Ofwat has today published its draft review of the 2014 price review (PR14). It found that over the PR14 period, outcomes generally improved for customers and the environment.
This included a:
- 36% reduction in pollution incidents across the sector; and,
- 4% increase in customer satisfaction; and,
- decline in average customer bills of approximately 5%;
PR14 marked a new regulatory approach for the water sector. Ofwat set out a ‘totex and outcomes’ framework that encouraged companies to engage proactively with customers, and to focus on delivering the services that matter most to customers and the environment in the most efficient way.
This draft review takes a ‘deep-dive’ look at how prices and service levels changed during the 2015-20 period, and how PR14 helped achieve these outcomes. This approach reflects Ofwat’s ambition to increase its focus on the analysis and evaluation of its policies to help Ofwat improve the design of future price reviews and increase its impact.
The draft review looks at five key aspects in the PR14 framework:
- the introduction of the outcomes framework which helped focus on delivery for customers;
- the approach to securing value for money for customers;
- the approach to the balance of risk and return;
- the approach to sustainable use of water resources; and
- the creation of separate targeted controls for wholesale and retail.
The findings show that the introduction of the “totex and outcomes” framework has been transformative. It has delivered a culture change across the sector, with companies significantly sharpening their focus on customers and the environment. Many companies reported that the framework helped them align their business operations more closely around the priorities of customers – linking performance targets and financial incentives to customer outcomes, while providing greater flexibility to choose how companies deliver outcomes for customers and the environment.
The draft review also identifies areas which, with hindsight, could have been improved (and indeed were improved in PR19). For example, it suggests that some service levels were not sufficiently stretching, and some other incentive rates could have been better calibrated.
Ofwat’s review also suggests there could have been stronger focus on environmental areas and the long term, including asset health. However, the focus on sustainable use of water resources meant companies did identify and start to explore a number of potential new trades. Ofwat also saw abstraction at more environmentally sensitive sites reduce.
Aileen Armstrong, Senior Director at Ofwat said:
“PR14 marked a new regulatory approach for the water sector and this review has allowed us to identify what has worked well, and where we could deliver more.
Many of our ambitions for PR24, including to increase focus on the long term and deeper understanding of customers’ views, are possible due to the outcomes framework put in place in PR14. Our vision for greater environmental and social value builds on areas such as our approach to sustainable use of water resources. And totex is an enabler for our focus on efficiency.
As we did with our approach to PR19, we are continuing to build on lessons learned as we move into PR24 and beyond.”