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MD164

TO MANAGING DIRECTORS OF ALL

WATER AND SEWERAGE COMPANIES AND

WATER ONLY COMPANIES

31 July 2000

The Review of the 1999 Periodic Review

The outcome

I set out in MD160 (21 March 2000) my intention to review the overall approach to the 1999 Periodic Review (PR99). The process of reviewing PR99 included a MORI questionnaire survey and interviews. I am grateful to all those who contributed to the review. This letter sets out the results of that review and some learning points for the future.

The overall response has been that the PR99 process was a successful one. It was a large and complex project. It presented considerable challenges to all those involved over a period of almost three years. Those challenges were all met on time and delivered a positive outcome for customers and the environment.

The review of the Periodic Review focussed on the process aspects rather than the methodology or outcome. It considered three key questions:

• what went well;
• what could and should have been done differently;
• what lessons can be learned for the future.

Conclusions and learning points

The main conclusions and learning points arise from the review under four key headings – achievement of objectives; timing, planning and direction; consultation and information and communication.

Achievement of objectives

Ofwat intended the PR99 process to be predictable with no surprises, to be consistent throughout, to be transparent in decision making and for decisions to be seen as credible.

Almost half of respondents rated the overall process as successful or highly successful with a further third considering it to be at least adequate but it was noted that for some groups the process is too complex for them to participate fully.

Ofwat was considered to have acted predictably by a large majority of respondents. Ofwat was also seen to have been consistent throughout the process by most respondents. The water companies, however, were critical on this point.

There were divergent views on Ofwat's success regarding transparency in decision making. The increase in the number of published papers was widely welcomed. Less than 2% of respondents considered that they hindered the process and many respondents were content with the degree of transparency overall. However, companies in particular were critical of their lack of access to Ofwat's financial model and to all the data used by Ofwat.

The calculations and workings of the financial model had been exposed at an early stage (The Financial Model Rule Book was published in October 1998) but Ofwat will consider the issue of transparency in this respect for the next Periodic Review in 2004.

The credibility of the process was viewed differently by different groups, although most, with the exception of the water companies, viewed it positively. There were some concerns regarding the degree of customer research carried out by Ofwat itself although on the whole respondents felt that customers' views were properly reflected in the price limits. Ofwat will consider this at the next Periodic Review.

Timing, planning and direction

Overall, many respondents felt that the length of the Periodic Review was too long, absorbing three years of a five year cycle. There are many factors which contribute to this, not least the need to carry out extensive consultation and the demands of establishing the quality programme. Responses suggest that a more appropriate period would be around two years. However, it may be possible to significantly reduce the period if the methodology and framework remain broadly the same for subsequent Reviews considered for the next Periodic Review.

Some respondents questioned the strength of communication and co-ordination with the Department of the Environment, Transport and the Regions, the Environment Agency and the Drinking Water Inspectorate. Each had their own aims and priorities throughout PR99. Generally the joint working went well, but a review of these arrangements prior to the PR2004 would be useful.

The communication of the process and the timetable for the PR99 was considered successful by respondents. Ofwat was also seen to be leading the direction of the Review. It was also considered that Ofwat clearly planned and sign posted the Periodic Review. More importantly, Ofwat was seen to have adhered to its timetable. Water companies, however, questioned the appropriateness of the timetable and found it difficult themselves to adhere to it in some cases.

The timing of the announcement of price limits (November 1999) is acceptable to most (despite its proximity to Christmas) but companies have some concerns about the short period in which to convert the price determinations into the following year's charges (requiring approval by Ofwat) and the preparation of bills.

This is recognised but late Autumn seemed the most appropriate time because of the valuable information gained by waiting for the full year results for the fourth year of the period (in this review for 1998-99).

Consultation and information

Nearly two thirds of respondents felt that the publication of a wider range of documents made the process more effective than in the previous Periodic Review. The majority of stakeholders recognised the importance of Prospects for Prices and the draft and final determination documents. However, not all stakeholders were aware of the more technical papers. The publications appear to have been more useful for customer, trade, environment and City stakeholders than for the water companies themselves.

