark, chair Bernie Mensah, co-head of global fixed “Consumer facing advertising cam- of WaterAid UK, who stated it was key to income, currencies and commodities at paigns are the way of operating now,” she educate the public on water, as it has been the Bank of America; Cecilia Chatterjee stated and emphasised that brands have on carbon: “People on the street under- Martinsen, CEO of WaterAid Sweden enormous power to mobilise change. stand carbon now. We need to make water and Aki-Sawyerr. The themes of the panel McGourty highlighted the brand Ben & like that.” were that the next ten to 15 years will be Jerry’s as a great example of a company Executive director of Unicef Henrietta decisive in reversing climate change and who “really put themselves behind” the Fore aptly summarised in the closing ple- that hundreds of billions of pounds per cause of environmental protection – suc- nary. “It is our duty to protect and manage year needs to be raised to really address cessfully engaging customers to sign pe- the environment for our children and our the problem. Martinsen summarised Wa- titions, go on marches and fight actively future, and it demands a global response. terAid’s three priorities: to get more in- for change. We need the private sector to help us”. TWR

THE WATER REPORT April 2020 29 news review|

In BRIEF DPC licence changes mooted Severn Trent has promoted Ofwat is consulting until 6 April need to agree for the company to services have not been included its head of economic on its views on the licence amend- undertake a DPC procurement in price controls as these will be regulation Shane Anderson ments that will be required to and obtain designated status; en- determined through a competi- to director of strategy and implement schemes associated ter into a contract with the CAP; tive tender. regulation. with direct procurement for cus- vary the contract; and revoke des- Ofwat said it would use respons- Pennon Group has agreed tomers – where a water company ignated status. es to inform a statutory consulta- to sell its waste manage- competitively tenders for financ- ❙ Amendment of an existing li- tion on the final form of the modi- ment arm Viridor to Plan- ing and delivery of the project by cence condition (Condition B) fications later this year. Initially, the ets UK Bidco for £4.2bn. appointing a third-party competi- to permit the water company to changes would apply only to water tively appointed provider (CAP). recover from customers, outside companies where DPC schemes Market researcher Accent There are two proposed modi- of price controls, the designated have been identified or where has won a £1m three-year contract with Ofwat for fications: charges that the water company there exists the possibility of a DPC research among domestic ❙ A new licence condition to es- has to pay to the CAP for services. scheme being procured within the customers (C-Mex) and de- tablish the processes by which the These services will normally in- 2020-25 control period: Anglian veloper customers (D-MeX). water company could undertake clude the design, build, financing, Water, Welsh Water, United Utili- the procurement of a CAP. In par- maintenance and operation of as- ties, Southern Water, Affinity Wa- Anglian Water CEO Peter ticular, Ofwat proposed it would sets. The CAP charges for these ter and Bristol Water. Simpson has been ap- pointed co-chair of the UK Corporate Leaders Group, a group of busi- nesses seeking to acceler- Ofwat raises the bar for inter company loans ate UK progress in tackling Water companies will only be such as intercompany loans from ance and pointed to companies climate change. granted consent for inter com- the water company up to the par- that have already started unwinding pany loans if Ofwat is clear the ent company, will receive consent legacy arrangements, including: WaterAid has awarded arrangements will serve customer only if the arrangements clearly ❙ Anglian arranged the full repay- SES Water’s recently retired managing director Antho- interests. serve customers’ interests. ment of its £1.6bn intercompany ny Ferrar its highest honour, The regulator last month pub- This could include direct cus- loan the President's Award, for lished guidance updating its tomer benefits (such as bill reduc- ❙ £220m of Thames Water’s inter- his fundraising efforts. policy on requests for consent for tions), or indirect benefits (such company loan was repaid derogations from the regulatory as arrangements that improve effi- ❙ Southern Water ensured the The government has ap- ring fencing framework, along- ciency). It said the guidance set “a settlement of £682m of its inter- pointed James Heath, di- side a conclusions document fol- high bar” for companies to clear company loan rector of digital infrastruc- ❙ ture at the Department for lowing its 2019 consultation. It before such arrangements will be South Staffordshire Water ar- Culture, Media and Sport, said water companies wanting approved. ranged the early repayment of a as the National Infrastruc- to enter financial arrangements Ofwat said it has received sup- £15m intercompany loan before ture Commission’s CEO. which are ordinarily prohibited, port from the sector on the guid- its contractual maturity date.

The Ethisphere Institute has named Northumbrian Wa- next legislative vehicle to deliver ter Group as the world’s “most ethical” water com- Environment Bill paused this may be several years away.” pany for the ninth time. The passage of the Environment UK called for: Waterwise confirmed Clauses 49 Bill has been paused during the ❙ Clause 81, which is a wide rang- and 50 “can be used to introduce Severn Trent showcased coronavirus pandemic. ing power to amend the regula- mandatory water labelling linked to investors plans to spend Since our last edition, the Bill tions that implement the Water to minimum standards across the £1.2bn on long term sus- has had its Second Reading and Framework Directive, to be deleted four countries of the UK, if the tainability commitments evidence been taken in Committee. or amended to ensure that targets governments choose to do so”. in AMP7. This included ❙ £0.7bn on restoring natural In a briefing for MPs ahead of the and standards cannot be weakened The bill to include a power to habitat, £0.2bn on a Triple Second Reading, Greener UK said without thorough public consulta- establish ‘no abstraction zones’ Carbon Pledge, £0.25bn while there were welcome mea- tion and scientific advice. around priority freshwater habi- on managing water scar- sures, “considered as a whole, the ❙ The Bill to tackle water con- tats where there is evidence of city; and £0.05bn on its bill does not achieve what has been sumption. “It must lead to a target damage by abstraction. role in society. promised: gold standard legislation, for rapid and sustainable reduc- ❙ a shorter timeframe for action showing global leadership for re- tion in water consumption, both (currently action is for 2028) for Andrex Washlets have secured Water UK’s Fine sponding to the environmental cri- household and non-household. Clause 80, to improve water ab- to Flush standard. sis, and a world-leading watchdog”. Anything less will be a signifi- straction, given the pressure on On water specifically, Greener cant missed opportunity, as the globally important chalk streams.

30 April 2020 THE WATER REPORT the Water competition Report

watcWe report on the impacth of Covid-19 Covid-19: impact on on the retail market as part of our wider coverage of the virus outbreak. the retail market See the article starting p4.

