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Price review 2009
PR09/09 28 March 2008 Dear Colleague OFWAT'S REVIEW OF THE OPA AND REGULATION OF SERVICE TO CONSUMERS The Overall Performance Assessment (OPA) has been used through two price review periods and has contributed to significant service improvements and the levelling up of performance across the industry. There is general consensus across the industry that the OPA has been a useful tool but that it now needs to evolve if it is to drive continuing improvement. In our 'Setting price limits for 2010-15: Framework and approach' paper (March 2008) we informed stakeholders of our intention to review the purpose and nature of the OPA and how it interacts with other incentive mechanisms and controls. Responses to our consultation paper(1) and discussion with companies and other stakeholders have shown an appetite for change. This letter sets out our proposed direction of travel as we develop our thinking on the OPA and the wider approach to regulation of services to consumers. A revised OPA would take effect from April 2010 and be used when setting prices at PR2014. At each price review we define the base service outputs that companies should deliver as part of their price determinations. If companies do not deliver these obligations they are subject to regulatory action to recover performance or, if necessary, when price limits are next set the relevant expenditure is logged down or shortfalled. The OPA, introduced in PR99 to provide a proxy of sorts for competition, generally acts as an incentive on companies to provide good service and to outperform their peers. The reputational incentives are strong but companies are also currently eligible for adjustments of +0.5 to -1.0% of K (reflecting historic performance) when price limits are set. The OPA, like other regulatory mechanisms, relies on our ability to gather data that is fit for purpose. At each price review, for transparency and to allow incentives to operate effectively, we determine the package of measures which will comprise the OPA assessment for the next period. For example, at PR04 we agreed the package of measures on which performance would be assessed and on which OPA-related price adjustments at PR09(2) would be based. The existing suite of service indicators and OPA will continue to operate until such time as a revised approach is introduced. Companies will need to continue to provide reliable, accurate and complete information in accordance with Ofwat's reporting requirements. 2 A regulatory model for service to consumers The existing OPA was purposely designed to drive improvements in core services. Therefore, many of the current measures focus on reliability and response times (the quantitative DG indicator measures). The OPA does not currently cover the quality of companies' interactions with their consumers (qualitative measures) to any significant degree. The OPA must be considered in the wider context of all incentives operating on the companies. We wish to develop a suite of incentives and service standards which protect consumers and which deliver service levels that consumers might choose in a competitive market. We also wish to achieve a simple effective approach to regulation that achieves best value outcomes and companies which take responsibility for meeting consumers' expectations. Where possible we wish to employ market mimicking measures. We have therefore considered our broad approach to regulating service to consumers, and in particular, what role an incentive mechanism such as the OPA should play. The consumer experience hierarchy We have considered various academic works and consulted with organisations that provide services to consumers across other sectors. Figure 1 depicts how different levels of consumer experience may be represented in a hierarchy. It was developed by SECOR Consulting from Maslow's hierarchy of physiological needs and is similar to that used by Yorkshire Water. It illustrates the steps that a service provider should go through from essential services at the bottom (which must be delivered but which do not provide consumers with enhanced satisfaction i.e. they are expected) to more innovative and personalised services that will garner increased consumer satisfaction and loyalty. It is these top layers of the hierarchy that a company in a competitive market would focus on in order to differentiate its offering, reduce churn and therefore maximise revenue. This behaviour would be seen in a company making an effort to meet individual consumer's expectations. Figure 1: Hierarchical pyramid of consumer needs (Source SECOR Consulting).