A number of stakeholders with an interest in the PR99 process but who do not have a continuous involvement, expressed a need for more simple documents. These should just outline Ofwat's position and invite them to respond. For future Periodic Reviews, Ofwat will consider publishing `laymans' versions of key published documents.

Prospects for Prices was an innovative document which sought to bring together the strands of work at an appropriate time so that stakeholders could make informed views at a relatively early stage. It also provided broad ranges of possible changes to bills. This is widely seen to have been a successful document by most stakeholders for whom it identified the pertinent issues to be considered in the remainder of the Periodic Review. This was also the view of the majority of Customer Service Committees (CSCs). Almost all respondents, except the water companies, said it was useful to publicise the broad ranges of possible bills.

Water companies' opinions of the document are mixed. As many felt it covered pertinent issues well as those that thought it covered them poorly. The majority felt it was not appropriate to publish broad ranges of changes to bills at that stage.

Almost all stakeholders groups agreed that it was useful to publish the Draft Determinations in July 1999. Most respondents also considered that both the quantity and quality of information was adequate or better although a minority felt that there was insufficient information to aid understanding and, hence, make an informed response. There was a similar response to the Final Determination document in November 1999.

There were, during the course of the PR99, a considerable number of information submissions largely from the water companies. The review highlighted companies' concerns about the data submissions, in particular, the volume of information required. Companies questioned whether all the data was used by Ofwat. The number of submissions required in the Summer of 1998 was also very demanding in the companies' view and made deadlines difficult to achieve.

There are a number of aspects concerning information submissions that will need to be considered for the next Periodic Review. Collecting early information submissions can add value to the process if it provides an opportunity for Ofwat, the companies and other interested parties to understand, refine and make changes to the data so that the companies' Business Plans are of high quality.

The burden of information collection on companies is recognised by the Director, particularly for small companies. It will be important to consult with the industry and others on the data required for the next Periodic Review in a similar manner to the recent consultation on the annual information requirements in the June Return, Annual Return 2001-05: consultation on monitoring companies' performance – May 2000.

Communication

A variety of methods of communication were used between Ofwat and interested parties during PR99. The degree and extent of communication also varied considerably – water companies enjoyed far greater access to Ofwat staff than other groups. This is not unexpected but the balance between groups should be appropriate.

Other than the consultation papers, the MD and RD series of letters were seen to be effective in keeping interested parties informed. The water companies particularly welcomed them. The letters were also considered to have been issued with sufficient time for action.

On the other hand, the seminars held by Ofwat for companies and those for customer and environmental groups were seen as less successful. It has been suggested that such seminars would be more useful if held at a regional or local level. Seminars held for the City (institutional investors and analysts) on the other hand, were well supported and highly rated.

The working level meetings between companies and Ofwat staff and the formal meetings of the companies and the CSCs with the Director General were well received. Companies' responses demonstrated overall satisfaction with these meetings, that they occurred at the appropriate stage of the process and were effectively administered. However, it was noted that there was no stage in the process for Ofwat to provide comments to companies on their Business Plans.

Background to the Review of the Review

The review covered all of the key stakeholders in the PR99. Broadly there were 12 groups of stakeholders

	Companies		The City
	Customers and consumer groups		The media
	Environmental groups		Government
	CSC Chairmen and members		The Drinking Water Inspectorate
	Ofwat staff		The Environment Agency
	MPs and Assembly members		Reporters and Auditors

The review was carried out through questionnaires and structured interviews between March and May of this year. The questionnaires were tailored to each group since each had different perspectives on the Periodic Review. However, each questionnaire had a core set of questions so that overall conclusions can be drawn.

The target audience for the review was based mainly on those who had responded to any of Ofwat's consultation papers plus others who were known to have an interest in the Periodic Review (primarily the media and the City).

The project was assisted by commissioning MORI, an independent firm of market researchers, to carry out a large part of the field work and analysis.

Over 500 questionnaires were sent out and more than 200 stakeholders responded. All of the responses made to MORI are confidential and hence a list of respondents to the review is not available.

Next steps

A good number of valuable learning points from PR99 have been collected. These will be considered by the new Director General when he begins to plan for the next Price Review.

Sir I C R Byatt