the risks and impact of any sup- ply restrictions. For example, we Business market must pull its expect wholesalers to gauge if and where restrictions on use may weight on water efficienc need to be prioritised, and to work with retailers to ensure this data is The Environment Agency and water efficiency sub group would be set up this year as part of a new shared with customers in a timely Ofwat have told wholesalers and be “ideally placed” to coordinate monitoring and reporting frame- manner.” retailers to take a series of actions production of the plan. work to report on progress on de- Fletcher and Bradshaw also wel- “as a priority” to boost water ef- Ofwat and the Agency clarified mand management, as part of the comed suggestions on what more ficiency in the business market their position on wholesaler con- National Framework. could be done from industry and and therefore the contribution the cerns that they cannot act in the other stakeholders. The idea of a business sector makes to the na- business market because of their ❙ Meter reads – Trading parties joint letter was a recommendation tional water resource position. Competition Act 1998 obligations, were told to support work to ad- from a Waterwise workshop on In a joint letter to trading party saying: “Provided wholesalers, re- dress the lack of complete, accu- raising the bar on water efficiency chief executives from Ofwat’s Ra- tailers and other stakeholders act in rate and timely meter reads in the for business customers last year. chel Fletcher and the Environ- compliance with competition law, we market, and to come forward with Waterwise head of policy and strat- ment Agency’s executive director see no reason why they should not their own suggestions on going egy Nathan Richardson described for the environment and business work together towards identifying further. “Wholesalers and retail- the letter, and in particular the re- Harvey Bradshaw, the regulators and delivering ways for business cus- ers can pursue amendments to quirement for an action plan within cited companies’ statutory duty tomers to use water more efficiently market codes. This includes those six months, as “a huge step forward”. under the Water Industry Act and reduce leakage. This means relating to metering and meter The regulators pointed out the 1991 to promote efficient use of among other things that a wholesaler reading, or where amendments business retail market accounts for water by their customers. They set may work with retailers on a non- may facilitate better or more cost nearly a third of all water delivered out three required actions: discriminatory basis to offer water effective provision of water effi- to customers in England and there- efficiency advice and services to end ciency services.” fore that improved business water ❙ WRMP24 – Within six months, business customers, and in ways efficiency could contribute signifi- wholesalers and retailers need to which preserve retailers’ and other ❙ Supply restrictions and other cantly to meeting national needs, as produce a joint plan of action set- stakeholders’ scope to do the same.” incidents – The regulators noted set out in the Environment Agency’s ting out how they intend to work They cited as an example Thames work to encourage good practice new National Framework for Water together to develop and deliver Water’s scheme to reward in-region on communicating with custom- Resources (see p12). However to 2024 Water Resource Manage- retailers with a one-off payment of ers when wholesalers need to in- date, water efficiency service up- ment Plans that deliver “signifi- 5p per litre per day of water saved for troduce restrictions during supply take has been small, “which means cantly improved levels of water each of their customers. shortages, but want to see more. the business sector is not currently efficiency in the business sector”. Fletcher and Bradshaw told “This is a good starting point but playing its part in meeting national The regulators suggested the Re- trading parties the action plans we think more could be done to needs for delivering water on a long tailer Wholesaler Group’s new would be presented to a group to proactively reduce and manage term, sustainable basis”.

vices by Castle. Castle to 'merge' with Affiiy fr Busines Blairgowrie headquartered Castle will add Affinity for Busi- The market saw further consolida- 350,000 in the merged portfolio. served by Castle Water” – a prod- ness’ Welwyn Garden City base to tion this month, when Castle Wa- Castle said the deal would “allow uct of geography for many, since its regional office portfolio, which ter subsumed Affinity for Business more efficient billing, reduced ad- Castle acquired Thames Water’s already includes London, Leeds, on 1 April. ministration and improved cus- business customer base. Many Af- Ayr and Portsmouth. Affinity for Business’ 50,000 tomer service for the many Affin- finity for Water’s water customers Affinity for Business staff will be customers will join Castle’s ity for Business customers already are supplied with sewerage ser- transferred over.

THE WATER REPORT April 2020 31 INterview|Phill Mills, UK Water Retailer Council Underlying health problems The Covid-19 pandemic could put some business retailers on the critical list (see p4). Speaking before the current crisis hit, UKWRC chair Phill Mills said the market was already ailing and in need of urgent attention.

fwat and MOSL have said they plan to establish a the large box on p34. To properly address them, cooperation is senior trading party group to consider the risks needed. But meaningful collaboration has – from some quarters posed by late payment and bad debt in the wake – been in short supply. of the economic devastation caused by the Coro- Take wholesalers. These have been firmly in Ofwat’s sights Onavirus. Retailers have been calling for such a group to be set since chief executive Rachel Fletcher wrote to them last May in up for some months now – but to urgently fix wider problems blunt language asking how they were supporting the market. in the English business market. Mills says while wholesalers can’t all be tarred with the same Through the auspices of the UK Water Retailer Council (UK- brush, as a group they are falling short. He cites, for instance, WRC) which represents retailers serving 99% of supply points in that he only got six replies to 16 letters sent to wholesaler chief England (see small box), their message is that the market is not executives setting out retailers’ common concerns in the wake working as intended when it was created three years ago and that of Fletcher’s communication. “To be fair to the six, they set out 80% of customers are not benefiting. UKWRC chair Phill Mills is what they are doing in response to our concerns; supported us calling for “fundamental change and a strategic direction from a seeking Ofwat engagement in this; and were generally support- high level group, driven from the top”. ive,” Mills says – “but we had hoped for more [replies]”. He points out too that all the signs are the retail market is not Low priority for wholesalers a priority for wholesalers collectively. “We [UKWRC] represent Mills explains that from retailers’ perspective, the problems retailers serving 99% of SPIDs. There doesn’t seem to be uni- with the market are many and serious. These are summarised in fied representation for wholesalers.” He notes that Water UK is directed by its members (wholesalers), and runs many effective UKWRC basics special interest groups so would have set one up to interface with retailers if that was a member priority. “So this harks back to how The UKWRC was set up in April 2018. Its fundamental purpose is to make the seriously do you take the retail market?” market work better, principally through: Mills takes time to praise the work of the Retailer Wholesaler ❙ Identifying and tackling key strategic issues around how the market works. Group (RWG) and acknowledges the wholesaler involvement there – ❙ Being an effective voice for the business retail community. ❙ Acting as a sounding board for key stakeholders. including to develop the R-MeX mechanism being implemented this ❙ Sharing best practice in market behaviour. month and a series of good practice guides. However, he notes that The Council, with meets in London quarterly with additional calls mid term, is the practice doesn’t always live up to the theory. Take leak allowances, attended at the highest levels, including by retailer CEOs, MDs and directors. for instance. Despite high quality RWG guidance, “wholesalers do It is open to all ‘active’ retailers – those switching at least 25 SPIDs per quarter their own thing” resulting in leak allowances that are very variable and – and represents “retailers across the spectrum,” says Mills, from the smallest to difficult for customers with premises in different areas to understand. the biggest; independents and those with wholesaler associates. Finally on wholesalers, Mills notes that the PR19 final deter- Members supply 99% of SPIDs in England and 96% of SPIDs in Scotland. minations, with their reduced revenues and stretching Perfor- Mills reports that there is “remarkably good agreement” despite the variety in mance Commitments, means life for wholesalers is “going to get the membership. “They have completely different business models but are fac- even harder” – and that no one has a good measure yet of the toll ing the same frictions and challenges.” that will take on the retail market.

