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 - a £18.8m reward for Severn Trent and £0.5m reward for Anglian, and a £1.7m penalty for South West Water.

The water sector regulator requires the companies in England and Wales to consult with their customers on performance commitments. The commitments are assured by independent customer challenge groups and then reviewed by Ofwat.

All companies have performance targets but only these 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.

Most financial ODIs will be reconciled at the 2019 price review (PR19) - ‘end-of-period’ ODIs. Any end-of-period ODI financial rewards or penalties will be received by companies and applied to customers’ bills in the next control period, 2020-2025.

At PR14 the three companies proposed ODIs that would be paid within the current price control period of 2015-20 – known as “in-period” ODIs as they are applied within the current price control period rather than being reconciled at the end of the price control period.

"In-period ODIs sharpen incentives to drive performance and are fairer to customers"

According to the regulator, there are a number of benefits from in-period ODIs – the consultation documents state:

“ They sharpen incentives on company management to deliver what matters to their customers. With in-period ODIs a company’s performance in 2015-16 generates a reward or penalty which has a financial effect on the company in 2017-18. This is much closer in time than a financial effect which takes place in 2020 onwards and is more likely to focus a company’s management on delivering for its customers.”

“ The sharper incentives should drive a higher level of performance that will set a new benchmark for the next price control period leading to better services for all customers. In-period ODIs are also fairer to customers whose bills reflect more recent service performance.”

If the company beats the stretching commitments, it is rewarded; if it misses them, it is penalised. The approach is aimed at encouraging companies to improve services for their customers and sets a new standard for more stretching commitments in the future.

Severn Trent - £18.8m reward will increase customer bills by £6 for one year only

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. 

The effect of the £18.787m payment will enable the water company to make an increase of approximately £6.00 to customers’ average combined household bill for one year only in 2017-18. The impact on an average water bill is a decrease of £0.50 and the impact on the average wastewater bill is an increase of £6.50. 

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. The effect of Anglian Water’s reward will be an increase of approximately £0.27 to customers’ average household water bill for 2017-18 for one year only.

Ofwat is consulting on a penalty of £1.7m for South West Water for missing targets, mostly connected with serious wastewater pollution incidents. The consultation paper says  "the poor performance by South West Water in regard to pollution incidents is a serious issue."

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.

Ofwat has agreed to consider the timing of the penalty again next year when it assesses their performance at which 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.”

The consultation period runs until 22 November 2016 - email responses should be sent to  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Later this year Ofwat is launching a separate 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.