PN 16/16 Ofwat consult on outcome delivery incentives

1 November 2016

Ofwat has today published a consultation on draft determinations for three water companies, based on their performance against commitments in their business plans for 2015-16.

Ofwat requires companies to consult with their customers on performance commitments. The commitments are assured by independent customer challenge groups and then reviewed by Ofwat. If the company beats these stretching commitments, it is rewarded; if it misses them, it is penalised.

This approach encourages companies to improve services for their customers and sets a new standard for more stretching commitments in the future.

Severn Trent Water beat its commitments on pollution incidents by 32%, internal sewer flooding by 21%, external sewer flooding by 7% and leakage by 2% – equivalent to an extra reduction in leakage of 10 million litres per day. Ofwat is consulting on a performance reward worth £18.8m.

Anglian Water has performed better than its commitment on leakage by 1.5% – equivalent to saving an extra 3 million litres per day. Ofwat is consulting on a performance reward of £0.5m.

Ofwat is consulting on a penalty of £1.7m for South West Water for missing targets, mostly connected with serious wastewater pollution incidents.

South West Water runs a WaterShare scheme in which it shares with customers financial benefits gained from beating targets. The independent panel which oversees WaterShare has proposed deferring the penalty to the 2019 price review, to offset rewards the company will be due at that point as a result of beating other performance commitments.

As such, Ofwat has agreed to consider the timing of the penalty again next year when it assesses their performance. At that point Ofwat will decide when to apply the penalty. The penalty will be uprated in line with inflation and interest.

David Black, Senior Director for Water 2020 at Ofwat, said:

“All water companies have to consult with their customers on setting stretching performance commitments. Then we use outcome delivery incentives to focus companies’ minds on delivering what customers want. This is especially important when there is no competitive pressure on companies.

“The incentives are set to reward performance that beats stretching commitments and penalise performance that falls short. Each time a company meets or beats a commitment, that sets a new, higher baseline for what we expect of them in the future. That is how we can use regulation to continually drive-up performance to give customers a better service.”

Later this year Ofwat is issuing a consultation looking at how it can drive companies to deliver more of the outcomes their customers want, including through incentive mechanisms like outcome delivery incentives.

ENDS

Notes to editors

All companies have performance targets but only three have chosen to have some of their financial rewards and penalties applied between price reviews. The others have their performance assessed and their rewards and penalties applied at the end of the five year price review period.

The consultation period runs until 22 November 2016.

Media enquiries to Ofwat Press Office on: Mark Anderson 0121 644 7728 and 07884 117 760 / [email protected]