32 April 2020 THE WATER REPORT Phill Mills, UK Water Retailer Council|interview

Ofwat standing back Mills says the UKWRC has in the past had good engagement from Ofwat at a senior level, and that retailers were “pleasantly surprised” by both Fletcher’s letter to wholesalers and the more detailed follow up letter sent by Ofwat’s senior director Emma Kelso. “They picked up a lot of things we are saying,” Mills recalls. Underlying However, he says that since the conclusion of the Retail Exit Code review which set price protections for 2020 onwards, en- gagement from Ofwat has tailed off. Mills appreciates the regula- tor has had its head down in PR19 – but he is left with a number of frustrations. Firstly, and fundamentally, his view is that there “seems to have health been an annoying and frustrating ignoring of the retail market within PR19”. Few retailers were consulted by wholesalers dur- ing the extensive customer engagement phase, and consultation with business customers was far from prominent. There has been little communication of, or clarity on, how business cus- tomers will be affected by the FD decisions. problems Second, as far as the REC review is concerned, Ofwat did ask retailers to submit their cost to serve data through a request for information. However it largely dismissed retailers’ costs as “not robust enough” and tweaked rather than overhauled the default tariffs for smaller (0-0.5Ml) customers, although there was more movement for the larger (0.5 -50.0 Ml) customers. Ofwat said it would look again in two to three years time. Not only does this leave retailers under-recovering the cost of operation in many cases, but there has been no information on what that review in two to three years will look like. “They need to tell us what the process and methodology will be,” Mills urges, adding it feels the whole topic has been kicked into the long grass. He only got six replies to 16 letters Looking ahead, he says there is only a fleeting mention of the market in Ofwat’s 2020-21 forward work programme, and that is sent to wholesaler chief executives set- to schedule another State of the Market report publication. And there is a general feeling amongst retailers that the regulator has ting out retailers’ common concerns “been a bit hands off and leftO M SL to get on with it”. The pinnacle came perhaps after the UKWRC wrote to Kelso market looks like; to identify what needs to be done to deliver it; last October, suggesting “there would be benefit from greater en- and to develop and monitor a delivery plan. gagement and direction from the regulator to help resolve the Mills notes that UKWRC supports and welcomes MOSL’s key policy issues currently holding back development of a well- work under chief executive Sarah McMath to become a more functioning market”. It proposed Ofwat-led action to get trad- intelligent market operator, but says MOSL only has the funding ing parties around the table, specifically: “UKWRC members and authority to do so much. It will take wider collaboration and believe Ofwat should take a lead in setting up and/or chairing a “higher authority” to take a lead on the changes needed. “Fun- such a forum or series of workshops… Members feel it unlikely, damental political and structural issues can only be addressed by without a demonstrative and hands-on approach from Ofwat, a high level group,” he argues. that little will change in the general approach from wholesalers It is extremely welcome, then, that Defra is getting back in the and the market will, at best, continue to benefit only 20% of the game. The department stood down its retail market engagement customer base or, at worst decline with more retailers exiting the to focus on Brexit preparations, but has now reestablished a team market, voluntarily or otherwise.” with the business market in its remit. Moreover, it is working on Mills reports little has come of this suggestion so far, with Of- a refreshed Strategic Policy Statement this year, which will set wat pointing to resource limitations in its response. out the government’s priorities for the water sector, and provides an opportunity to include requirements for the retail market. A high level group Mills reports Defra officials have met the UKWRC twice al- Retailers, both on their own account and on behalf of customers, ready, with quarterly meetings scheduled. The Council has put feel their options are running out and only a high level, multi- forward the idea that a high level group – similar to that which stakeholder group can cut through the treacle. “This needs au- existed in the run up to market opening – be convened. Mills thority and influence,” Mills asserts. says the early signs are good. “Officials understand the market’s Ideally around the table would be Defra, Ofwat, MOSL, CCW, not working as it should do,” he says. They were “generally posi- UKWRC, Water UK, RWG and representatives of wholesalers tive” about the high level group suggestion, and asked the UK- and retailers. The objectives would be to define what a successful WRC for more details on how it might work. In response, the

THE WATER REPORT April 2020 33 INterview|Phill Mills, UK Water Retailer Council

Council compiled the following principles to underpin the work: out a doubt, be fewer retailers. “Some will go voluntarily, some ❙ One national market – at present, lack of standardisation will be forced to go.” He points out that as things stand, only one means England feels more like multiple regional markets than retailer is making a profit. a single unified one. He expands: “Take bilaterals. It’s potentially two to three years ❙ Fair and efficient cost recovery – economic cost allowances that before we have a solution and it’s been three years already. There cover the cost of trading. could be a lot less retailers around in three years if nothing ❙ Access to the market for all customers – not just the largest changes.” Should a large retailer exit the market, there are real 20%. questions about whether others would be able and willing to pick ❙ Equal access to new technology – wholesalers, retailers and up its customers, especially those in wholesaler regions where customers should have access to consumption data, not least to the costs of operating are higher. Fewer retailers will mean less help manage usage down. As more wholesalers start to roll out choice for customers. If that leads to more disillusion and dis- AMR technology, this data should be shared in a standard for- heartenment, customer engagement could decline further and mat. Mills comments: “Retailers don’t want perpetuation of the the market really start to wither. bilaterals issue… but at present, different companies are running Mills wraps up: “Big things need to be done, and that takes ahead and doing their own thing.” leadership and engagement.” On a positive note, he points out the Conservative government is keen to see competitive markets The alternative working, and knows water market failure would be a reputation- Mills paints a pretty bleak picture for both retailers and business al hit. “Defra don’t want this,” he says, adding that while minis- customers if the market is allowed to creak along as it is, with its ters are yet to form a view, officials are clear the market “does not costly frictions and low allowable costs. He says there will, with- meet government expectations”. TWR

UKWRC priorities for change 1. Practical and targeted is inconsistent (some retrospective and some Water, which undertook an initiative to tackle harmonisation forward looking). unread meters, investing ~£50 per meter (£200k ❙ Wholesaler tariffs – There are over 11,000 whole- ›Agreeing a common methodology for allocat- in total) to identify and resolve issues associated sale tariff elements in CMOS. The huge variation in ing fixed and variable charges. with 4,000 ‘not found’ meters. “But we believe wholesalers’ pricing structures and methodologies that a more holistic approach is required to ad- baffles customers, makes comparing quotes com- ❙ Wholesaler policies – Because wholesalers are dress the extensive data quality issues remain- plex, and makes it impossible for retailers to offer free to set their own rules in relation to many of ing… There also needs to be agreement over customers a unified price across a multi-site or the policies handled through bilateral arrange- how improvements will be funded. We would national contract, “which is what customers were ments, there is a high level of variation between expect wholesalers to meet the costs of correct- led to believe would be possible once the market regions. Key examples include leak allowances, ing data provided at market opening.” opened”. Moreover the complexity causes return to sewer allowances and data logger Particular action is needed to address how retailers considerable operational and service policies. There is also no consistency on how vacant sites are treated and – a perennial – me- problems. “The potential for error in processing tar- each policy works, the service level agreements ter reading. Retailer frustrations include the cost iffs is high, and the extent of manual intervention (SLAs) that apply, charges levied by wholesalers and capacity of independent and wholesaler required pushes up cost to serve, both of which for carrying out tasks, or how each wholesaler meter reading, as well as access to wholesaler have knock-on implications for customers.” communicates with retailers. Retailers are metering technology. According to UKWRC: “We recognise that unable to standardise and automate pro- full harmonisation of tariff structures across the cesses and have a greater reliance on manual 3. An effective wholesaler incentive intervention. This makes for potentially slower market is probably not realistic in the short-term. framework However, we believe that a significant step and inconsistent responses to customers and The UKWRC proposed a financially incentivised change can be made in terms of customers’ increases cost. The UKWRC recognises the good B-Mex, a C-MeX for business customers. So far this ability to understand and compare their charg- work of the RWG but, Mills says, market wide has not been adopted, though Mills says the repu- es as well as market operational effiiny b consistency “could only be delivered through tation-incentivised retailer measure of satisfaction, some or all of the following”: the imperative coming down from on high”. R-MeX, is “a move in the right direction” and there ›Aligning on a common set of volumetric “may be financial incentives down the line”. bands, consistent with the price bands set by ❙ Bilaterals – work is underway from MOSL and Ofwat as part of the REC process. Ofwat to introduce a unified solution to improve ›Agreeing a set of standards for (a) seasonal data flow, market operation and customer 4 Cost allowances charging; (b) block charging; and (c) start of outcomes. “But there is still considerable scope In serving SME customers in particular, costs and the financial year. to influence the size and shape of the solution. risks for retailers outstrip allowed costs, UKWRC ›Where meter sizes are used for charging, the We believe that not only is it important to have explains. This effectively leaves 80% of the size brackets could be aligned across all whole- a single portal, but that the key processes are market unable to access its benefits, and retail- salers, e.g. < 15mm, < 20mm, etc. rather than aligned and standardised, and that the solution ers restricted in offering value added services. these varying from wholesaler to wholesaler. provides a common tool for monitoring SLAs.” There are also concerns than the implications ›Charging consistently for the same services, for of the PR19 final determinations will mean even example (i) charges for surface water drain- 2. Improving data quality lower revenues for retailers from April as the age by surface area (the cost reflective way) The UKWRC supports MOSL’s work to improve price controls for larger 0.5 – 50Ml customers are are applied in some areas but not others; (ii) market data, and recognises individual wholesal- based on a uniform gross margin on reducing the use of samples in trade effluent charging ers’ actions. For example, it points to Southern wholesale charges.