The consumer experience hierarchy provides a useful model when considering the role of the OPA and our approach to regulating service to consumers. We have developed this model further for the water industry as shown below. Figure 2 shows how the possible or existing enforcement/regulatory tools and measures/indicators could be mapped across to each level of the hierarchy. Figure 2. Our proposed consumer hierarchy model 3 Proposed way forward for OPA Scope of OPA We see significant merit in refocusing the OPA so that it moves away from those aspects of service where standards and other enforcement tools are available or appropriate and instead focuses on the qualitative aspects of service that is the consumer experience. In this approach the OPA would only cover the top layers of the pyramid. This would encourage companies to understand and take responsibility for delivering what consumers rather than the regulator expects, as would be the case in a competitive market. Core services would be protected by appropriate standards secured by regulatory or enforcement mechanisms. Refocusing the OPA so that it concentrates on more qualitative consumer experience measures, which tend to be funded by operating rather than capital expenditure, would also reduce any potential conflict with the capital expenditure (capex) incentive scheme (developed from our menu regulation proposals). We will need to look further at the balance between the operating expenditure rolling incentives and a refocused OPA. We will need to consider further whether, and if so how, the best companies are rewarded whilst maintaining incentives on others to improve. As core services could be secured by other controls, in some cases including an element of financial penalty, we might consider that only positive financial incentives should be offered under the OPA. Alternatively, we may conclude that no financial incentives are required and the reputational incentive of being 'top of the class' is in itself sufficient. 4 Development of wider regulatory approach Consumer experience measures Since November 2007 we have been working with an industry-nominated working group and CCWater to develop practicable new consumer experience measures which can be piloted and developed during 2008-09 and 2009-10. We see these as key components of a revised OPA from 2010. We are writing separately to Regulatory Directors with details of the measures we would like to introduce but summarise our proposed approach below. The working group has helped us to develop two measures to the stage where they are ready to pilot: · a consumer experience survey; and · a quantitative measure of complaints/contacts reflecting service which does not meet consumers' expectations. The proposed consumer experience survey seeks to measure how a consumer feels about a specific, actual interaction with their water company. It will seek views on the consumer's experience from first contact to resolution of their issue. We will also seek views on the consumer's propensity to switch or to recommend their existing supplier if given the choice and to benchmark against other sectors. The proposed quantitative measure will be a composite model which focuses on contact and complaint volumes(5) and attaches more weight to contacts/complaints which are not dealt with effectively by companies. It attempts to expose where a company is not meeting its consumers' expectations. Because these measures are automatically recalibrated by consumers as their expectations change, they are capable of providing a continuous incentive on companies to deliver the service levels that consumers want. They allow for different service offerings in different regions if that is what consumers want and are willing to pay for. They would thus be more consistent than the existing OPA mechanism with cost-benefit driven investment programmes and would allow companies to focus on meeting their own consumers' expectations. We will write to companies shortly(6) with more details of the quantitative measure which companies are asked to pilot during 2008-09. We will also be seeking support for a pilot of the consumer experience survey from the summer 2008 onwards. We envisage a two-year consultative process to test and refine reporting requirements and to allow companies to develop appropriate systems and procedures to deliver robust data from April 2010. We would anticipate that once these experience-focussed measures are established it should be possible to reduce some existing reporting requirements. Regulation of service to consumers Companies will continue to be responsible for delivering good service. If the OPA were refocused as outlined above, stakeholders have told us it will be important to ensure core services are secured. We will therefore want to review our other regulatory tools and standards to ensure that essential service levels in the lower levels of the hierarchy are adequately protected. We anticipate that this will involve a review of the GSS. We may also wish to consider whether licence amendments would provide further protection for consumers. As now, companies will need to ensure they maintain and are able to provide to Ofwat, reliable, accurate and complete regulatory information. However, once any new measures or standards are established, it may be possible to collect less data on a regular basis and instead conduct periodic detailed checks. For example, the current DG9 telephone call handling satisfaction survey might be amalgamated with the consumer experience survey. We would need to retain the ability to carry out regular and random checks of company data and performance to ensure compliance. In the longer term such a risk-based approach could reduce the regulatory burden and lighten the reporting load on companies. 5 Next Steps We plan the following next steps:
Comments We welcome your views on the direction of travel set out in this letter and will continue to engage with companies and other stakeholders as we develop this work. Please send any comments to Sue Cox at Sue.Cox@ofwat.gsi.gov.uk. Andrew Dunn Director of Consumer Protection (1) 'Setting price limits for 2010-15: Framework and approach – a consultation paper', October 2007 (2) The broad range of measures include water supply (e.g. water pressure), sewerage service (e.g. sewer flooding incidents), customer service (e.g. written complaints) and environmental impact (e.g. pollution incidents). (3) Further information on the measures which are included in the existing OPA can be found in the following documents which are available on our website: - 'Updating the overall performance assessment (OPA) - Conclusions and methodology for 2004-05 onwards', March 2004; - 'Telephone call handling (DG9): A consultation on a revised package of measures - Our conclusions', April 2005; and - 'Reflecting security of supply in the overall performance assessment (OPA) – summary of consultation responses and our conclusions', December 2006. (4) DG2: properties at risk of low pressure; DG3: properties with unplanned interruptions; DG4: Population subject to hosepipe bans; DG6: Billing contacts not responded to; DG7: Written complaints not responded to; DG8: Bills not based on meter readings; DG9: telephone call handling. (5)Unwanted telephone contacts, avoidable written complaints, written complaints escalated to second stage of a company's complaints procedure and complaints accepted for investigation by CCWater. (6) RD04/08, 'Development of consumer experience measures'.  |
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