34 April 2020 THE WATER REPORT |news review

of consumption data, which has been identified as a principal mar- Priority changes made to ket friction. This change proposal seeks to improve incentive mecha- incentivise meter reads nisms in the market in order to ad- dress these issues.” Ahead of a wide ranging review ing parties incur for under perfor- in order to avoid additional charges. The changes were scheduled to of the retail Market Performance mance against Market Performance “Additionally, trading parties come into force on 1 April. Ofwat Framework (and the coronavi- Standards (MPS), and extending have been charged for the late said there will be a much larger rus situation), Ofwat approved a the time parameters for meter read submission of meter reads but not impact on retailers than wholesal- package of priority changes to im- submissions. Ofwat’s explained: penalised for meter reads that they ers, “primarily due to the signifi- prove data submission. “Under the current MPF, the un- take but that they do not subse- cant volume of MPS 18 (Missed Two change proposals, CPW078 capped charges of trading parties quently submit into the central sys- Cyclical Meter Reads) tasks and and CPM020, seek to: enhance have been far higher than their tem. Finally the five day submis- charges, as well as the number of financial performance incentives; capped charges. This is largely due sion window has caused trading Retailers currently exceeding the encourage better submission of to the charges driven from MPS 18 parties to submit estimates rather cap in most months”. meter reads and improve data [missed cyclical meter reads]. This than actual reads. As estimates All market performance charges quality. has resulted in little incentive for are likely to be less accurate than are, however, currently suspended The changes introduced include trading parties, in particular retail- actual meter reads, this can have to help retailers cope with corona- increasing the cap on charges trad- ers, to improve their performance a negative impact on the quality virus related problems (see p4-5).

New Panel Sainsbury’s shops for a self supply licence appointments Supermarket and retail giant J as well as have a voice in the mar- MOSL has appointed Mike Rath- Sainsbury has applied for a self ket and gain control of its data to bone, market change manager at supply water and sewerage licence inform its water targets (it has al- Severn Trent, as the new wholesal- (WSSL). ready reduced consumption by 1bn er member on the Panel, following Sainsbury’s – which has 1400 litres since 2005/6, and has a broad the resignation of Ian Dearnley. supermarkets, 900 Argos stores environmental and sustainability Rathbone is an active member of and other interests including strategy aligned with the UN Sus- the Market Performance Commit- Sainsbury’s Bank, Tu, Habitat and tainable Development Goals). tee, the Operational Performance Nectar – switched to two retailers The supermarket’s long stand- Standards working group and the when the water market opened. ing partner, Waterscan, will act as Code Advisory Group for the bi- Ofwat reported Sainsbury’s has managing agent. Ofwat was con- lateral transactions project. turned to self supply now to “fur- sulting on the WSSL application It has also reappointed intellectu- ther opportunities for innovation” until 1 April. al property barrister Helyn Mensah as an independent member, and re- cruited new independent member WICS schedules retail market consultation for April Pamela Taylor – an executive coach and former Ofgem director. Water regulator WICS will pub- market, which began in Septem- tion process. John Vinson, who was ap- lish a statutory consultation in ber 2018, this month’s consulta- It plans to implement the de- pointed as a Panel member on an April on key aspects of policy in tion will cover customer pro- cisions resulting from the April interim basis, will return to his the non household retail market tection, level playing field, self consultation from 1 October, and position as alternate independent in Scotland. supply, mergers and acquisitions, in April to implement decisions member from 1 April when these According to an updated time- ethical business practice and reg- on the gap site incentive scheme new appointments begin. table for WICS’ review of the ulation, and the licence applica- considered in January.

Retailers asked for easy access to audio records of verbal switches Ofwat sought views by 1 April on cro-business. change relates to complaints, and Ofwat said it was supportive in a change proposed to the Cus- Proposed by the Utilities Inter- requires retailers to cooperate principle, but wanted more infor- tomer Protection Code of Prac- mediaries Association, CP0004 with requests from micro busi- mation on the impacts of the pro- tice in the business retail market, follows the implementation of nesses or their representatives to posal and whether it was the most to ensure ease of access to audio CP0002, which allowed water access all relevant audio records appropriate means of achieving records where a contract has switches by micro businesses to in an accessible format within five the desired customer protection been orally concluded by a mi- the concluded orally. The code business days. outcome.

THE WATER REPORT April 2020 35 The Water Report Expert Forum

Regular exclusive research from The Water Report & Accent into the thoughts of industry leaders on the sector’s key issues. Topics to date include: ❙ PR19 determinations ❙ Trust in water ❙ Customer engagement and empowerment ❙ Business retail ❙ Domestic competition prospects

report|TWR ExpERT FoRum

DomE was reasonable: “Transition is unlikely TWR ExpERT s FoRum|report CHART 3: Do you expect any T be rapid, so ‘starting’ it may not be i ic to ment irrelevant (the household market CHART 2: Is the FD cos to appeal to the CMA? propriate”. And there were those w nap- will be opened regardless of the findings reportpackage nanceable? it was achievable, given the right circuho felt CHART 1: Is the FDPR19 | chart3: How in uentia – one described it as “a token thin package achievable? expectD the ndingsiss of l doER you stances: “Given a successful introductiom- No and those who see it as critical (the findg”), 3 or 4 Driven by ideologyto be in determining not evidence; whetherthe CBA vic too soonE of non-household competition, then 2020n 10% chart5. Will the benets be 14% the market is opened? ? ings will determine whether household- unattractive to customers: The Water Report E is feasible.” enticing to the avera retail is opened to compet ; and domestic customer? ge Don’t know member commented: “Givenition). One Forum shows little support for the government’s Will it definitely happen? 24% Critical the Trea Yes xpert sury position which relies on - Yes plan to open the household12.5% retail ma The Treasury document that announc Don’t know 38% 52% 1 or 2 sis, it will be impossible to this analy- 29% 76% the new market was oddly phrased – ed No Irrelevant Don’t outcome of this analysis. Thatignore the rket – but can sentially suggesting that while es- 24% see little chance12.5% of stopping it now. know scope for analysis is broad.” said, the PR19 12% | No will undertake a cost benefit anaOfwat report he Water Report’s Expert Forum However, analysis of the verbatim com licies by 33% (CBA) in 2016, the Treasury’sYes mindlysis leaders and opinion formers – be advocating doing this”– and t ments made by respondents suggests an- k on key industry issues and po A contributory already made up to get 21%the ball ro is in and around the sector (see frombox, cited practicalities: “Just not feashose who expectation that the CBA’s sway will be he process is simple, easyw and factor 75% on market opening by 2020. So we aslling Please help us get fast feedbacxpert Forum. t ible, and limited to influencing matters such as he Water Report e TWR Expert Forum) – is far from would not enable the benefits identified the Forum how influential it expect ked joining our t emailed a survey once everyccent fe send enamouredT by the prospect No 67% the timing and nature of market opening from the NHH market to be realised.” findings of this CBA to be in s the the competition as the Treasuryof hahousehold rather than the bald fact that in one shape, completely anonymous. Youner will Accent, be to complete online. Ang issue. Most took issue with the timing – not re ing whether the market is op determin- sionally sketched it. The policys isprovi s - jecting the notion outright, just arguing or form it will open. Among the com months by our research part ta which we report in the followi CHART 6: Are the PC - chart 3 shows, three quarters saidened? it will As as driven by ideology not evidence;een ments we received here were: - ers, so if you are working at a CHART 5: Do the FDs adequately expectations reasonable? the new market needs more thor be a contributory factor but th us aggregate, anonymised da another ns the holding limited prospect of benefit foras ough ex ❙ “I think that the government wants provide for resilience and ploration and preparation than i - factors will also be influential.at other teR We are actively seeking new memb .co.uk to CHART 4: Are the FD expectatio an average domestic customer; and likely s possible open the market but the Ofwat r to A in the sector, within a company or at He FD environment? within a few years. maining quarter was equally splThe re- W Con HAcost e ciencyrt 4: Isreasonable? t chart3: How in uential do you eport to produce losers and well as winners. In could influence the timing and conditions.” reasonably senior level se email karma@thewaterreport ble on Don’t know This view came through clearly whe tweenexpect those the whondings considered of the assessit be lutions that are cheaper in the reAsonA 10% - ❙ y? terms of exactly how the market shou we asked specifically about the timen- to be in determining whetherthe CBA “The cost and benefit analysis for hous stakeholder organisation, plea sting members. ost eFFICIenC - chart5. Will the benets be . too costly and too risky.” short-term, but not the most C be defined – as thick or thin, or wide ldor the market is opened? hold competition will play a e- t chart 2. Is the governm table: the Treasury document advocated enticing to the average Unwelcome: 71% do not think R hank you very much to our exi Another pointed out cus- efficient / effective in the long o join. t making a referral to the CMA Yes narrow in Ofwat’s proposedterms (see timetable box, p22), ent’s chart 1: to those done for non-househsimilar role the household market should b Don’t know Yes No beginning the transition to househ chart 1. Do dyouo thinkyou the think domestic customer? ReP tomers have no right of ap- term;” “Prioritise particular 4% Don’t know 24% 57% appropriate? old retail. e opened from 2020 Having said that, given the size 33% there is a broad spread of opinion. thehousehold household market market As long as Ofwat’s results aren’t 24% competition by the end of this parliaold- Critical What do you think has motivated the government’s desire of the gaps between the totex peal, and in that sense the sys- targets resulting in short-term Yes shouldopened to competition should from be the decision will be made on principlnegative, expert Forum ment – is that appropriate? Nearly tw B12.5%e opened to to open the household market no proposals in some companies’ tem is not fair. “If companies reactive programmes of work 48% competition2020? should households be able to thirds said no (see chart 2). M o- F and theory arguments, with the cost ande rather than long term planned Irrelevantrom 2020? Don’t consumer objective ine business plans and the allow- believe that Ofwat’s modelling No No switch? Don’t any felt it benefit analysis being largely ignored by W? L would be sensible to see how the e 52% 12.5% know iP is wrong they can appeal to programmes.” 48% know ideological belief in mark ances at FD, it would not be Only a quarter of respondents to our latest busi- Don’t decision makers.” 12% “A need to show a poli Limited appeal ❙ Squeeze the supply chain, by 21% ness market beds in – for example: “L tical will to ets a surprise to see one or two the CMA. Customers have no survey said the household mar Yes know ❙ “George Osborne seems to have decid- increase competition in “An obsession with market on a roll financeable at the BAA1 level On the matter of how many sort out non household competition beet’s Yes order to s as the an- ems in the P companies decide they cannot right of appeal if their expecta- pushing risk out and reducing be opened to competition fromket 20 should 17% 4% ed he wants household retail compet benefit consumers” swer to everything” “A desire to take advan Ofwat claims to be targeting.” companies will choose to live fore we set off on this complex and chal- A contributory 21% obL tions are not met or if the FD is margins, and generally pursu-- Yes - R live with Ofwat’s determina- chart 1). Three-quarters did not su20 (see to go ahead and it will be ha ition tage of the high level of P lenging policy change” and “The key to factor 75% Many indicated companies with their determination rather tion and go to the CMA. This unacceptable to them.” ing more aggressive commert 25% Ofwat are against competition,rd th to stop. If engagement in the sec- spending cuts, short termism, and would only just scrape through, than appeal, there was widely the move, among them the out-rightpport op introducing this market is th should be seen as an additional cial terms. One responden totex No 62% No 67% tor with non-household posed – “if it was up to me I would not- to be sufficiently separate fromat itthe needs be embarrassing / annoying for theat wouldchan selective target pursuit – but also including: “Only just finance- agreement (76%) that most Coping strategies noted this would “increase in The Water Report and Accent No 71% retail reform, an part of the price review process, cellor but unless there is significan - d to utilise able. Ratios under massive pres- would accept, but that one or also asked the Forum about market opening to allow lessons NHHto be the momentum that has adding further checks and bal- With most companies expect- cyclicality and the negative litical support for Ofwat’s position,t thatpo- “Better deals for domesti innovation – are all expected by sure.” And: “Achievable with sig- two companies would find t learnt and also for return on investment c cus- ances, rather than as a failure.” ed to accept their determinaas- impact this has on the supply specific aspects of the PR19 Wr expert Forum tomers. increased interest “George osborne be been created.” nificant penalties for some. Not their settlement impossible to not motivated to be realised. I am not sure h is unlikely to stop the chancellor. This is from lieves in competi- the Water Report expert Forum, as Unsurprisingly, those com- tions, despite these being, chain.” - package, focusing on totex and outside parties (such as tion and markets. He “This is a natural s square so would seek a referral. CHART 9: Ofwat said its FDs wereou agree?The Water Report, in part Ofwat are looking at this.” ow hard a political issue as much as an economic large wants to move to- tep fol- financeable for many.” one Forum member put it “the ❙ Focus on those Perfor cost efficiency; outcomes; and nership with energy compani wards a more market based e lowing NHH retail panies with the greatestations gaps r by a desire to reduce bills. Do y market research company decision.” es) now that the opening There was also a strand sug- A significant minority felt there the allowed return on capital. Others were concerned about practi market size is bigger.” conomy.” companies cope with FDs that many between their represent most stretching time for wate mance Commitments (PCs) CHART 8: Is the return on the Expert Forum to consult Accent,e set up and other extensions of gesting that even those who- could be double that number at As chart 4 shows, respondents calities – “In an ideal world this would be- competition upstream.” see as coming at the expense of and the FD package were companies I have known!” strate we- with the biggest rewards at- capital: month on a key industry very other “clearly not motivate can manage today will be stor the Competition and Markets were divided down the middle Don’t know issue. Approxi- good, but looking at the po chart 2: chart 3: d by any seen as the most likely appel- asked what operational tached, or where the biggest CHART 7: Do you anticipate - mately half our Forum is the hoW in fresh evidence! suggest it “i think that there is an future customers and resilience. ing up problems for tomorrow. Authority (CMA), with 14% ties widely? 5% members are at board level and sociated timescales of the openinglitics and as chart 2. Is the governm do you expect theFluential is ideological belief gies companies were likely to penalties can be avoided – in- on whether Ofwat’s expecta Yes most of the remainder in - proposedgovernment’s timetable proposedent’s ministerial desire to that markets provide lants. One Forum member companies incurring penal chart3: How in uential do you come up with choice and that ers and opinion formers, was For instance: “The challenge of respondents anticipating tions on cost efficiency were 24% other senior management po NHH market I don’t think this would of the appropriate?timetaB Findings oFchart 1. Do you think the some headlines on choice reduces prices ventured: “I think the massive- adopt in response. Many listed cluding taking “decisions on tions. many thanks to all th le appropriate? expect the ndings the of c B udging by responses will be the next period, whilst three of four companies going,re Don’t know ose who have joined. si- achievable.” And others still about con be in determininghousehold marketa to Be pro-competi- and stimulates in- split roughly into thirds on negative consequences in the where the penalties are less reasonable. Some acknowl- Group members are ema Q5. Where you think to be in determiningopened whether theto competition CBA should from betion and pro-consu novation. But in wa reductions expected in Nor 14% the market is opened?Whether mer stances”chart5. Will the benetster be there can only be to the latest The Wa- whether the PR19 package in companies may manage in this though none expecting mo edged the regulator’s conces- take no more than ten iled surveys which should sumer protection: the balance “Unless of cost such and a benetran- the market is opened?2020? a choice of provi thumbrian will be difficult to long run, though innovation than the cost of achieving No enticing to the averageder, not of the product, ter Report Expert period what impact will this than that taking the plunge.ght A Don’t know About right are treated as confident minutes to complete. Res sition is well thought through and sce- t will sit? and the energy ma the round is achievable (yes/ featured too as companies [the] objective”. One Forum sions between14% the draft and 43% 71% ponses domestic customer? rket had shown that swallow – Anglian also have ial. Findings will be reported All household Don’t many find this limited c Forum survey, Ofwat- no/don’t know). Meanwhile, have for future customers?” similar minority (10%) thou member remarked: “Some final stages, where totex al- aggregate only an customersnarios tested to ensure that benefits are- know some big challenges. Thames attempt to cut their coats ac- Too low d any comments used will in Critical Don’t hoice confusing and “It may appear that com- there would be no appeals at all nymised. capable of being accrued indiscriminately, 21% and unattractive.” Jhas pitched its final deter just over half thought it was targets will just have to be lowancesNo were increased and 43% be anoVulnerable- house- “i suspect that there is an el and Southern wouldn’t dare to cording to their cloth. The Yes 12.5% know (chart 3). 19% Yes The next Forum will take p hold customers e- minations (FDs) well; there’s financeable (chart 2). Clearly panies are living with the FD missed because of so many some PCs relaxed. 67% it is more than likely th 17% 4% ment of dogma - comp “political dogma, backed risk it.” Financeability was cit- main strategies mentioned by issue of The Water Report lace in march for the April at some consum- Irrelevant etition is Don’t up with little no overwhelming agreement that’s far from a ringing en- but in practice at what cost to This respondent summed up A number who felt the ex- Non householders will be impacted more good as a headline-and analysis of the cos ed by some as the most likely respondents were: – multiple demands and vary- welcome more member . We would be delighted to 12.5% Yes also an know ts and benefits” future resilience of assets and the general sentiment: “Com- customerscannot see this being tested thanwell iothers; I element of expediency (a that the package is either eas- dorsement. grounds to seek a referral. ❙ Defer or reduce spending ing levels of penalty.” pectations are unreasonable s in senior positions. if you are 25% 12% terested, or if you have a top n two to all politics) with so many othes with ily achievable and acceptable Some had clear reasons for services? Customers do not panies complain about Ofwat’s ❙ Pursue innovation – “Priori- pointed to the cost models ic suggestion for the Forum,Thein environment- three years.” No 62% One respondent pointed out “risk of maintenance dipping please email karma@thewate things going on a nice r Yes (too soft) or the opposite. In- saying ‘no’ on the financeability want to see companies running decisions at every price review used as “flawed” or overly sim- rreport.co.uk Among those who thought the No 71% that while the option to appeal too low, challenge to enhance- tise innovation in the specific A contributory about “ doing our bit forheadline t 21% question, such as: “Ofwat’s own down their assets for the sake and then, in almost all cases, The economyment’s timetable was appropriategovern were- fact, views are pretty polar technically exists for all, in prac- ment obligations;” “Reduce areas of focus and increase plistic – one for instance com- factor 75% consumer” . he of saving a few pounds and they accept the FD rather than those who pointed out getting started ised on most aspects of the FDs show that in absence of tice, some companies’ options spending, withdraw unfunded collaboration.” mented: “The derivation of 20 February 2016 Incumbent water FoRum|report putting costs and failure on to “General belief that No 67% TWR ExpERT deal. This suggests it will be a PAYG adjustments (which rat- are limited. “It’s for us very tough schemes.” ❙ Inject equity. - these allowances places undue companies competition future generations.” CHARTCHART 3:CHART Do 3: youDo 3: you expect Do expect you any expect any any will keep prices down. Defl “This proposal is part of the fine line for many companies ing agencies will see through) CHArt 3: Do you as one of the best performers so ❙ Make short term rather than ❙ Move debt up from oper weight on a suite of relatively ects govern- CHART 2: Is the FD cos costo appeal tocos appeal to to appeal the to theCMA? toos CMA? the toCMA? 0 criticism from government (th ment’s larger deregulatio in choosing what to do next.- the notional companies are not CHARTCHART 2: Is 2: the2: Is theFDIs FD t He t Any C long term choices – “More ating companies to holding simplistic models and make 20 40 n/pro-competi- CHArt expeC mA? others must find it even tougher. The benets 60 THE WATER REPORT there is no competition).” at tion push rather than an CHART 1: Is the FD He packagepackagepackage nanceable? nanceable?A genanceable? to tHe C 80 However, there is consider CHARTCHART 1: Is 1: the Is theFD1: FD Is t FD pACk go We believe Ofwat has made ‘sticking plaster’ solutions;” companies. will outweigh The costs 100 FoTHE WATERRum REPORT specific reasons”. y water industry CHApackagert achievable? ble? The costs and eport|TWR ExpERT able agreement that the re- packagepackage achievable? achievable?kAge AnCeA |Industry model “Utilise asset management so- the costs | will out-weigh r FD pAC FIn No No Noreport some poor and unfair judgments Industry model reportthe benets benets are april 2017, how ble? 3 or 43 or 4 10% Other - view will have some negative ACHIevA 3 or 4 10%10% regarding some historical issues approximately e in eaCh of the 14%14%14% data, for instance, while only 8% antici- Chart 1: By the time the marketompanies opens in to B longer term consequences. and the impact is much tougher equal t water C We feel powerless to change their position within the patedFebruary full readiness, 2016 a further 76% antici ready do you expeC As chart 1 shows, the Fo-- Don’t know Q5. Where you think the 21 Don’tDon’t know know than we (or they) expected. And pated partial readiness. Non household following areas? 100 24%24% balance of cost and benet w 60 80 rum, which is run in partner 24% 9 chart 2. Is the governmen 40 Yes Yes Yes we feel powerless to change their constraintsar from digging in oftheir the heels inFD 12%process. said the concerns For raised smaller about the companies there is a major service outage;” “It needs in the opposition do not understand the data is a notoriously thorny area and no 0 20 Don’t know Yes YesYes 1 or 2 February 2020 proposed timetableill sit? t’s ship with researcher Accent Don’tDon’t know know 38%38%38% 52%52% 1 or1 2 or 2 position within the constraints chart 1: Which of these All household chart 1. Do you think the 29% 52% 76% defence of the thestatus quoCMA in the processmodel were not is justified, too and costly the remainder and too risky. to deliver more consistent outcomes…re- water sector. Angela Smith MP has done appropriate? T? one is expecting pristine quality on day 29%29% 76%76% best describes your vieW customers no household market should b Systems/technology and comprises industry lead- R No of the FD process. For smaller y o No D No face of legitimacy, ownership and didn’t know. Views of those in the first camp gional variations are unacceptable. There her best to explain this to her colleagues a E one. So how much of an issue data qual- Vulnerable house- R opened to competition fr e 24%24%24% of What needs to happen Who’scompanies the CMA process is trust challenges, water leaders are are summed up well by this contribution: noW to the current is no reason why, 25 years after privatisa- but they are dogmatic.” hold customers 2020? om ity proves to be will come down to exactly Data No No No 33% listeningF and keen to evolve the privatised “The private model has worked well overall, tion, that there continue to be such dif- A number of commentators also refer- Before the Treasury announcement on domestic competition, how partial the readiness is. 33% private Water model? Non household Don’t Customers may end 33% THE WATER REPORT Codes/legal compliance water model so it is fit for the future. a lot of investment has gone into the sector, ferences in customer service levels and enced that the sector had not helped it- customers know we polled our Expert Forum on water company readiness forDon’t Some of the verbatim comments we THE WATER REPORT That was one of the findings from our and while private investors have also been operational performance.” self – for instance: “Recent service failures 21% up overpaying for WIllIng to Don’t The environment Yes know received on data indicated we should Appropriate organisational structure in place latest The Water Report Expert Forum remunerated, the highest dividends have ❙ Citizen concern – “More society fo- (leakage targetsknow missed and London streets non household retail. We expected17% to find preparations on4% “soft” have a positive outlook – for instance: 12% dy to asset resilience. No 6% Behavioural aspects - rea poll (see box for details and to join), been paid by companies that have outper- 17% cused outcomes than service focused flooded, Cryptosporidium outbreaks, and The economy aspects such as culture and behaviour to be lacking, but in factYes “Companies recognise that there is lots he market 12% behave appropriately in t which surveyed industry leaders and oth- formed regulatory assumptions.” outcomes;” “It needs to show the ‘value of record pollution fines), and own goals 25% of room to improve their data” and “…it d 8 February 2020 change? Incumbent water found confidence in short supply even on the basics. Culture: distinct retail an er experts on where the privatised water water’ more obviously and how vital the on financial structures and salaries, have No 62% wholesale cultures CHARTCHART 6: Are 6: the Are PC the PC companies is impossible for companies not to have CHART 6: AreIn the PCour latest poll of industry model should go from here. As chart 1 Where to now? work of the water sector is to society.” made it an obvious and easy target”. And: No 71% CHARTCHART 5:CHART Do 5: theDo 5: theFDs Do FDs adequatelythe adequately FDs adequately expectationsexpectationsexpectations reasonable? reasonable? reasonable? here is little confidence that wa- received the message and started work on s prepared shows, over 70% said the basics should be Two main themes emerged in comments ❙ Defined targets – “Much clearer targets “It is feeding off criticism initially laid 0 Wholesale operation provideprovide forprovide resiliencefor resilience for resilience and and the theand the leaders, 82% accepted 20ter companies40 will be fully ready preparing for their submissions in 2016”. CHARTCHART 4:CHART Are 4: Arethe 4: theFD Are expectationsFD the expectations FD expectations Yes The benets 60 environment?environment?environment? retained, but the model should be adjust- on how the model should be adjusted. and explanation on investment and leak- down by the regulator that has since been 80 Others were less optimistic: “Data quality Retail strategy prepared on coston cost e ciencyon e ciencycost e ciency reasonable? reasonable? reasonable? 71% 82% will outweigh Thefor costs market opening by April 2017 100 someDon’t know of the challenges to ed to address key political and public con- First, that it should have more of a social age is needed to enhance the water com- adopted by the press and then reflected The costs and Don’tDon’t know know the costs will out-weigh is a huge issue and some companies seem dy Don’t know 10%10% – even on the basicsbenets – according are the10% private water model are cerns. That compared with just 17% who purpose. One participant, for instance, panies’ reputation.” back as supposed public opinion. Secondly the benets - Other Fully ready Partially ready Not at all rea Tto the findings of this approximatelymonth’s The Wa under-prepared for ensuring their data is said the model should be defended and said “Explicitly showing that public inter- ❙ More markets – “Greater use of markets it it the easier of the other options. They legitimate, and 71% said the ter Report Expert Forum.equal Our research ready for the new market”; “The danger Don’t know Yes Yes YesYes Yes retained in its current form, perhaps with est outcomes are being met is essential” will expose true costs and greater innovation.” have also seen little opposition to the pro- 100 Don’tDon’t know know Don’t knowYes No No is that [lack of] data integrity in one or 60 80 4% 4% Don’tDon’t know know 24%24% No 57%57%57% ■ It should be defended and retained partner Accent asked our Forum mem- 40 4% 24% 24% 33%model33% should be adjusted better explanation; and 12% who thought while another observed that “The trick However, as with the previous ques- posal as the friends of the industry in terms 0 20 24%24% 33% in its current form, perhaps with better more companies could derail the market on wholesale operations and devising a YesYes Yes bers – leaders and opinion formers from 80 100 the stark opposite – that the model needs will be to take the best of the current tions, some Forum members defended of stakeholders are politically sensitive and on day one.” 40 60 48%48%48% to address concerns. explanation in and around the sector – for their views retail strategy.Systems/technology A lower proportion0 said 20 to be replaced entirely. model, take account of customers’ and the sector’s delivery record, indicating have remained at best silent.” Unsurprisingly, expectations on the No ■ the same order of attention had been paid No No No No The basics should be retained, but on water company retail marketQ5. prepara Where- you think the ba - Data No 52% Moreover, asked whether any of the political concerns, and evolve to a new a step up in outcomes is unnecessary. Chart 3 shows how our Expert Forum softer aspects of readiness were the low Systems/technology 48%48% 52%52% the model should be adjusted to to behavioural and cultural aspects (high 48% challenges/concerns raised about the pri- paradigm which has the best interests Some comments were: “Companies de- members thought Labour’s model of tions, challenges and likely readiness. lance of cost and benet w - address key political/public concerns Only a little over half of respondents ill sit? est. Between a fifth and quarter of respon 60%-low 70%).Legal These compliance results withareData shown in vate model are legitimate, 82% said yes of customers and the environment at its liver good outcomes and clearly compa- democratic public ownership would af- All household ■ dents said water companies would not be chart 2. codes/regulations etc (see chart 2). By far the most common heart.” Second, that the model must cater The model needs to be replaced nies plans for the future look to deliver fect various aspects of the industry. Two- expected companies to be fully compliantcustomers at all ready in cultural terms to compete We appreciateOrganisationalCodes/legal that asking compliancestructu aboutre overall problems Forum participants identified better for the long term. This was encap- with a new model more, but this is not the main point. The thirds majorities or more said the follow- with codes and legal requirements,Vulnerable and to- house- hold customers – i.e. would not have distinct wholesale have an appropriate organisational struc readiness couldAppropriate mask organisationalsignificantpropriate variety were excessive returns, unhealthy levels of sulated by the comment that the model concern is more about the way in which ing would be negatively affected, should Behavioural aspects - eg ap arket and retail cultures in place by April 2017 companybehaviours to company. in thestructure open So m we in placealso asked gearing and other questionable corporate should “Move away from quinquennial minimum necessary to satisfy regulators companies deliver rather than what they the Party’s plan come to pass: investment, ture in place at market opening.Non Fewer household customers – and would not be at all ready to behave the ForumBehavioural for views aspects i erenton the - r retaileadylevel to of vari- behaviour in some quarters. price review to longer term strategies and in each price review. Currently, the long deliver;” “Customers main priority seems 82% (for instance: “The challenges the than half anticipated full readiness in any Culture - eg cultivating d he markets appropriately in the market. Only 8% and behave appropriatelyand wholesale in tculture other area, including on IT systemsThe environment – a - ety across the industry. Virtually all those At present the three biggest Regulation also came under fire, for business plans.” term legacy of the industry is under- to be clean drinking water, and the trust sector faces are operational – changing Culture: distinct retail and 4% anticipated full readiness in these re whoImpact commented on wholesale thought operations the variety was ot motivated standing by and letting this happen and also Among the 17% who said the model whelming.” in the industry appears to generally high, the ownership structure does not affect prerequisite of participation. These results wholesale cultures not motivatedivated spects. Again, this won’t get in the way for post challenges to the market [are] ❙ are shown in chart 1. The implicationsThe economy of marked,Devising though a retail a numberstrategy of different ex- CHARTCHART 9:CHART Ofwat 9: Ofwat 9:said Ofwat said its FDs itssaid FDs were its were FDs not were mot n for being too short termist. For instance: should be defended and retained in its cur- Fairness – “It appears to be primarily an so I am not sure that society as a whole that. Unless you believe that public own- Aprils prepared 2017 of market opening; indeed, some Forum planationsWholesale as to why operation were offered. Among by aby desire a desireby toa desire reduce to reduce to bills. reduce bills. Do bills.youDo you agree? Do agree? you agree? “The regulatory model has allowed com- rent form, perhaps with better explanation, issue of being seen to be fair with custom- has been short changed;” and “In general ership will release large amounts of capi- a lack of readiness in these coreIncumbent aspects water of data, data and data… members pointed out that you wouldn’t tention Don’t know CHARTCHART 8:CHART Is 8: the Is thereturn8: Is return the on return on on ers in sharing outperformance when the tal into the sector – which with continued preparation speak for themselves.companies - the commentsRetail we received strategy preparedwere: Some attention No at panies to prioritise the short term over the a common theme was that it was the ex- water companies do deliver for customers necessarily expect separate cultural iden A lot of attention capital:capital:capital: The picture is considerably better if we Don’t know long term. This is because there has been ercise of regulation rather than the model good times come. When the consumer – just not explained well.” austerity I do not – then there is very little 0 dy Don’t know Don’tDon’t know know 20 tities for instance to emerge until after tially ready Not at all rea Companies CHARTCHART 7: Do 7: you Do anticipate you anticipate 5% group expectations on partial readiness 40 - Chart 2: in preparingFully readyfor non Par household retail market CHART 7: Do you anticipate 5%5% insufficient understanding about the impli- itself, that was the problem. Comments sees unfairness, they understandably then upside that customers will gain”); effi- The benets- 60 h attention do you think water ts? companies incurring penalties widely? YesYes Yes 80 April 2017. It was also noted that on re companiescompanies incurring incurring penalties penalties widely? widely? 24% react badly to any failures that emerge. Public ownership prospects ciency 76%; innovation 82%; operational together with full readiness. Partialwill readioutweigh The costs 100 opening, how muC Ch of the following aspeC 24%24% cations of companies’ decisions on invest- included: “The model works but requires The costs and ness in some aspects of preparationthe costs will will out-weigh tail strategy, some companies are activelye overall have so far paid to ea 100 Don’tDon’t knowDon’t know know ment. Ofwat has now woken up to that fact robust regulation. Ofwat is now trying to Some individual companies have shown We also asked The Water Report Expert performance 76% (“Totally unworkable benets are 60 80 the benets Other choosing to be second movers and henc 20 40 14%14%14% but the horse bolted some time ago. There reverse years of a laissez-faire approach, that where they treatBills their24 community 35Forum specifically about public41 owner- to have e.g. 60+ local councils running a be sufficient for the market to open. On approximately 0 No equal the absence of a honed retail strategy on Don’tDon’t knowDon’t know know AboutAbout rightAbout right right No No needs to be more technical understanding which allowed instances of corporate ex- with explicitInvestment fairness and respect, their ship prospects. There was a mixture of regional company”); long term planning tor 14% 71%71% 12 82 6 Systems/technology 14%14% 43%43%43% 71% day one shouldn’t be taken as an indica and scrutiny within Ofwat of companies’ cess. It is still not good enough at differen- ratings and trustEciency can go up even when views on why Labour had put water at (“Long term planning would be dead”); 6 76 18 xpert forum of unreadiness. Data TooToo low lowToo low long term plans (beyond just the current tiating between the leaders and laggards in the front of the queue. These included the and customer focus. twr e - No No No 43% the Water report Innovation 18 82 However, if Forum members’ expecta Yes Yes 43%43% 19%19%19% Yes AMP) and a holding of them to account.” the sector;” and “The key change that’s re- chart 2: are any of the practical – unlike other utilities, water is Two areas stood out where the major- Legal compliance with 67%67%67% Sta experience 18 23 59 The Water Report, in partnership with tions are correct and appropriate cultures expert forum Some also commented on the failure of quired is to the regulatory model. To plan challenges/concerns little fractured and therefore the easiest ity of respondents felt democratic public ccent, set up codes/regulations etc market research company a and behaviours don’t emerge rapidly, the the industry collectively to explain itself for the much longer term – not just five raisedTransparency about the47 private industry to renationalise; 24 the moral – that 29 ownership would have a positive effect: Please help us get fast feedback on key the Expert Forum to consult every other effective operation of the market could be Organisational structure well and to prevent matters from going years – and to ensure that companies can Operationalmodel performance legitimate?6 76 as a natural monopoly essential service, transparency, 18 47% and local/regional fo- industry issues and policies by joining month on a key industry issue. approxi- hindered. ppropriate Fairness Behavioural aspects - eg a ket our the Water report expert Forum. the as far as they have. One said: “The water make a fair, but not excessive, return.” 35 water stirs 18 strong feelings 47 and bringing cus, 53%. On top of that, two other areas mately half our Forum members are at board level and behaviours in the open mar Don’t process is simple, easy and completely industry in England and Wales has yet to Local focus it back into public control is perceived to got fairly high positive scores: fairness, most of the remainder in other senior management posi- g di erent retail know 53 24 23 Wide variety Culture - eg cultivatin anonymous. you will be emailed a survey make any case for public legitimacy12% as a societal outcomes be popular; the legitimate – there were 35% and trust 29%. Those who wish to tions. many thanks to all those who have joined. and wholesale cultures 17% Long termNo planning6% 12 70 18 To put the results on expected readiness in once every few months by our research collective, or show their vast contribution We also asked whether the water sec- again references to the excessive corpo- deter ownership change may do well to Group members are emailed surveys which should perations Customer12% focus 23 65 12 context, we asked the Forum how much Impact on wholesale o partner accent, to complete online. this should take you to society, health and the environment tor needs to deliver better outcomes for rate behaviours described above, teamed take no more than ten minutes to complete. Responses for post Trust attention water companies overall have so Devising a retail strategy about ten minutes; typically we ask eight questions. outside of the financial. They have let the customers / society and if so, what would 29 with 18 mention of some 53 high profile recent are treated as confidential. Findings will be reported in April 2017 accent send us aggregate, anonymised data which 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%Only 100% as a collective are aggregate only and any comments used will be ano- far paid to each of the various preparation doom mongers build and stoke up a criti- priority better outcomes might look like. failures; the lack of competition; the fact ention Don’t know we report in the following issue. nymised, unless members are happy to be identified. activities. Over 80% of respondents said Some attention No att cal trust issue that does not seem to exist Some ideas that emerged were: Yes thatPositively private water Negatively asset ownership Don’t know is an they seen as motivated - A lot of attention We are actively seeking new members, so if you are The next Forum will take place in January for the Feb- companies had paid some or a lot of at at individual company level in any factual71% ❙ Long term resilience – including greater 82% anomaly in the wider world; and the lack working at a reasonably senior level in the sector, within ruary issue of The Water Report. We would be delighted tention to codes and compliance, systems, research I have seen. Only as a collective attention on flooding, drought and emer- of understanding of the industry among more by profit than 19 a company or at another stakeholder organisation, to welcome more members in senior positions. If you data, organisational structure, the impact December 2015 please email [email protected] to join. thank are they seen as motivated more by profit gency response. “The focus needs to shift those proposing to change its ownership serving their communities. are interested, or if you have a topic suggestion for the you very much to our existing members. than serving their communities. Time to to recognising the need for investment arrangements. On this last point, one con- Forum, please email [email protected] Hide or seek? There is huge variety on retail preparation company to company THE WATER REPORT think again.” ■ It should be defended andfor retained the long term, rather than just the tributor commented: “The policy makers Time to think again. THE WATER REPORT in its current form, perhaps with better 4 November 2018 explanation THE WATER REPORT THE WATER REPORT November 2018 5 18 December 2015 ■ The basics should be retained, but the model should be adjusted to address key political/public concerns ■ The model needs to be replaced with a new model

Bills 24 35 41 Investment 12 82 6 Eciency 6 76 18 Innovation 18 82 Contact [email protected] experience 18 23 59 to suggest Transparency 47 24 29 Operational performance 6 76 18 Fairness 35 18 47 Local focus 53 24 23 Long term planning 12 70 18 Customer focus 23 65 12 Trust 29 18 53 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Forum topicsPositively Negatively Don’tor know to enquire about joining.